Wednesday, September 14, 2011

Just Call it a "Social Security Scheme"

There's been a lot of debate over whether Social Security is a "Ponzi Scheme".  I propose we stop calling it a Ponzi Scheme - as the term is a bit dated, since Ponzi pleaded guilty to fraud in 1920 - and call such schemes "Socially Security Schemes"  For example: Bernie Madoff ripped off investors through a Social Security Scheme.  

The elements are effectively the same.  Social Security and Ponzi schemes take your money and promise some return on it at a later date.  But rather than investing your money, both schemes rely on people joining into the pyramid in the future.  Most Ponzi schemes collapse by failing to continue to attract new investors.  Social Security has avoided that fatal flaw by forcing every generation of workers to pay into the system.

Of course, as the number of recipients increased faster than the number of payers, Social Security has continued to become a worse deal.  As Michael Tanner points out, we are paying more and getting less: 
The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. ...

Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.
Andrew Biggs elaborates on this, noting that - like a Ponzi scheme - those than joined the Security Security Scheme early get a much better payout than those joining late:  
A person who retired in 1950 received around a 20 percent annual return on the taxes he paid (which happens to be exactly the same return that Madoff promised to his investors). Put another way, that person received around 12 times more in benefits than he’d paid in taxes. That helps explain why Social Security became so popular: it was simply an incredibly good deal.

If you were born in 1950 and heard your grandparents say how much they liked Social Security, you’d be tempted to think you’ll get the same sort of deal. But you won’t: an average wage earner born in 1950 will receive around a 2.2 percent return from the system, which is less than what you could earn on guaranteed government bonds. A person entering the workforce today will receive only around a 1.7 percent return.
 Yikes, could I please get my money back?

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