Good Math, Bad Math

Naturally, since this friday was the first time that the SB server has really been down since I start blogging (planned downtime, as it happens, for a major system upgrade), there
was spectacularly bad math in the local news here in NYC friday afternoon.

I’m not sure how long this has been the case, but Mayors of NYC have a radio show. It’s a mixture of them spouting off about whatever they feel like babbling about, and call-in questions. I don’t generally listen, but once in a while, if the mayor says something either particularly interesting or particularly insane, I’ll hear the segment repeated on the local NPR station.

In this friday’s show, he sprung a really shockingly stupid line. The supposed
topic was Bernard Madoff and his pyramid scheme. Bloomberg responded by saying
that “Madoff’s isn’t the biggest ponzi scheme ever. If you really want to see the
worlds biggest ponzi scheme, just look at social security.” He continued along
those lines for a few minutes.

This is, to put it mildly, bullshit. Incredibly, stupid, rampant, bullshit.

As usual, I’ll start with a bit of background to clarify things.

A Ponzi scheme is a particular kind of pyramid scam. It’s really a process for running a
scam. The way that it works is that you create some kind of “investment fund”. You promise
some kind of great payoff, and convince people to invest. As you get new investors, you use
their investments to pay off the previous investors, skimming off a layer from the top to
enrich yourself. The whole pyramid – the layers of investors paying off investors – is really just a front for what’s really going off – which is the manager of the Ponzo scheme
stealing money.

For example, you could start a Ponzi scheme by selling an “investment” with
a promised growth rate of 50%/year. Suppose you sold 10 $100,000 “shares” in your fund.
At the end of the year, you need to be able to pay $150,000 to each of your original
ten investors. So you get 20 people in invest – you’ve then taken in $2,000,000, and
you’ve paid out $1,500,000, which means you got to pocket a cool half-million dollars.
Of course, the next year, you need to enlist 30 new investors just to break even – so you’d get something like 40 – and pocket the money left after paying off the previous
year’s 20. And so on.

This works great for as long as you can rope in more investors. But eventually,
you’re going to get to the point where you can no longer bring in enough investors.
And the whole mess collapses, because there was nothing really there. There was
no business. There was no investment. There was just a scam to allow the people who
started it to cheat a lot of people out of a lot of money.

The whole idea of a Ponzi scheme is that you’ve got that pyramid – the ever-growing
pool of “investors” at the bottom, who are pouring money into the pool, and there’s a small group of people at the top, who are stealing money from the pool, while doing the Ponzi
payoff trick just to make the people at the bottom still keep pouring money in.

For those who haven’t followed it, Bernie Madoff is a famous New York
investment broker. He’s the former president of NASDAQ. It turns out that his
investment fund wasn’t really an investment fund – it was just a Ponzi scheme. He
managed to keep it going for an astonishingly long time. And it wasn’t
a well-hidden one – we was under suspicion for at least a decade, but
no one really bothered to investigate, because despite the fact that it looked
like a Ponzi scheme, acted like a Ponzi scheme, smelled like a Ponzi scheme, etc.,
no one could believe that a guy like Madoff would get involved in anything
so crass.

Ok. So that’s background. Now Bloomberg is coming along and saying that Madoff’s
Ponzi scheme – the largest one in history – is nothing, because social security is
the same thing, but on a much bigger scale.

Why do I say that that’s bullshit?

The biggest reason is: social security isn’t an investment. It’s a government
social program that taxes wage-earners, and guarantees that every retired person
gets enough of a pension to allow them to get by. That might seem like a shallow
distinction – but it’s not. It’s incredibly important. The trick behind a Ponzi
scheme is that you lie to the people buying in to it. You tell them that
they’re investing their money, when you’re really just pocketing it.

Social security, from the day it started, has been a direct payment system – that is, it
levies a tax, and the revenue from that tax is used to pay the cost of the program. It’s not
a savings fund, it’s not a personal investment – it’s a tax program that provides a pension
by levying a tax. The original idea of it was to be a zero-balance program – each year, it
takes in as much in taxes as it needs to pay benefits, so that at the end of the year, the
balance is zero. It’s a system that deliberately operates on the edge of what would
be bankruptcy if it were a business! It constantly tries to ensure that it’s expected income
never exceeds its expected payments.

There’s a piece of it which looks Ponzi like: generation N+1 pays in to the system,
which pays the benefits for generation N. Each successive generation, when it retires,
collects benefits based on money paid in to the system by the next generation. But remember that the point of the Ponzi is to (A) trick people into thinking that they’re
making an incredibly profitable investment, and (B) skim a huge amount of money for yourself from the top. That’s not what social security does, at all. It’s a zero-balance
tax-funded benefit.

In practice, maintaining the zero-balance gets complicated, and the complications can
make it appear, in some ways, to look a bit like an investment – but it’s important to keep
in mind that it’s not. As I said above, the idea is to make expected payments match
expected income. The expected payments are the amount of money that conservative
projections predict will be needed to provide a basic living-wage pension to every retired
person. The expected income is the total amount of money collected as taxes from
wage-earners, and any income earned by investing that money. It’s not really run on
a year-to-year balance method, because that wouldn’t work well. The government actuaries and
accountants who administer the program, being the kinds of meticulous people that actuaries
and accountants typically are, naturally realize that demographics make this complicated: the
ratio of the number of people paying social security to the people collecting
benefits isn’t constant. In fact, there are some bulges – that is, generations of
people that are larger than average. When they retire, the payments out of the program are
going to be disproportionately large. But before they retire, the number of people paying
into the program will be equally disproportionately large.

Instead of constantly changing the social security tax rate – lowering it when the
large generation is paying in, and raising it when they’re drawing out, it makes a lot
more sense to set the rate so that they take in excess for a demographic bubble,
they put the excess away, and save it. Then when that bubble retires, the social security administration will have the excess money that they saved away to pay the benefits. If you look at that, you can see it looking sort of like an investment. You pay social security taxes, and right now (as we head towards the end of one of those demographic bubbles),
most of the money that you pay is invested by the government into federal treasury bonds. So the money that’s being paid into SS by you is, mostly, being invested. But it’s not the case that your SS money is being invested for you. It’s being used to pay current benefits – and saved to pay off the next generation of benefits – which is, most likely, not yours. Your SS benefits will be paid by taxes paid by the next generation of
taxpayers. That’s the way it works, by design.

You don’t have any money saved or invested in social security. It’s not a savings
account, or an investment account. It’s a tax that’s used to pay benefits. And there’s
no one making a profit by stealing money from the social security.

It’s not a Ponzi scheme. It’s a zero-balance tax-funded benefit system. The similarity
between SS and a Ponzi is that at any moment in time, the people paying in to the system are different from the people who are cashing out – and the first generation of people who collected money from SS didn’t pay in to it at all. At any point in time, generation N+1 is paying the benefits for generation N.

There are philosophical and political arguments against social security. Personally, as a
liberal, I find most of them rather unconvincing. But my opinion is beside the point. If someone like Michael Bloomberg doesn’t like Social Security, he should have the guts to be
honest about why. Bloomberg is no dummy – especially when it comes to finances. He knows how it works. He knows that calling it a Ponzi scheme is an out-and-out lie. But he’s willing to tell that lie.

Comments

  1. #1 Aerik
    January 11, 2009

    Oh, David Hitt, eat your heart out.

    His podcast “quick hitts” and it’s early episode “economics for lefties” has always been a joke. I shake my head at his every post on economics and politics in the skepticality.com forums as “hittman”

  2. #2 NonServiam
    January 11, 2009

    Interestingly, the strategy of saving extra income from gluts of new payers for future periods of few payers is used by the best Ponzi schemers, too.

    Obviously I think it’s a bit of an overstatement to call SS a Ponzi scheme, because there’s no lying going on, but it’s still basically the same mechanism, just fully disclosed (I almost said “voluntary”, but er, it’s not). And it’s not true that SS has no “skimming” — the bureaucratic infrastructure that runs the program is partly funded by the same taxes that it redistributes… exactly analogous, really.

  3. #3 Rick O
    January 11, 2009

    I have but one minor nitpick here:

    “You don’t have any money saved or invested in social security.”

    While this may be technically true, the annual statements mailed to you sure make it seem otherwise, don’t they?

    “Your contribution for 2008 was … If you retire at 68, it is expected that you will have paid …”

    And, more nitpickery, if it is a tax and not an investment fund, then why have individual account tracking in the first place? Similarly, why distinguish it from income taxes at all?

    (I don’t disagree with Social Security, I’m just playing Devil’s Advocate.)

  4. #4 Michael
    January 11, 2009

    I think that NonServiam has it right. The only significant difference between a classic Ponzi scheme and Social Security is that the latter is (generally) honest about how the mechanism works.

    Part of Madoff’s effectiveness as a fraudster was that his funds did not offer huge returns. They offered small — but impossibly steady — returns. Social Security does the same thing.

    Mark, you make too little of the fact that Social Security is paid by future generations. The beneficiaries receiving SS money are increasing in number, and will continue to do so for the foreseeable future. They will also require increasing payouts to cover inflation. Balancing this requires some combination of increasing the number of payers and increasing pay-in per payer. The latter is composed of increases in marginal tax and increasing salary, although most of any increase in salaries is eaten up by inflation adjustments in the payout.

    Also, the Federal government as a whole *does* skim from the SS trust fund (it is not just administrative costs for the fund itself). The US government borrows from the SS trust fund to help cover the deficit in the general ledger. I do not believe it has repaid any of these “loans” in the past several decades — and current projections say that starting in 2017, FICA taxes will bring in less than SS pays out, so those loans will need to be repaid so that SS can pay out what is promised. You can probably guess where money will come from to do that.

  5. #5 Aerik
    January 11, 2009

    The difference between an investment and social security or ponzi scheme is, fellas, is that in an investment there is a product. Somewhere a resource is consumed to create something that is sold for capital at greater value than it cost to create. Labor participation in the product is not a pre-requisite of an investment.

    Ponzi schemes trick you into thinking this is happening, and distributes the wealth upwards, in a very unfair manner. Tupperware parties.

    Social Security is honest in telling us that this does not happen, and distributes the wealth equally. Taxes.

    That difference is not trivial.

  6. #6 Timothy
    January 11, 2009

    SS is not technically a Ponzi scheme, as it is transparent, non-voluntary, but has been sold by politicians in ways that make it a close parallel of a Ponzi scheme. Taxpayers were told that they were “investing” in SS (they weren’t; as the post noted, the money was mostly spent immediately on current SS expenditures) and that they were therefore somehow “entitled” to their SS pension (again, wrong, SS payments were normally far greater than the respective individual’s contributions).

    Part of the economics used to justify SS and similar schemes is that each person take out more than they put in, and that this situation can continue indefinitely, justified by optimistic projections of growth in population, GDP per capita and future tax revenue. This suffers from exactly the same weakness as a Ponzi scheme; when the growth in taxpayers/investors slows, the scheme eventually collapses. On this logic Paul Samuelson famously – and wrongly – said that SS was a Ponzi scheme which would actually work.

    Put simply, SS does by coercion plus inaccurate statements made by politicians what Ponzi did by outright deceit. If it was sold to the American public as a straight out wealth distribution measure, the way similar schemes were in the UK, Australia, etc, with taxes going into, and payments coming from, general revenue, then it would not have been a Ponzi scheme.

  7. #7 John Cotterell
    January 12, 2009

    Taxes, being mandatory and enforced with threats, are more like a state-sponsored protection racket than a ponzi scheme.

    The key difference is that a ponzi is optional, making it a far less serious crime.

  8. #8 Noadi
    January 12, 2009

    Want to know what comes to mind when I hear people say things like taxes are a protection racket:

    “But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?”

    Just replaces Romans with taxes. Might have to drop wine from the list but otherwise it’s pretty close. Taxes may be unpleasant and frequently the government spends some of that money on things it shouldn’t but they’re necessary.

    I agree with Mark, if you disagree with Social Security be honest about why. If you can’t be honest about your reasons then maybe it’s because you know those reasons aren’t going to hold up to much scrutiny.

  9. #9 ShinyTitan
    January 12, 2009

    You missed the fact that the fundamental reason why a Ponzi scheme will eventual collapse is its inherent exponential growth, which is not sustainable in a finite world. Social Security is not a Ponzi scheme because it aims at zero growth, as you astutely note. However, there IS a retirement Ponzi scheme alive an well, and that is the 401k/stock market scam, which promises exponential growth.

  10. #10 MPL
    January 12, 2009

    My social security account is no more a ponzi scam than my medical insurance account is.

    Ponzi schemes are doomed to fail not because they pay old liabilities with new income—every bank, business, and person in the world does that—but because they promise exponential growth (in terms of total dividends) on the basis of nothing but new deposits, which can’t help but fail.

    An insurance fund—including social security—pays up old obligations with new deposits, but because it promises a net zero growth rate (or a growth rate tied to the interest on the float invested in some low-risk asset), this is just fine. Yes, an insurance company can certainly have cash-flow issues (which is probably why my health care premiums went up this year despite being healthy), but this is an accounting and planning problem, not an inherent flaw.

    The basis of social security is not that you get out more than you put in—it’s that your future payouts are significantly less risky than your life earnings. If you were rich, social security is probably a net loss for you. But hey, you were rich, cry me a river.

  11. #11 John Cotterell
    January 12, 2009

    @Noadi-

    I dont disagree with social security.

    I’m happy to pay the 15-20% of my income that’s needed to support it.

    However, over 50% of my income goes to the government(I’m in the UK), and the SS system here is a joke.

  12. #12 Nick
    January 12, 2009

    The biggest reason is: social security isn’t an investment. It’s a government social program that taxes wage-earners, and guarantees that every retired person gets enough of a pension to allow them to get by. That might seem like a shallow distinction – but it’s not. It’s incredibly important. The trick behind a Ponzi scheme is that you lie to the people buying in to it. You tell them that they’re investing their money, when you’re really just pocketing it.

    Social security isn’t an investment, but neither is a Ponzi. Neither have a fund backing them up.

    The both rely on more mugs being recruited to keep them going.

    The second problem with SS is this. You don’t benefit from compound interest and growth in your contributions. They get spent. That’s a rip off.

    Nick

  13. #13 Luna_the_cat
    January 12, 2009

    John Cotterell: Quit whingeing. I live in the UK as well — but have also lived, and paid taxes, in the US.

    You claim that 50% of your income goes to the gov’t — I assume you mean that you are in the highest tax bracket of 40%, plus the 11%(+?) for NI. If you were in the US, your base income tax rate would be a lower effective rate of 31%, and payroll taxes of 8.65% (which can vary down by 1.2% depending on what state you are in and what they do for unemployment insurance). However, on top of this you would have state income tax, which varies hugely from state to state, and local city & county sales and property and sometimes income taxes, which also vary hugely. And then on top of that you would have medical/health insurance expenses, which are far greater than you would pay even for the best BUPA programme, and you wouldn’t have a choice about that.

    Having lived in several areas, I can say from experience that 2/3 of the time my US taxes (& necessary expenses) exceeded by a minimum of 6% what I would have paid in the UK, and was near-equal or roughly equal to UK taxes the rest of the time. Plus, it was anything but simple and transparent to work out who was getting what, and where my money went.

    Besides, if you are on that highest tax bracket, I very much doubt that ALL of your income is being taxed at 40%+. If you don’t have tax favoured investments, I’ll eat my desk. And YouTube it.

  14. #14 John Cotterell
    January 12, 2009

    Luna,

    Why should I quit whingeing? You may be happy to take it up the bottom from the government, please don’t get upset because others are bold enough to complain.

    My total income tax and NI is 38% of my income. Local rates are another 2%. The remaining 10% is made up of a mixture of capital gains and a plethora of different consumption taxes. I guarantee if you were to add up *all* of your UK taxes you’d be reeling.

    I don’t have any tax-favoured investments. Hope you’re feeling hungry.

  15. #15 Christophe Thill
    January 12, 2009

    If some people think Social Security is a rip-off, what do they have to say about insurance companies? Especially when, in case of damage, they try their hardest not to pay what they should. Like, for instance, in the real world.

  16. #16 Luna_the_cat
    January 12, 2009

    John Cotterell: Not the John Cotterell of Endava, then?

    I don’t have anything on which to pay Capital Gains, and don’t much have an opinion on them, and I invested in my house when it was still a low enough value to avoid stamp duty. And actually, I’ve worked out what I pay with poll tax (whoops, sorry, “Council Tax”), Road Tax and VAT, and included that in the direct comparisons with what I would have been paying in the Colorado, Ohio and Maine locations where I have lived in the past, as well as what I would be paying if I lived in the Texas or Washington locations where family members are now. My conclusions stand. And overall, I’m paying what I would consider fair taxes, completely, for what I get from this country. the only UK tax which I really consider unfair is the inheritance tax, although what my local council does with the council tax pisses me off on frequent occasions. But your “taking it up the bottom” is YOUR opinion. Your whingeing. We don’t agree.

    And, you don’t even have an ISA, huh? Or a pension fund? Reeeaaaalllly?

  17. #17 Michael
    January 12, 2009

    @MPL: “Ponzi schemes are doomed to fail not because they pay old liabilities with new income—every bank, business, and person in the world does that—but because they promise exponential growth (in terms of total dividends) on the basis of nothing but new deposits, which can’t help but fail.”

    Social security promises exponential growth (due to inflation and increasing number of retirees) on the basis of nothing but new deposits. Why throw more money at a system that is doomed to fail?

    @Christophe Thill:

    I do not particularly like insurance companies, but — except for auto and home insurance — I can generally choose not to use them, and can choose which (if any) to give my money to. However, insurance is generally for emergencies that you do not expect to happen. Social security is for getting old, which most people fervently hope will happen. The elements of choice and expected outcome make them very hard to compare.

  18. #18 Luna_the_cat
    January 12, 2009

    For some reason, my last comment seems to be hung in moderation — no links and no cussing, so I’m not sure why.

  19. #19 Kill jewish dogs
    January 12, 2009

    Fuck you, jewish dog. Go preach communism to your fucking israel.

  20. #20 MarkW
    January 12, 2009

    John Cotterell: I find your figures hard to believe unless you’re on about a quarter of a million a year. In which case STFU and pay your share (unless you don’t like using public services). You’re still left with a lot more than my net income.

  21. #21 Adult programmes on TV
    January 12, 2009

    I second the comment about insurance companies – and home insurance is the worst. You break something or have a flood or something and suddenly your premium goes up.

  22. #22 Nick
    January 12, 2009

    My total income tax and NI is 38% of my income.

    ————-

    You’ve missed out the employer’s NI. Just because they pay it, doesn’t mean in reality its not you that’s paying it.

    It’s the same as VAT. You can’t claim that you don’t pay VAT because a company pays it on your behalf.

    PAYG (pay as you go) schemes such as the UK and the US basically means you pay, and the money goes, to someone else.

    I personally think they are nuts. You’re relying on a future generation agreeing to be taxed to the hilt. They can rightly decide, no, we’re not going to pay. It’s like having people in the third world born into debt because some previous leaders had looted the treasury. Alternatively they get forced to pay, and the tax revenues end up on the wrong side of the Laffer curve.

    As for having a fund of government bonds as the assets, I too can be a millionaire. I just write an IOU to myself for a million, and hey, I’ve got an asset with a value of a million. The sames true of using government debt to fund government liabilities.

    How do you tell if PAYG is substainable?

    Since there is no fund. It means that current payouts = current income. Future payouts = future income.

    Purely from the demographics, that doesn’t work. If you have a bulge in population, the future generation gets stuffed.

  23. #23 Matt
    January 12, 2009

    The main issue here is that SS assumes that the base (# of contributors or earnings) will continue to grow.
    What about the rise in life expectancy? What about the decline in birth rates?
    Suppose SS goes bust and the people who were “contributing” all their life get nothing at the end. How is this different from a collapsed Ponzi Scheme?

  24. #24 Tim
    January 12, 2009

    It is clear he was using hyperbole and that Social Security is not a ponzi scheme for the precisely the reason you mentioned, that Social Security is quite up front about what it does.

    With that said, the two of them are similar in many ways and are in many ways analogous. Whether you support SS or not, it is rather disingenuous to call him an outright lier and user of bad math when he was making a valid (if deliberately hyperbolic) point which had nothing to do with math (at least not directly).

  25. #25 xebecs
    January 12, 2009

    Social Security:

    1. Not fraudulent
    2. Purpose is not to enrich the administrator
    3. Does not require ever-expanding enrollment
    4. Will not collapse if properly managed

    Yep, Ponzi right down the line. Bloomberg should be on the Nobel short list.

  26. #26 Hittman
    January 12, 2009

    If you don’t believe that SS is a Ponzi scheme, try this:

    Create a retirement fund that works exactly like SS. Sell it to the public.

    You will soon end up in jail. For running a Ponzi scheme.

    One of the key components of Ponzi schemes is putting money in your own pocket. This is exactly what the government does. There is no real money in SS. Any surplus has been spent by the government in exchange for IOUs in the form of t-bills.

    You’re playing language games to cover up the reality of what SS really is. It fails the duck test. It walks like a Ponzi scheme, talks like a Ponzi scheme, quacks like a Ponzi scheme, and works *exactly* like a Ponzi scheme. That’s becuase it IS a Ponzi scheme.

    Ponzi schemes often bankrupt their participants. The SS Ponzi scheme, with its trillions of dollars worth of IOUs, has the potential to bankrupt the entire country.

  27. #27 Julien Couvreur
    January 12, 2009

    This was a poor rant, Mark.

    The fact is that like a Ponzi or pyramid schemes, social security relies on more people joining to pay the people who arrived earlier. Also, much indicates that it is unsustainable (ie. not actually zero sum), which is another characteristic of such schemes.
    Sure, that politician is not using a making a misrepresentation, or at least using an improper name, but that does not invalidate the point of his analogy.

  28. #28 John Cotterell
    January 12, 2009

    @Markw:

    My salary is about 10k more than the national average.

    My taxes total around 50%, not including employer NI contributions.

    If I drove a car or owned property it would be higher still.

    Everyone underestimates the amount of tax they pay, usually by a long, long way.

  29. #29 Luna_the_cat
    January 12, 2009

    Trying again to post this; maybe it will show up. If *both* this and the previous attempts eventually show up, then apologies for the duplication.

    John Cotterell: Not the John Cotterell of Endava, then?

    I don’t have anything on which to pay Capital Gains, and don’t much have an opinion on them, and I invested in my house when it was still a low enough value to avoid stamp duty. And actually, I’ve worked out what I pay with poll tax (whoops, sorry, “Council Tax”), Road Tax and VAT, and included that in the direct comparisons with what I would have been paying in the Colorado, Ohio and Maine locations where I have lived in the past, as well as what I would be paying if I lived in the Texas or Washington locations where family members are now. My conclusions stand. And overall, I’m paying what I would consider fair taxes, completely, for what I get from this country. the only UK tax which I really consider unfair is the inheritance tax, although what my local council does with the council tax pisses me off on frequent occasions. But your ‘taking it up the bottom’ is YOUR opinion. Your whingeing. We don’t agree.

    And, you don’t even have an ISA, huh? Or a pension fund? Reeeaaaalllly?

  30. #30 Luna_the_cat
    January 12, 2009

    Trying again to post this; maybe it will show up. If *both* this and the previous attempts eventually show up, then apologies for the duplication.

    John Cotterell: Not the John Cotterell of Endava, then?

    I don’t have anything on which to pay Capital Gains, and don’t much have an opinion on them, and I invested in my house when it was still a low enough value to avoid stamp duty. And actually, I’ve worked out what I pay with poll tax (whoops, sorry, “Council Tax”), Road Tax and VAT, and included that in the direct comparisons with what I would have been paying in the Colorado, Ohio and Maine locations where I have lived in the past, as well as what I would be paying if I lived in the Texas or Washington locations where family members are now. My conclusions stand. And overall, I’m paying what I would consider fair taxes, completely, for what I get from this country. the only UK tax which I really consider unfair is the inheritance tax, although what my local council does with the council tax pisses me off on frequent occasions. But your ‘taking it up the [wherever]‘ is YOUR opinion. Your whingeing. We don’t agree.

    And, you don’t even have an ISA, huh? Or a pension fund? Reeeaaaalllly?

  31. #31 nick
    January 12, 2009

    SS, UK scheme etc, are rip offs.

    It’s very simple mathematics to show that this is the case.

    Lets say you contribute 1000 units in a year to the scheme. SS spends that 1000 units. It relies on getting 1000 units plus inflation from from another person in the future.

    Now compare that against 1000 units in an fund. You can even use a TIP (US) or ILG, that pay inflation plus a margin.

    What do you get back? Well, you’re fund grows. In the first case it doesn’t.

    The reason is actually very simple. The older generation were paid out, when they hadn’t paid in. They were paid by the generation current working. ie. People have been ripped off, and they have been ripped off to the extent of lost compound growth on their contributions.

    In the UK, if all the NI contributions made over the last 40 years for an average worker had been invested in the FTSE all share, they would be retiring now with a fund of 750K, (down from over 1 mill in the recent crash). Compared to the cost of the state pension of 150K to purchase an indexed linked annuity, they are only getting 20% of the income they should have got.

    It’s a rip off, and a huge theft from people.

  32. #32 trrll
    January 12, 2009

    It’s the usual deceptive rhetorical bait-and-switch. If you don’t like something that most people do like, try to find an excuse to call it by the name of something else that most people don’t like.

    People don’t like Ponzi schemes mainly because they are frauds. They con investors into thinking that they are investing in actual assets when in fact they are not. The purpose is to enrich the con man, who steals their money while using growth in investors to hide the theft. When the truth comes out, the value of the fund instantly collapses and everybody suddenly most or all of their investment.

    The people who are making the Ponzi scheme comparison aren’t unhappy about Social Security because it is fraudulent–they simply don’t like public funding of retirement benefits. They know that most of the public disagrees with that view, so they are engaging in another kind of fraud–trying to get the anger people feel toward Madoff to “rub off” on Social Security. But the main reason why people are angry about Ponzi schemes–their dishonesty–don’t apply. There is no secret about how the Social Security system works. It does not pretend to invest in any kind of assets. The Social Security system will not abruptly collapse when its true workings are revealed, because there is no secret about how it works. It is certainly true that the Social Security system, like most of our economic system, benefits from growth, and that as population and/or economic growth levels off, the tax rate will need to increase if benefits are to be maintained at their current levels, but again, there is no secret about this–indeed, it has been discussed extensively in the media.

  33. #33 Luna_the_cat
    January 12, 2009

    John Cotterell: Not the John Cotterell of Endava, then?

    I don’t have anything on which to pay Capital Gains taxes, and don’t much have an opinion on them, and I invested in my house when it was still a low enough value to avoid stamp duty. And actually, I’ve worked out what I pay with poll tax (whoops, sorry, “Council Tax”), Road Tax and VAT, and included that in the direct comparisons with what I would have been paying in the Colorado, Ohio and Maine locations where I have lived in the past, as well as what I would be paying if I lived in the Texas or Washington locations where family members are now. My conclusions stand. And overall, I’m paying what I would consider fair taxes, completely, for what I get from this country. The only UK tax which I really consider unfair is the inheritance tax, although what my local council does with the council tax pisses me off on frequent occasions. Your opinion on how bad UK taxes are is YOUR opinion. Your whingeing. We don’t agree.

    And, you don’t even have an ISA, huh? Or a pension fund? Reeeaaaalllly? but you say you ARE paying capital gains taxes — on what assets, I wonder, if you don’t even have something in an investment ISA? That makes no sense.

  34. #34 rnb
    January 12, 2009

    One thing that never gets considered is how much of what we inherit from our parents and grandparents are a result of social security and medicare paying part of their expenses? Without those programs I might even have had to pay to support my parents in their later years.

    I inherited from my parents about what I have paid into social security. How much of that is because of social security I don’t know, but it should be thought about.

  35. #35 Jim C
    January 12, 2009

    Like many other posters I see little different in the two schemes. I especially agree If I set up a fund based on the same rules as SS I certainly would be arrested and put in jail.

    Like most of my generation I have paid a small fortune into SS and expect to see little if any money from it when I retire. The ratio between workers paying the tax and retires getting payments just keeps decreasing. The system doesn’t work today, will work even less in the future, everyone knows it, but no one in power will do anything about it. SS is a house of cards waiting to fall.

  36. #36 MarkW
    January 12, 2009

    John Cotterell: Your claim was 38% in income tax and NI, 12% in other taxes.

    I’ll agree with you when you say “If I drove a car or owned property it would be higher still.” And I can accept that we pay 12% in indirect taxation, given our 15% VAT rate, but I’m sure your income tax figure must be wrong.

    The UK national average wage is (as far as I can gather) around £28Kpa.

    For an annual salary of between £35K and £40K, you should pay 26% of your salary in income tax and NI. The only way you get near to the 38% you claim is on a salary around £200K.

  37. #37 Anonymous
    January 12, 2009

    I can’t say that I’m surprised by the responses here; this is pretty much what I respected.

    I still think that my original point stands. The entire purpose of a Ponzi scheme is to let the folks running it steal money; the rest of the structure is just there to deceive people into putting their money into it. Social security on the other hand, has never lied about how it works, and it does work. You can gripe about whether or not its fair, but it’s pretty hard to make the claim that it doesn’t work. It’s been providing people with a basic pension for 80-odd years, and if you look at a straightforward analysis of its finances, it takes only mild tweaks to keep it running into the indefinite future.

    A lot of the complaints against it are basically fairness complaints. That’s the biggest argument against programs like SS: if I didn’t need to pay into the SS system, I could invest that money myself, and I’d have a lot more money when I retire than I will under the SS system. That’s not an unreasonable complaint. But it’s no excuse for calling it a Ponzi scheme, when it’s not.

    With respect to the folks who are trying to portray it as a pyramid – I’ll be blunt. You’re full of shit, and I think you know it.

    The only way that social security becomes anything like a pyramid is if the pool of people recieving SS benefits grows continually. But it doesn’t. People die. Overall, there’s an equilibrium point, where the number of retired folks stays relatively constant as a percentage of the working population. There are demographic bumps – points in time (like right now), where the number of people retiring is unusually large as a percentage of the population, but they’re offset by the times when the number of people
    working is relatively large. But the pool of people recieving SS benefits can’t continually grow. That’s one of the common lies that get used to
    try to discredit it: the first generation to receive it didn’t pay in to it. The next generation had to pay for the first. The one after that had to pay for the first and second. The one after that had to pay for the first, second, and third. And so on. But that’s not true: people die. By the time the third generation of social security recipients started collecting, the first generation was mostly dead. Just as there’s a continual stream of new people collecting, there’s a continual stream of collectors dying, and therefore not collecting anymore.

    With respect to the inflation argument: yes, when people retire, they’re paid benefits that make a current living wage; but they paid into the system based on past incomes, which were lower. But that’s really a circular argument. On the one hand, you want to argue that you could have more money if you invested it yourself; but when you talk about other people collecting it, you want to argue that it’s unfair because they’re recieving inflation-adjusted benefits – which are the same as the benefits that you’re complaining are unfairly small.

    Finally, again with respect to inflation: yes, payments are based on the inflated current living wage. But as a zero-balance system, the taxes paid into the system
    also increase with inflation. That’s the whole point of the system operating as zero-balance.

    Like I said, there are reasonable arguments against programs like SS. I don’t agree with those arguments – but I can see where they’re coming from, and how they’re a valid, consistent viewpoint. But calling it a Ponzi scheme isn’t reasonable – it’s a dishonest mischaracterization of the system that’s used to discredit it.

    My personal viewpoint on it is that making sure that every retired person gets a living wage is a moral obligation of society. It’s not OK to let people starve because they either didn’t make enough money to save for retirement, or worked for a company that managed to lose their retirement money, or were unlucky enough to retire at a bad time for the economy. Yeah, that ends up also covering some jerks who just didn’t bother to save – but that’s life; there are always parasites who leach off of anything. You can’t avoid that when you’re dealing with people.

    To get personal for a moment, when I think about SS, I see my mother. My dad died almost two years ago. Before he died, between my mom’s medical bills and his medical bills, they had to spend a huge chunk of their retirement on medical bills. And then, a huge chunk of what they had left got lost in the recent economic disaster. Paying SS was definitely a burden for my parents when I was growing up – losing that chunk of the paycheck every week was a big deal. But what it means is that now, regardless of what the stock market does, my mom’s got enough money to survive with a roof over her head.

    That’s the point of SS – to make sure that retired people have enough to get by. And a zero-balance system like SS works. You can do the math – and it’s not a Ponzi fake. As long as it’s administered carefully, it doesn’t run out of money.

  38. #38 Douglas McClean
    January 12, 2009

    “I especially agree If I set up a fund based on the same rules as SS I certainly would be arrested and put in jail.”

    This point, and similiar points made by previous commenters, is incredibly disingenuous. If you tried to set up a program mirroring any of several other government programs you would (minimally should) be put in jail. Examples include: the military, the draft, the police, the tax system, the air traffic control system, the courts, etc.

    What you are missing or conveniently ignoring is that the _entire_ purpose, and even the best definition of, government is to be the sole legitimate user of violence (broadly defined, most often in the sense of compelled obedience with the law). Go read Max Weber and come back when you have caught up with the rest of the class.

    Additionally, all the griping about how social security doesn’t produce a rate of return is misplaced. It isn’t intended to, it is intended as a baseline to provide a floor of income in retirement for those who may have been unfortunate in their careers, health, or investments. Commenters would do well to study the history of what happened before such a program was in place. This safety net is a major _enabler_ of entrepreneurial capitalism because it provide people with room to take risks.

    As to the issue of the sustainability of social security, the issue is less grave than many have been led to believe. The issues caused by the demographic bubble of the “baby boom” generation can be solved by a relatively minor increase in tax rates. Since the U.S. has nearly the lowest tax burden of any developed country, and contrary to disinformed ramblings of some on the right is nowhere near the cutover point in the Laffer curve, this really isn’t the problem that some would like you to believe it is. See http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP for information on comparative tax rates around the world.

  39. #39 Lucas
    January 12, 2009

    Ok, I’ll buy that SS isn’t a Ponzi scheme because the mechanism is disclosed in its entirety, and Ponzi schemes have a connotation of fraud. But the mechanism of operation is essentially the same, the reasons they eventually run into financial trouble are the same, and in point of fact, SS is frequently billed as an investment both by the people who run the program and by politicians. So with those similarities in mind, perhaps you should revise your statement:
    “This is, to put it mildly, bullshit. Incredibly, stupid, rampant, bullshit.”
    to read
    “This is, perhaps not _completely_ accurate, and may be overstating the case a bit.”

    Seems a bit more honest to me.

  40. #40 Anonymous
    January 12, 2009

    The whole “if I set up something that worked the way SS does, I’d be arrested” is just another of the lies that get circulated to try to make SS look bad.

    How does a non-profit insurance company work? They take in payments on a yearly basis from people, and use those to pay bills for those people. They operate on a zero-balance principle..

    One of the doctors that I used in the past participating in a church-operated alternative retirement medical insurance system. They allowed people to enroll at any age before they retired, but the insurance didn’t kick in until you retired. Once you retired, they’d pay up to some maximum amount of medical expenses per year for you, for the rest of your life.

    This was a fully legal, registered plan in the state of NJ. And it was clear to anyone who wanted to sign up that older people could sign up two years before they retired, and receive benefits. It worked fine – because the yearly payment ceiling was based on how many people were paying in to the system. It was designed to operate at zero-balance. If one year, the payouts were lower than expected, they raised the payment ceiling for the next year.

    There’s nothing illegal about a rolling zero-balance system – so long as it’s fully honest about being a rolling zero-balance system, and everyone who signs up for it is fully informed that that’s what they’re signing up for.

  41. #41 Eric Lund
    January 12, 2009

    I agree with the poster upthread who said that this is a rhetorical bait-and-switch.

    There is a certain category of people in this country who have been trying for decades to get rid of Social Security. Prior to 2000 they had no realistic chance of achieving this goal.

    In 2005 this group (via Republicans in Congress) made a serious attempt. The rhetoric at the time was that Social Security and Medicare were actuarial ticking time bombs. Note the attempt to conflate Social Security, which had such problems only under certain remarkably pessimistic assumptions (which have not, so far, been borne out by realistic economic performance), with Medicare, which does have actuarial problems. One of the few political successes of Democrats in the Bush era was the defeat of this plan.

    Now Bloomberg is trying to tie Social Security, which has careful and transparent rules designed to prevent it from collapsing, to Madoff’s “investment” strategy, a real Ponzi scheme which inevitably did collapse. The differences between Social Security and a garden-variety Ponzi scheme may be subtle, but they are real differences. The only reason for someone like Bloomberg, who should know better, to make this claim is if he is trying to set up a political framework in which Social Security can be killed.

  42. #42 elspi
    January 12, 2009

    Ok folks, this is really simple.

    We, the adults of today, fund the education of the children, and the retirement of the old people. When we are old, we will receive ss from the children we paid to educate and they will also pay to educate the next generation.

    This is how families have always worked, except by expanding it to the whole country we get enormous economies of scale.

    And yes, for the brainless “government is the problem” twits, ss is the most efficient retirement program in the world because of the economies of scale involved.

    It isn’t just not broken; ss is the best in the world.

  43. #43 Adrian
    January 12, 2009


    “But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?”

    Just replaces Romans with taxes. Might have to drop wine from the list but otherwise it’s pretty close.

    WTF? Where are you from? NYC? Apparently, from the city, at any rate. Almost everyone out in the country drills their own well, digs their own septic tank, irrigates their garden with the water from their own well, bulldozes their own private roads, get’s fresh water from their own well, many even educate their own children as good or better than the state EVER has, and like most people, they go see some private doctor for their health problems. The only thing on the list that relies on taxes is possibly public order. Everything else only involves taxes usually AGAINST the will of the people, forcing them to submit to inferior producers of what would normally be private goods. Even the best universities in America are all the Ivy League which were mostly originally private (though, now even private schools are almost nothing of the sort).

    ***

    As for SS being a Ponzi scheme, I think most of Mark’s commentators have explained it fairly well. Someone should say something about the decreasing force of mortality which is probably the biggest single issue. Also, what makes it a Ponzi scheme isn’t the government skimming from it (not that that doesn’t make it extra sleazy and all) but the fact that the early investors get everything while the people at the bottom of the pyramid (my generation) probably will get nothing. I would have thought that even the most entrenched liberal would be satisfied by the fact that this sort of thing was outlawed in private pensions a long time ago. I guess not, though.

  44. #44 Adrian
    January 12, 2009

    With respect to the folks who are trying to portray it as a pyramid – I’ll be blunt. You’re full of shit, and I think you know it.

    You’re full of shit and I think you DON’T know it. You know like a bunch of world-class economists, plenty of actuaries, and all kinds of other people in the financial world have all called it a ponzi scheme. But, NO! YOU’RE PROBABLY RIGHT! And, do you know ANYTHING about actuarial science?

  45. #45 Anonymous
    January 12, 2009

    I think that #39 demonstrates a very effective bit of agit-prop. The portrayal of SS as Ponzi scheme has been pushed by people who oppose SS for quite a while, using the supposed impending collapse of the system. By constantly pushing the meme that SS is on the verge of collapse, it aims to convince people that they’re stuck paying into the system, but they’ll never be able to collect.

    If that were the case, there might be something to the argument of SS as a Ponzi pyramid. But fortunately, the facts don’t support that. It’s been bandied about enough that a lot of people really believe it, and I’m not saying that Adrian is being dishonest – I think that he’s been honestly fooled by someone who was deliberately lying.

    The thing about SS is, it’s not in any danger of failing. It’s actually extremely well-balanced, and even the most pessimistic models of the future of SS keep it solvent and functional for as long as we can produce models that are meaningful. SS is not in any danger – the people paying in to it today will be able to collect SS in their own retirements – unless the American public lets themselves get suckered into killing it. If SS dies, it won’t be because it’s finances are unsound – it will be because political opposition deliberately destroyed it.

    It’s really astonishing to read the actual data on SS financing. It’s a very different situation from the way it’s been portrayed. It’s actually on extremely solid financial footing, with no changes at all needed to keep it running for quite some time, and only minor adjustments needed to keep it running solvently for the indefinite future.

    As another commenter pointed out, the way that SS is portrayed as being in trouble is by talking about SS and Medicare/Medicaid as if they were all the same thing. Medicare/Medicaid is a completely separate program, with a completely separate budget. M/M, as it’s currently run, is a huge flaming disaster which is on the verge of collapse. But that’s got nothing to do with SS. But by pushing the idea that the three programs are all interconnected, the people opposed to SS manage to push the idea that SS itself is in trouble, in order to generate the public will to dismantle it in the name of supposedly saving it.

  46. #46 Noadi
    January 12, 2009

    Apparently I live in a more civilized rural area than you do where the towns have sewers and public water even if people like me on a small farm have wells and septic tanks. I went to a very good public school as do just about all kids around here, I know only a few religious wackjobs who homeschool (and think the end times are nigh). Roads are publicly maintained (your driveway no matter how long is your concern because it’s private property). As for public health, unless you grow and make every possible thing your family needs taxes are helping your public health in the area of making sure the food your eat and the products you buy are generally safe. Public health does not just mean medical care though I definitely think it should.

    Now if you live in some rural paradise I don’t know of, good for you. However last I checked the majority of people in the country do not.

  47. #47 Adrian
    January 12, 2009

    This is the most amazing display of ignorance and political rewriting of facts I have seen in a while….

  48. #48 DA
    January 12, 2009

    Adrian:
    I like how you disingenuously attempt to imply that most Americans live in the country digging their own wells. Over 80% of Americans live in urban areas.

    So, yeah, that dude probably is from a city and relies on the government to provide infrastructure. Just like farmers rely on city-folk (and gov’t farm subsidies) to live their life.

    And let’s not pretend that these farming country-folk would prefer to live in a would of simple subsistence farming without the need to sell goods to us city-folk.

    Speaking of actuarials, if you check the facts you will find that home schooling does not give the best results (how many CEOs and scientists were home-schooled versus the number of crazy Christian zealots?). Nor does our private healtchcare system work better than most gov’t run health systems.

    But go ahead and carry on screaming and swearing. That home-schooling taught you GOOD.

  49. #49 Anonymous
    January 12, 2009

    “Speaking of actuarials,…”

    LMAO! Holy shit! I’m suddenly surrounded by the liberal version of young earth creationists! Was Mark’s blog always like this?

    You people are idiots. You sound ignorant. You brazenly contradict widely accepted facts without much of a care about it. And, you have little better than non sequitur responses to your critics.

  50. #50 Mark C. Chu-Carroll
    January 12, 2009

    Re #45:

    You’re pretty quick with the accusations, but you’re not bothering to cite any facts to back them up. What widely accepted facts are being contradicted? And are those widely
    accepted facts actually facts? (A lot of stuff that’s believed to be facts by a lot of people is pure political propoganda. Note that I’m not saying that that’s solely propaganda put forth by one side; both sides are guilty of lying and pushing bullshit into the memespace. But in this case, there’s a lot of “commonly accepted facts” that aren’t true – like the idea that social security is on the verge of bankruptcy.)

    To be specific, my numbers for the viability of social security come from the congressional budget office statistics and projections. The specific copy that I’ve read is from 2006. The CBO is non-partisan, but is forced to work within the bounds set for it by congress. If you look at the CBO reports, you’ll see that they’re written using extremely pessimistic projections – and yet, it’s still easy to keep SS viable indefinitely.

    With respect to the way that SS and M/M are constantly conflated, well… Here’s a link to an NPR story. NPR typically exhibits a leftward bias – but even their reporting contains this association, even though it doesn’t exist. The link is: http://www.npr.org/templates/story/story.php?storyId=1140634. THe relevant excerpt
    from the story: “NPR’s Joanne Silberner reports that Social Security and Medicare are projected to go broke, but officials are now saying it’ll be a few years later than expected.”

    Note – the liberal-biased media source adopted the “common-knowledge” association between two distinct programs, with separate budgets. Why? Because that’s what the republican treasury secretary told them. And why’d he say “SS and Medicare”? Why would the treasury secretary say that, when he knows that they have different budgets? Because he wanted to say that SS was going to go bankrupt – only it’s not, so he connected it with something that was.

  51. #51 Timothy
    January 12, 2009

    trrll #29 said:
    “People don’t like Ponzi schemes mainly because they are frauds. They con investors into thinking that they are investing in actual assets when in fact they are not. The purpose is to enrich the con man, who steals their money while using growth in investors to hide the theft. When the truth comes out, the value of the fund instantly collapses and everybody suddenly most or all of their investment.

    The people who are making the Ponzi scheme comparison aren’t unhappy about Social Security because it is fraudulent–they simply don’t like public funding of retirement benefits.”

    Go and reread my earlier post, #6.
    SS has been sold in terms that make it a Ponzi scheme. The more intelligent members of the public could see through that, and new that it was nothing more than a tax and spend resdistribution of weath. But it was (and occasionally still is, despite all evidence to the public) sold as a scheme in which workers “invest” part of their wages which will then pay for their “entitlements”. Economic growth was supposed to mean that the scheme would last indefinitely without going insolvent, even while paying out actuarially higher returns than its contributions.

    No one here in Australia ever claims that social security is a Ponzi scheme, because it was never dishonestly sold by politicians as an investment in the first place.

    Some other miscellaneous points:
    if your house is damaged by flood or you are robbed then your insurance premiums go up for the obvious reason that after having happened once, such events are statistically more likely to happen again. Insurance is not a charity scheme, it is a risk mitigation mechanism.

    Anonymous #36:
    “How does a non-profit insurance company work? They take in payments on a yearly basis from people, and use those to pay bills for those people. They operate on a zero-balance principle.”
    no, this is not how a non-profit works. Even non-profits are not allowed to be legally bankrupt and continue trading. Anyone entering the scheme you cite might want to check the fineprint details carefully, to see if they are actually legally entitled to the medical benefits they are expecting, and what the scheme’s financial position is, otherwise they may find that it is exactly like a Ponzi scheme – it requires a certain number of new subscribers each year to make current payments, and if it can’t attract them, then current beneficiaries, who have payed into the scheme in previous years, will not receive the benefits they had expected.

    As for the US having the lowest taxes in terms of GDP, first, only if South Korea isn’t developed and Hong Kong isn’t a country, and Singapore, which isn’t on that list anywhere, has lower taxes as % of GDP than the US. But more importantly, so what? That the US is slightly less bad than other nations is not much to be proud of.

    As Adrian noted above, the idea that SS is not technically bankrupt is absurd. It will be unable to make future payments without either raising SS taxes or reducing benefits. If you wish to claim that SS is not bankrupt because the government is free to raise taxes and/or cut benefits, then fine, that is a defensible position, but don’t claim that SS is solvent at current tax and payment levels; that is a claim that is not actuarially plausible, and a quick search of the web will bring up plenty of information about the insolvency of SS under such assumptions, including articles in respected economics journals and reports commissioned by the government itself.

    I’m new to this blog, and I’ve found many of the recent posts interesting, however whatever the author and commenters know about mathematics, many or most are phenomenally ignorant of economics and finance. And as always, there is a strong inverse correlation between the certainty and vociferousness of their opinions and level of their knowledge and reasoning ability. For a blog that complains (rightly) about the proliferation of bad maths in the world, the amount of bad economics and actuarially ignorant statements here is shocking.

  52. #52 Mark C. Chu-Carroll
    January 12, 2009

    Quick test – is typepad working now?

  53. #53 Dave Hitt
    January 12, 2009

    “One thing that never gets considered is how much of what we inherit from our parents and grandparents are a result of social security and medicare paying part of their expenses?”

    If your parents and grandparents invested the money they put into SS into conservative funds they would have three times the income when they retired – without touching the principle. They’d most likely have enough wealth to pay their own medical bills and still have money left over, instead of forcing everyone else to pay their bills. When they died anything left in that fund would be real money they could pass on to their kids. If they died before collecting payments they’d have real money they could pass on. Now, if someone dies before getting much from SS, too bad. That money is now gone.

    SS supporters like to claim that it has rescued the elderly from poverty, but if you look at the real numbers and the pittance most retirees receive, then compare what they would have received had they been allowed to invest the same amount of money in a real retirement fund, it is clear that SS is the greatest cause of elderly poverty.

    “To be specific, my numbers for the viability of social security come from the congressional budget office statistics and projections.”

    Well, that’s a relief. The government would never lie to us.

    The illusion that SS is solvent is based on the fallacy that there is really money in there. There isn’t. There is nothing but IOUs. Government backed IOUs, but still just IOUs that have to be sold before they can be used as money.

    The mechanics of a Ponzi scheme and the mechanics of SS are not merely similar, they are identical. Big Brother apologists can use rhetoric and word games to deny it. They can talk about motivation and intent and whatever other Humpty-Dumpty language they like, but those of us with a firm grasp on reality know that SS is, always has been, and most likely always will be a classic Ponzi scheme. Denying that fact won’t make it go away.

  54. #54 Luna_the_cat
    January 12, 2009

    ‘Cuz, yeah, private investment has worked so well for people over the last few years…?

  55. #55 B-Con
    January 12, 2009

    Not knowing the Mayor nor having listened to what he actually said, to me it sounds more like he was describing S.S. as a Pozi scheme in a more loose sense:

    One round of people put money into the pot. This money is then taken out of the pot and handed to the previous round of people who put money into the pot. The Nth generation always pays to the N-1th generation. Once the operation closes, the last people to pay into the pot don’t get anything back out of it, according to the way the system works.

    Some people need to be held accountable for their gross mis-uses of mathematical terms, but this isn’t such a case. I think you’re being too picky.

  56. #56 Paul Murray
    January 12, 2009

    [blockquote]The biggest reason is: social security isn’t an investment. … The trick behind a Ponzi scheme is that you lie to the people buying in to it[/blockquote]
    But, but … social security in the US [i]is[/i] sold as being like an investment. People have “accounts” that “pay interest”, and think that the money ins in some sort of impossible “lock box”.

    If they’s simply [i]call[/i] it an “age pension”, then you’d be right. But they dont. And the reason is so they can justify paying more money to some old people than to others.

  57. #57 trrll
    January 13, 2009

    But, but … social security in the US [i]is[/i] sold as being like an investment. People have “accounts” that “pay interest”, and think that the money ins in some sort of impossible “lock box”.

    I think that the clearest evidence that the enemies of Social Security know that the American public supports the system as it actually exists is the fact that they feel the need to use deceptive tactics to argue against it–such as trying to suggest that it is the same as a fraud that actively lies about its nonexistent investments, or that Social Security is misrepresented as an investment.

    I have my Social Security statement. There is absolutely nothing about an “account” that pays “interest” or dividends. Neither will you find anything of the sort on the Social Security web site. Nor is there anything about a “lockbox.” Indeed, the only use of the term that I can recall was debate rhetoric by a Presidential candidate who did not even win.

    And while a Ponzi scheme collapses when its true nature is revealed, the reality is that the only way in which people who are currently paying Social Security taxes might fail to receive benefits would be if deceptive rhetoric such as comparing Social Security to a Ponzi scheme succeeds in convincing the public that we should abandon our longstanding social commitment to provide a retirement stipend to our elderly.

  58. #58 Science Avenger
    January 13, 2009

    “If your parents and grandparents invested the money they put into SS into conservative funds they would have three times the income when they retired”

    You could say the same about your welfare taxes, and it would be just as irrelvant. SS isn’t an investment program or a pension, so it is inappropriate to compare it to them. It is a form of social insurance, a welfare program for old people if you like. As welfare programs go, its one of the more defensible. After all, we all get old, and those that don’t aren’t in a position to complain.

    The comparison with ponzi schemes is as ignorant as Mark described, and those who claim knowledge of actuarial science says otherwise are bloviating out of their bungholes. The very fact that we actuaries (ACAS, MAAA, 1994) study SS and attempt (succesfully to date) to keep it solvent proves its not a ponzi scheme, since one of the things that make ponzi schemes what they are is a complete disregard for the solvency of the program. They begin with a business plan certain to fail. That is simply not true of SS.

    Now it is true that many politicians talk about SS as if it were a pension plan (if they say “trust fund”, turn your skepticism way up), and we should all be more vigilent in holding their feet to the fire for doing so. But, with apologies to Quentin Tarantino and Samuel Jackson, that’s not remotely the same thing as a ponzi-guy like Madoff lying to investors. It’s not in the same ballpark, its not the same leage, it’s not even the same fucking sport. The sport here is people ideologically predisposed to oppose government programs grasping at straws to attack social security.

  59. #59 Daryl McCullough
    January 13, 2009

    Mark, here’s an opportunity for an article by you on the mathematics of retirement. There are some basic facts about the economics of retirement that I think nearly everyone gets wrong.

    Those who argue against Social Security make two arguments (1) maintaining Social Security benefits in the future will place too great a burden on future workers, and (2) retirees would have been better off investing their money in the stock market. These two arguments, though both plausible, are actually contradictory.

    Let R be the number of current retirees. Let W be the number of current workers. Let P be the productivity of those workers (some measure of goods and services produced per worker per year), and let C be the average consumption (some measure of goods and services consumed per person). Then, no matter whether you have Social Security, or 401Ks, or retirement money saved in the form of gold bullion hidden under the bed, you have a constraint:

    P*W >= (R+W)*C

    You can’t consume more than is produced. If there are people, the retirees R, who are not producing goods and services but are consuming them, then that will be a burden on the workers W, no matter *how* you pay for your retirees. If the huge number of retirees R is too big a burden on the workers, then you *can’t* improve the situation by *increasing* the amount paid out to retirees. Suggestions that replacing Social Security by privatized investments would give retirees 3 times as much money to retire on cannot *possibly* decrease the burden on future workers.

    If there is a demographics crunch, the only things you can adjust are to try to raise average productivity P, or to lower average consumption C (assuming that we don’t have any good way to alter W or R; I suppose that immigration and borrowing from foreign effectively allows us to increase W).

    If Social Security is a ponzi scheme, then so is *any* means of supporting retirees. Now, you could very well argue that the whole point of investing in the stock market is that your money goes into improving future productivity, so that P is increased and we are all saved. Maybe so, but if so, it’s a big assumption. You are basically relying on ever increasing productivity to save your ass, which is wishful thinking of the same sort as relying on an ever-increasing population of workers.

  60. #60 Daryl McCullough
    January 13, 2009

    I have another comment about Social Security’s “trust fund”. If (and I know this is counterfactual) the social security excess received between 1980 and 2020 had been used to pay down the US debt, *then* it would have meant that in the future, money that would have gone towards interest payments could instead go towards paying for the retirement of baby boomers, with no additional burden on workers. As it turned out, wars and tax cuts made sure that we never made any payments on the principal of the US debt.

  61. #61 MattXIV
    January 13, 2009

    The original idea of it was to be a zero-balance program – each year, it takes in as much in taxes as it needs to pay benefits, so that at the end of the year, the balance is zero. It’s a system that deliberately operates on the edge of what would be bankruptcy if it were a business! It constantly tries to ensure that it’s expected income never exceeds its expected payments

    Is flat out wrong, which is probably why Mark backpedals most of it away in the next paragraph. SS has always had a positive balance of payments since it’s inception and will likely continue to have one until the mid 2010s or so. The idea was to run it like a pension fund, where the payouts are funded by adding money to the fund at the time the obligation is incurred, hence the SS trust fund. Of course, the trust fund isn’t actually meaningfully funded since the excess revenues were put into US gov’t bonds (which are worthless in this case since they need to be paid off by increasing taxes or borrowing) and booked as revenue in the general budget meaning the program has in practice been ran on a year to year basis. Much of the problems of the program stem from the fact that it is treated like a pension fund sometimes but like a pay-as-you-go program sometimes, creating the illusion that it’s future obligations are better funded than they are.

    While not a strict Ponzi scheme, it does share the elements of booking lent money as a investment while booking borrowed money as revenue to provide the illusion of greater income and long term instability due to the need of an ever-increasing revenue base to maintain its current payout level. The instability element comes in from the fact that there is an overall “greying” demographic trend that is occuring throughout the first world and is unlikely to stop as long as birth rates continue to decrease and life expectancies increase. The persistent increase in the retiree/worker ratio means that someone paying to support SS now will either recieve less benefits than someone who paid equivalent taxes or will pay more taxes and recieve the same benefits.

    Or as the CBO puts it:

    As the baby boomers retire, the number of Social Security beneficiaries will grow considerably, and absent legislative changes, spending for the program will climb to nearly 6 percent of GDP in 2035, CBO projects. Spending will decline slightly over the following 20 years, to about 5.6 percent of GDP, as an increasing number of baby boomers die. However, demographers generally expect life expectancy to continue to increase, and scheduled Social Security outlays are projected to resume their upward trajectory after 2055, reaching 5.8 percent of GDP in 2082.

    The amount of dedicated revenues credited to the Social Security trust funds, however, is likely to shrink somewhat as a share of GDP, from 4.9 percent of GDP today to 4.7 percent in 2082. Social Security benefits are funded primarily through payroll taxes, with a small portion of revenues derived from income taxes on the benefits of higher-income beneficiaries. CBO projects that although total earnings will remain a nearly constant share of GDP, taxable earnings will decline as a share of GDP because a growing share of compensation will be paid in the form of nontaxable health benefits. Thus, in the absence of changes to the program, revenues from payroll taxes will decline as a share of GDP over the 75-year projection period, falling from 4.8 percent in 2008 to 4.2 percent in 2082.

    See Figure 9 here to see the increasing divergence between the promised benefits and what is funded as birth year goes up.

    The point of the deception is to allow politicians to tell the public they can have their cake and eat it too instead of to make off with the cash, but the means and structure are very similar. You don’t have to call it a Ponzi scheme if you don’t want to, but it’s neither dishonest nor hyperbole to point it the very troubling structural similiarities between the two.

  62. #62 MattXIV
    January 13, 2009

    Daryl,

    The problem with your model is that productivity is a function of capital stock. If I invest in stock or corporate bonds, almost all of the money goes into capital accumulation. If I invest in a goverment bond most of the money goes into providing good or services (some of it gets invested downstream when it ends up in employee incomes or business profits, but most of it it goes towards consumption of some kind). Consequently, the value of P varies depending on if the money goes into a 401k, the treasury, or buying gold to stick under the bed.

  63. #63 Paul Murray
    January 13, 2009

    [blockquote]I have my Social Security statement. There is absolutely nothing about an “account” that pays “interest” or dividends. Neither will you find anything of the sort on the Social Security web site.[/blockquote]
    Well, I can’t access the site from here in Oz, but what’s this page about?

    http://www.ssa.gov/OACT/ProgData/intRates.html

  64. #64 trrll
    January 13, 2009

    Well, I can’t access the site from here in Oz, but what’s this page about?

    This has nothing to do with (and is not represented as) interest or dividends paid to individual “investment accounts,” as you claimed. Social Security receives money from tax revenues, and obviously they earn interest on the money that is not immediately needed to pay benefits. One of the many ways in which the Social Security Administration differs from a Ponzi scheme is that full and accurate accounting of SSA’s financial activities is available to the public.

  65. #65 Daryl McCullough
    January 13, 2009

    MattXIV,

    Yes, when you invest in stocks, the money can lead to improved productivity, but it certainly is no guarantee.

  66. #66 Timothy
    January 14, 2009

    SS was sold as an investment, in order to disguise to a sceptical

    Also, Social Security is not an insurace program, though in this instance it definitely is sold as one. It has some superficial characteristics of an insurace scheme, just as it has some superficial characteristics of an investment scheme. In an insurace program, each person’s expected returns are the same as they are without insurance (minus admin costs), but their risk is lower as the risks are pooled. Insurance reduces risk without altering expected returns; SS greatly increases or reduces the returns expected ex-ante, depending on the level of one’s payments into SS. Again, falsely selling SS as insurance scheme rather than a straight-out socialist redistributionist scheme is designed to make it sound more market-like.

    But, given that there are people here denying that it was ever sold as an investment, no doubt in a few years there will be those denying that it was ever sold as insurance, claiming that this is just some lie told be those who don’t like SS.

    Daryl #55, your equation P*W >= (R+W)*C is wrong because the capital stock can be reduced in a particualr time period if it has been built up over previous ones. That said, this rarely actually occurs, and you are mostly (but not exactly) right that the claims 1 and 2 are contradictory (incidentally, 2 is false, and 1 is correct). MattXIV is mostly correct in his criticism of your argument: the combined productivity of labour and capital in period N+1 is dependent on the accumulation of capital in period N. You can’t change how or how much capital is invested now and expect P*W not to change in the future. However, whether moving money from government bonds to the stock market improves future productivity is debatable: if the government still borrows as much money today, someone must purchase T-Bonds for the value of government borrowing; the price of bonds will fall, and more will be offered for sale, until the government raises sufficient revenue.

  67. #67 Daryl McCullough
    January 14, 2009

    Timothy,

    Yes, if people are saving for their retirement by actually building up a stockpile of goods (a basement full of canned food, or a factory warehouse full of replacement parts) then saving today does reduce the need for higher productivity tomorrow. Alternatively, you can think of saved inventory as a temporary boost to productivity; while you’re able to draw from your stockpile, “productivity” is higher, because very little effort (going to the warehouse and picking up some inventory) is needed to produce goods and services.

    My point, which I think a lot of people gloss over, is that an individual saving or investing has two different effects: (1) It can increase overall future supplies of goods and services, and (2) it can increase that individual’s share of future goods and services. The individual doesn’t need to worry about whether his improved living standard is due to effect number (1) or effect number (2). But the country as a whole has to depend on effect number (1). Effect number (2) is a zero-sum game; if you’re winning, somebody else is losing.

    The argument that investing in the stock market does so much better than social security mixes the two effects, and so is meaningless as an argument for what is good for the nation as a whole.

  68. #68 AJS
    January 14, 2009

    Advance disclaimer: I’m from the UK. My brain is physically incapable of wrapping itself around the idea of having to pay for medical treatment or not receiving benefits in times of unemployment.

    The point of the Government taking care of your retirement pension for you is that you benefit from economies of scale — they have lots of money to spread around — and from a Government guarantee.

    Money doesn’t come from nowhere. Financial equations are as balanced as chemical equations. Which is to say, nobody ever gets richer without somebody else getting poorer. For all you say about people investing in the stock market for their old age and making much more money than the Government paid out, I’m quite sure that there must be many, many people out there who could have done that and ended up losing the lot. If not many who actually have.

    I’m quite willing to pay my taxes because, even though I have no time for the present government, I believe fundamentally in the concept of a civilised society; and right now, there are a lot of people who need a government to keep them even half-civilised.

  69. #69 Pat
    January 14, 2009

    @ Adrian (#39)

    > Apparently, from the city, at any rate. Almost
    > everyone out in the country drills their own
    > well, digs their own septic tank, irrigates
    > their garden with the water from their own well,
    > bulldozes their own private roads, get’s fresh
    > water from their own well, many even educate
    > their own children as good or better than the
    > state EVER has, and like most people, they go
    > see some private doctor for their health problems.

    Let us assume for a moment that your entire screed is accurate.

    Can you explain to me why high earning urban areas therefore pay more money in federal taxes than the federal government returns to those states, and rural states pay less than they receive? (http://www.taxfoundation.org/blog/show/1397.html)

    What are your local governments spending the money on? Certainly something.

    Note, however, that your list here is ignoring virtually all of the indirect costs involved with living. You most likely don’t generate your own power. You don’t pump your own oil, or refine your own gasoline, and you don’t pay the environmental cleanup or regulatory costs that refining states do. Where does your gas come from? From trucks, traveling on federal highways. Or trains, traveling on federally-subsidized rail. Where does your food come from? Do you eat oranges out of season? That comes from Chile, via the port of Los Angeles, across the rails or highway system again. All the equipment you buy? Fantastically cheaper than it would be without the existing transportation network. Your local doctor? Probably went through medical school on a federally-subsidized student loan, trained using equipment paid for by a federal grant. The equipment you’re currently using to post to the Internet? Probably wouldn’t have been available for another decade without government funded research. Not to mention the Internet itself.

    You’re not nearly so independent as you think you are.

  70. #70 MattXIV
    January 14, 2009

    Yes, when you invest in stocks, the money can lead to improved productivity, but it certainly is no guarantee.

    For a given stock or bond purchase, this may be the case, but in the aggregate, but the average yield on an investment instrument must be less than or equal to the productivity increase provided by the additional capital, or issuing the investment instrument would be a net loss for the company. Thus, we may look at bond rates to approximate the marginal impact of additional capital investment on productivity.

    The argument that investing in the stock market does so much better than social security mixes the two effects, and so is meaningless as an argument for what is good for the nation as a whole.

    This is wrong. Investing in the stock market vs spending on goverment programs results in a higher rate of capital accumulation, which will result in case 1), improving the total output of the economy.

    Let’s look at a very simple example. Say I have 4 hours a day to work on getting water to my garden over two growing seasons. I can spend this time watering my vegetables or digging a new irrigation ditch. Every hour I spend per day watering increases my yield at the end of the year by 10 vegetables the year I do it; the ditch would increase it to 15 vegetables, but it will take me an hour a day to complete it. Thus, if I chose to not invest my effort in capital improvments, I can consume 40 vegetables this year and 40 vegetables the next year, but if I invest my time in the ditch, I can consume 30 this year and 60 next year.

    Since most goverment activity is aimed at providing immediate goods or services and the money raised through the bond or equity markets is used to finance capital improvements (capital improvements may not always be clearly tangible, but they should always be improving productivity – a company that takes on debt without increasing it’s equity value by at least as much is not long for this world), investment will generate more total output for the ecomony over time under normal conditions.

    There are plenty of chances to defer consumption to increase total consumption, due in no small part to people having a near universal time preference for present consumption. Interest rates are determined by the value at which the amount the lender is willing to accept for defering consumption (plus a risk premium if relevant) is equal to the increase in output that can be achieved by investing the money in capital improvements.

    I’d recommend taking a look at the sections on time preference, interest rates, and growth theory in a macro text book. There are already well-developed mathematical frameworks for addressing these phenomena.

  71. #71 John Marley
    January 14, 2009

    #33:

    Yeah, that ends up also covering some jerks who just didn’t bother to save – but that’s life; there are always parasites who leach off of anything.

    Why is someone who relies on the system necessarily a “jerk” and a “parasite”? It certainly isn’t a very wise idea, but still, SS provides retirees with a basic living. If that is all someone wants, and they’ve paid into SS before retirement, then what is wrong with that?

  72. #72 Timothy
    January 15, 2009

    Daryl,

    your explanation of effect number 2 is mistaken.

    If I invest in shares of company X then company X has more money to buy present day goods, and I have a claim to Company X’s value in the future. This will always increase my claim on future goods, and always increase the total amount of future goods. Further (and most cruicially) at the margin (which is the only thing that any of us invest at) my claim on future goods exactly equals the increase in future goods due to my investment. The percentage of total future goods I’m entitled to may be a zero sum game, but that misses the point: if I invest in the stock market now, an upon retirement sell my shares, the amount I get for my shares is equal to the extra amount of goods now available because of my investment.

    I recommend MattXIV’s final paragraph:
    “I’d recommend taking a look at the sections on time preference, interest rates, and growth theory in a macro text book. There are already well-developed mathematical frameworks for addressing these phenomena.”

  73. #73 Daryl McCullough
    January 15, 2009

    Timothy,

    That’s just not true. Investing in company X does *not* always increase the total amount of goods. Company X may not do anything worthwhile with your investment.

    You wrote:

    Further (and most crucially) at the margin (which is the only thing that any of us invest at) my claim on future goods exactly equals the increase in future goods due to my investment.

    That’s just not true. If I buy 100 shares in company X, and the price goes up to $1000 per share, then I have a claim on $100,000. But that *doesn’t* mean that company X has *produced* $100,000 worth of goods and services for anyone. The worth of the stock could be the result of pure speculation.

    Now, maybe you want to say that *eventually*, if company X doesn’t produce enough goods and services, then its stock price will decline. But by then, I may have already sold my stock, and taken my $100,000.

    The fact that my investments made $100,000 for me does *not* in any way mean that $100,000 worth of goods and services have been produced.

  74. #74 Daryl McCullough
    January 15, 2009

    MattIV writes:

    This is wrong. Investing in the stock market vs spending on goverment programs results in a higher rate of capital accumulation, which will result in case 1), improving the total output of the economy.

    You could say that investment tends to increase productivity. But it doesn’t always have that effect. When a company spends money that it gets from investors, some of the money is spent on research and development, which has the possibility of increasing future productivity, but it isn’t a sure thing. But your investments don’t always go towards increasing future productivity.

  75. #75 Daryl McCullough
    January 15, 2009

    Here’s the point about social security: For the last 50 years, productivity in the US has increased at a rate of around 2% per year. If that continues into the future, then Social Security is sustainable. The projected increase in the number of retirees can be made up for by increased productivity of future workers. So if SS is sustainable, then it is dishonest to call it a “Ponzi scheme”.

    I’m not sure what the name of the following fallacy is, (maybe “the fallacy of equivocation”) but almost always when people argue about whether X is an instance of Y, some sort of the following fallacy is involved:

    1. Everyone agrees that Y is bad.
    2. X can be construed as a type of Y.
    3. Therefore, everyone should agree that X is bad.

    Why is this a fallacy? Because the reasons that everyone agrees that Y is bad may not apply to X, even if there is some way of defining Y such that X is included. When people agreed that Y is bad, they are thinking in terms of typical instances of Y. If X is not a typical instance of Y, then the conclusion doesn’t follow.

    For example, everyone agrees that communism/socialism is bad. But isn’t there a sense in which a family practices communism? We take from family members according to their ability (to produce income, to cook meals, to drive, to open hard-to-open jar lids). We give to family members according to their needs (babies’ and children’s needs are taken care of, without regard to their ability to pay). So our syllogism should say that families are bad.

    The syllogism doesn’t work because a nuclear family is not a typical instance of communism/socialism. It is not what people think of when they conclude that communism/socialism is evil or unworkable or whatever.

    In the case we are talking about, the X is Social Security, and the Y is a Ponzi scheme. We agree that Ponzi schemes are bad, because they are unsustainable, because there is fraud involved, etc. By some definition, Social Security is a Ponzi scheme. But it doesn’t follow that Social Security is bad, because the reasons that we reject Ponzi schemes (unsustainability, fraud, etc.) don’t necessarily apply to Social Security.

    The only point of arguing that Social Security is a Ponzi scheme is to attempt to lure people into making a fallacious argument. I consider that dishonest.

  76. #76 Pat
    January 15, 2009

    @ MattXIV, Timothy

    > Investing in the stock market vs spending on
    > goverment programs results in a higher rate of
    > capital accumulation, which will result in
    > case 1), improving the total output of the
    > economy.

    It can also result in an over-capitalization in the market.

    I love how fans of privatization push the advantages without talking about the risks, and then direct people who are not fans to read basic economics. Gentlemen, while there are certainly advantages and disadvantages to both models, it is disingenuous to not acknowledge the disadvantages of your position and then, before anyone has the chance to point them out, turn around and attack their basic credibility.

    Look, it’s quite simple. In the one case, you have a close to revenue neutral government program that will work as long as the net productivity of all current workers is sufficient to cover all current retirees. This is *obviously* a risk; like all risks, it can be managed at a cost. Certainly it is decoupled somewhat from your capital market – while it relies upon wages, it is an indirect reliance, and as thus (when properly managed) the oscillations in your capital market have a reduced impact upon your program.

    In the other case, you have a direct reliance upon your capital market; more to the point, the direct reliance is from the current retirees to the market, rather than the indirect reliance of the retirees to the current workers to the capital market. Again, there are risks. Again, they can be managed.

    However, there is a huge advantage that the first model (social security) has over the second; in the event of a market downturn, the reliance is abstracted. The market turns down, the workers have wage problems, and the government operates the program at a loss (recouping the losses later). The downturn has little impact on the retirees. The risk is spread out.

    In the second, the market turns down, and the retirees lose their shirt. In both models, the retirees cannot easily (or at all) assume the mantle of “worker”. They cannot get back into the system, which means in the second model there is no way for them to recover their loss; even if they could, the length of the market downturn and the impact on their net worth may surpass their lifetime. They are screwed. No more diversified risk.

    An obvious answer to this is to provide some sort of model for risk management for the people who will be up shit creek should your suggested model fail in a short run – which you must admit will occur, unless you’re completely intellectually bankrupt. Then I may regard your model as comparable… but I imagine that any adaption you’ll make to your model will wind up being effectively cost/benefit neutral when compared to social security.

    Otherwise, what you’re saying is essentially, “My social construct cares not for the unfortunate”. If that’s the case, call a spade a spade. Those now bankrupt retirees have no economic worth. They have medical costs. Who is going to pay them? Nobody? If you’re true to your model, you’re saying, “Eh, they die, life is tough all over.”

    Without debating the moral or ethical consequences of such a position (because all in all, that comes down to a metaphysical argument that will eventually wind us up well off the topic of economics), what are you going to do when this very large population of dying, starving elderly riot? They’re under-medicated, their immune systems are easily compromised, and the lack of herd immunity means the outbreak of epidemic for common diseases like the flu is much higher. They impose burdens on your working class, who need to quit their second job to take care of their parents. Lost wages! Lost productivity!

    Risks like these must be added as a cost to your model. It imposes a risk to society; the existence of an underclass creates risk for the remaining members of the society.

  77. #77 trrll
    January 15, 2009

    Without debating the moral or ethical consequences of such a position (because all in all, that comes down to a metaphysical argument that will eventually wind us up well off the topic of economics), what are you going to do when this very large population of dying, starving elderly riot?

    Or even vote? After all, there are a lot of them; that’s part of the problem. So the “Let everybody make their own retirement investments, if they make a bad investment, they’re just out of luck” is unrealistic. No matter how uncompromising your personal ethical views may be, the political reality is that those people who fail to provide for their own retirement, whether by negligence or economic downturn, will end up consuming government services. With Social Security, these costs are budgeted and can be reasonably anticipated.

  78. #78 MattXIV
    January 15, 2009

    Pat,

    If anybody’s being disengenious here it’s you. I wrote a series of corrections regarding technical aspects of growth theory explaining why money going into investments generates a higher total output than money going into government spending. The one comment where I actually took a policy position is still being held in moderation because it had links in it. Thus, you’re largely flailing at a strawman (my actual position on social security is that it should be replaced with a heavily means tested program that is funded from the general budget). I’ll point out a couple mistakes although neither is actually salient to my previous posts.

    RE “overcapitalization”: And what happens when there is more capital available that can be profitably invested? Perhaps yields fall, signalling not to invest more in that area? Do you think increasing the savings rate by around 4-5% of GDP (and that’s a high estimate) is going to be enough to reduce real interest rates to zero? If not, then we can rule it out as an issue.

    RE risk in the stock market: Duh, that’s why you shift your investments out of equity, high risk bonds, and real estate to low risk bonds in the 5-10 years leading up to when you actually will need the money. If you’re too lazy to do it manually, every company that runs 401k that I know of has funds which do it for you automatically as your retirement date approaches. Or if you’re really risk adverse, you can invest in low risk bonds in the first place at the price of making less money. If you’re willing to take the risk, you can stay in equity until you need the cash, but it’s nobody’s fault but your own if you get hosed by doing it. This is actually one of the advantages of mananging your own retirment savings vs relying on a pension fund-type structure – you get to chose the level of risk you’re comfortable with.

    And the reason I recommend reading a macro book to Daryl that growth theory exists to address how long-run changes in output levels occur and his position is based on a misunderstanding of the impact of saving rates.

  79. #79 MattXIV
    January 15, 2009

    Without debating the moral or ethical consequences of such a position (because all in all, that comes down to a metaphysical argument that will eventually wind us up well off the topic of economics), what are you going to do when this very large population of dying, starving elderly riot?

    I forgot we lived in a Mad Max-esque dystopia where the elderly ruled the highways before the first montly check went out in 1940.

    This is an exceptionally poor justification for SS as implemented since the program isn’t means tested – as currently implemented, the more you made while working the larger your monthly payment. As you can see in this chart there isn’t a whole lot of rhyme or reason to who gets the biggest payouts (note that the graph is net (SS benefits – SS taxes) benefits). If the program only collected and disbursed what was needed to cover the elderly poor, many of the criticisms leveled at it would not be relevant, but right now it’s a clusterfuck that tries to be a pension fund, welfare program, and disability insurance policy at the same time and does a poor job at all 3, and that’s not even getting into the dishonest accounting.

  80. #80 Pat
    January 15, 2009

    @ MattXIV

    > I forgot we lived in a Mad Max-esque dystopia
    > where the elderly ruled the highways before
    > the first montly check went out in 1940.

    Nice reducto ad absurdum, I’ll grant you. It reductos to more absurdum than mine did. However, since (as trrll pointed out, and I was implying) there are indeed practical problems with removing this risk reduction, can you perhaps just answer the question?

    > This is an exceptionally poor justification
    > for SS as implemented since the program isn’t
    > means tested

    Now this may be a legitimate implementation critique, but you’re following a common rhetorical strategy of moving the target. You said, “Investing in the stock market vs spending on goverment programs results in a higher rate of capital accumulation, which will result in case 1), improving the total output of the economy.” I said, “There are disadvantages to this that you’re not acknowledging”. You still haven’t acknowledged that there are in fact disadvantages to this approach. You can’t do a risk analysis if you’re going to pretend that disadvantages don’t exist.

    Put another way, if you’re going to switch to arguing that the implementation of social security is broken, you must first grant that it is possible that social security can in fact work. Then we can discuss implementation problems. You may be able to show that one or more of them is intractable, and we can then return to the original hypothesis and conclude that *given that the implementation problems are intractable*, we can agree that social security does not, in fact, work. But you can’t just start be-boppin’ and scattin’ all over the place :)

    I pointed out that one of the advantages of the social security system is that it provides a diversified risk (socially). You countered with the advantages of the individual investor model is that you can still diversify risk (individually); the obvious point here is that you’re comparing apples to oranges.

    Again, assume that we move to the privatized model (we’ll ignore the switching costs for the sake of this exercise). I will still posit that not all investors will properly manage their individual risk (given cognitive theory, it’s pretty much a given that many people will bollix this up), or their diversifying efforts may be stymied by the overall economy (I know people that are close to retiring now who had diversified portfolios have lost most of their real estate and much of their stock and bond equity). Quite obviously, then, the social security model (by diversifying risk across the society) has provided some coverage where the private investment model has not. I state this has an obvious advantage over a system that does not provide this coverage. Now, you can grant me this and argue that this still does not compensate for the implementation (or some other not currently mentioned) difficulties… but you either have to grant me this point, or explain to me why it is not relevant before we go on :)

    I grant you that your system works when it does not fail. What do you do when it fails? Or are you stating baldly that it will not fail?

  81. #81 Daryl McCullough
    January 15, 2009

    MaxXIV,

    You wrote:

    And the reason I recommend reading a macro book to Daryl that growth theory exists to address how long-run changes in output levels occur and his position is based on a misunderstanding of the impact of saving rates

    No, it’s not. I understand that investment tends to lead to increased productivity. I never disagreed with this tendency. If you are claiming that it’s not just a tendency, but a certainty then you are just mistaken. To give an example, if you spend X number of dollars exploring for oil, and you don’t find any, then that money is down the drain. It didn’t increase any future goods and services. Such investments will sometimes pay off, and sometimes they won’t. You’re not saying that investments always pay off, are you? Of course not.

    Then what, exactly, are you saying that I’m misunderstanding?

  82. #82 MattXIV
    January 15, 2009

    Daryl,

    My point is that since on average investing generates a significant yield, it must on average increase productivity. Thus, while a given investment only tends to increase productivity, the aggregate effect of investing most of what currently goes in to SS payroll taxes in will be very, very, very likely to increase productivity, while using the same money to finance goverment spending via treasury bills is very, very, very, unlikely to increase productivity anymore than a small fraction of the amount that investing the money would because most goverment spending goes to goods and services, not capital.

    This is going to be my last attempt to explain this to you. I think you’re just being stubborn.

  83. #83 MattXIV
    January 15, 2009

    Pat – Would you please stop misrepresenting my positions? To be perfectly clear, I have staked out 2 positions here:

    1. The current SS system should be replaced with a much smaller means-tested program funded from the general budget. I believe this position does directly address the rioting, straving elderly stuff. I take this position because I believe a strong case can be made that it’s cheaper simply bail out people who screw up their retirement investments badly or don’t earn enough money while working that to route everybody’s money through the current SS system. I mentioned this position as an afterthought initially, but this is exactly where I stand.

    2. If SS taxes were not collected and the money was invested instead, overall output would almost certainly be higher due to a higher savings rate. This has been the topic of the bulk of my comments and I think I have solidly demonstrated it by this point.

    I’m using fails in the sense that it fails to achieve its objectives at minimal cost. Thus, I regard it as failing in it’s 3 purposed purposes because:

    -As a pension fund since it’s yields are lower than even extremely conservative investments.

    -As a welfare program since those who had lower incomes while working, and thus are most likely to have inadequete retirement savings, recieve the lowest benefits.

    -As disability insurance since it fails to price the relative risk of occupations into it’s coverage, which makes it effectively a subsidy for more dangerous jobs.

  84. #84 Pat
    January 17, 2009

    @ MattXIV

    I wasn’t misrepresenting your positions, you weren’t making them clear :)

    > I believe a strong case can be made that it’s cheaper
    > simply to bail out people who screw up their retirement
    > investments badly or don’t earn enough money…

    This is a very valid point. I agree. I certainly think that since the point of SS is to provide *social security*, not *revenue for whoever*, and that many people in the higher earning brackets simply don’t need the monthly check.

    > If SS taxes were not collected… [snip]…

    This is a point, but you’re forgetting the transition cost, which I think renders your economic math moot. Right now, the SS taxes that are collected are (for the most part, albeit not entirely) immediately transferred out to current retirees, who spend that money, thus contributing it directly to the economy. They certainly don’t invest it, admittedly, but it’s not like the money is going into a sock somewhere, it’s still in the economic engine.

    Now, Social Security paid out 581 billion dollars in 2007. How, pray tell, are you going to supply that money for the duration of the transition? If people currently working stop contributing to Social Security and invest the money for themselves, in order to make your transition impact-neutral, you’d have to pony up a truly staggering sum to yield a conservative 5% return equaling out to the 600 or so billion dollars you’d need to cover the people currently in the system. Even if you propose that there is huge waste in the system, your plan is still cramped significantly by the need to come up with several trillion dollars. Or are you proposing to just cut off payments? Then we’re back to the practical counterargument that this simply will not fly as long as old people can vote.

    Regarding your three failure notes, Mark’s point (and I agree with him) is that social security is not and never has been a pension fund, so critiquing it in comparison to a pension fund is ridiculous, for just the reason illustrated in my previous paragraph. However, your second point in hugely valid, and I agree this is a major problem with our current implementation. Your third, I don’t think is relevant; any insurance is effectively subsidizing risk. While people who have dangerous jobs do indeed get some measure of risk abatement here, there is a societal value to having people perform dangerous jobs, and thus providing them insurance I would argue is a *good* thing, not the reverse.

  85. #85 Pete The Truth
    May 2, 2009

    I’ll call it a Ponzi scheme because we have been promised this big ole lie come age 62-68! But the fact is if I put 12.4% of my income into an investment for 40 years I would have a lot more than the $1,268.00 I am told I will get on my birthday by the Social Security Dept. The fact is if SS had not been skimmed or actually drained dry the benefits received would be much higher. But under President Johnson and the Democratic Congress in 1966 they decided to skim to balance the budget. Now we have a 11.2 trillion dollar deficit and no social security trust fund!! Your politicians at work. So not only will I call it a Ponzi scheme but the biggest screwing of the American Taxpayer ever!!!!!

  86. #86 Kathy
    December 11, 2009

    Yes, you’re right; there are differences between Ponzi and Social Security. First, people CHOOSE to get involved in Ponzi schemes, even if they are lied to. The American people have no choice but to contribute to SS, even if they don’t want to and even if they KNOW they’re being lied to. Second, there IS NO FUND that is held for later generations. That was smoked by Congress decades ago. NOW whatever I put into SS immediately goes to someone else NOW receiving it. Third, you couldn’t be more wrong that people are not being lied to about what’s going on with SS. Wow, you are truly naive. And SS is bound to fail just like a Ponzi, because there will never be enough to sustain it, with baby boomers now getting ready to collect. You say it’s not an investment, and it’s not a savings, but it’s a tax benefit. Did the Social Security fairy tell you that one? And I love the way you use adjectives to distinguish the difference — “INCREDIBLY profitable investment” and “HUGE profits.” I guess since they don’t tell us we’re getting a great deal, there’s no similarity? NO, it may not be a perfect Ponzi, but it is INCREDIBLY similar with a HUGE amount that is the same. They lie to us, we give them our money, they take it, they spend it, and we get very little in return. The biggest difference – we are FORCED to participate.

  87. #87 Nomen Nescio
    December 11, 2009

    Second, there IS NO FUND that is held for later generations. That was smoked by Congress decades ago. NOW whatever I put into SS immediately goes to someone else NOW receiving it.

    well how exactly did you think social security would work? were you under some misconception that money paid in was put in oaken barrels to age for forty years before being paid back out again? of course not; money paid in now represents resources that can be useful now. letting those resources sit idle and unused would be silly. we can debate whether paying them out to recipients is a better or a worse use than investing them as capital hoping for growth, but just stuffing them under a mattress would be manifestly stupid.

    SS is bound to fail just like a Ponzi, because there will never be enough to sustain it, with baby boomers now getting ready to collect.

    so what? the millennials are entering the workforce, and they’re nearly as numerous as their baby-boomer parents. the baby boomer generation is no unstoppable juggernaut coming to smother us all to death, you know. they’re people, and they’ll need support in their old age paid for one way or another. doing it by taxation allows us to use economies of scale to make the job that much easier.

  88. #88 Wow
    February 15, 2010

    ok, Fisrt the Definition of a Ponze Scheme – New investors pay for older investors- General Idea – Guess What – The First person to ever recieve Social Security Recieved a 300% Return.
    Oh, not looking far enough back –
    2 People who immagrate into the Country Get Access to the System who have Never paid A dime into the System –
    For me i live off 300 Dollars a Week after tax – 400 A month Paid to Taxs – Almost 200 a month to SS and Medicaid – –
    So lets See if 0 I can Keep my SS and put it into an IRA – 100 Earing 4% for 50 years 60k – 25$ an month into an Money Market – for 50 years – at That will give me – about 70k uncompounded – Thats also not investing in other areas
    So please tell me that me being poor whoe i can rely on any System of Government- 14k in 09 an i fell in the 10% tax bracket- Please Tell me again how the war on poverty these dam progressives have been fighting. It Seems the more harder i work the more i’m dragged down by the have not’s.
    That is Marks greatest work – be a Tyrant as long as its for the people.
    FACTS – 2010 – Social Security is paying out more than its taking in.
    Fact You have not Choice So its worse than a ponez Scheme,
    Fact – The US Govermnet is bankrupt – and 20 Trillion dollars by 2020 WAKE THE FUCK UP PEOPLE – OBAMA Talks like a Conservative Walks liKe a Liberal ACts like a Dictator.
    You can have my liberty over my cold dead hands – FUCK EVERY last Liberal progressive NAZI(National Socialest Party)
    I’d Rather have Dr. King – at least he was a conservative – Please Where are the LEaders like Goerge washington, John adam- Read the Federilst Papers – They Hated the IDEA of A Governemnt But “knew it was A Ness. Evil” Social Security – It’s Funny how – the US GDP spent on health care is 15% with 300 million people- Sweden spend 7% with less that 50million – Oy yea – that 15% is the same as the Social secuirty Tax –
    Guess what you pay XX amount into Social Security Your Money -You Die and they Keep it – So Yea thats why libs want a national Health care system so they can hope you get sick die and Welcome to Socialism – Statism, Communism – or what ever god dam thing you wanna call it.
    An my last thanks -0 The NEW DEAL also created the dam Health care problems – and Gave us employer based systems- The Goverment Completely Regulates Health care –
    So please If the Liberals don’t want to end poverty because they want you enslaved to the government and eventually when 50% of the pop are enclaved to either a government program or Working for the government. they have a lock on elections’s So keep beleaving the News – and pick up a book.

    Last Fact – Why are companies leaveing the US – Government Employess 15%- An all people on entiltiments make up 30% of the Market share- 40% of any companies sales is There dam Tax money being paid back to them lol.
    I tell yea what that – A Government Employee – gets his pay check – an pays into a penson plan – An opts out of SS – Lol – Yea thats a GReat System. After he pays his taxs to help pay fo his next check – = Spends his money – THOSE COMPANIES HE SPENDS HIS MONEY at PAY TAXES AND THOSE COMPANIES PAY HIS CHECK LOL HE IS WORKING FOR FREE WHO IS THE SLAVE –
    The Progressive TAX Policy is destroying are country and keeping us poor –
    And actually a % of your Check is just Your Money and for the Prodcuing class – that would be your Debt burden that App how much money you could have Earned.
    64k * 300 – is a debt in 2020 i ask anyone feel like they got there moneys worth.
    DAm liberals, progressice democRATS, are STUpid

  89. #89 Andrew
    March 23, 2010

    I like the argument. Let me see if I get this right, “SS isn’t a Ponzi scheme because its up front about what it does”

    Oh, ok. So I can opt out of Social Security at any time, right? Just because SS is upfront about being a Ponzi scheme doesn’t make it not a Ponzi Scheme.

    The fact that I have no say as to whether or not I want to be a part of Social Security makes it the most beautiful Ponzi scheme in the world!

    If I put a sign on my door that says, “Please enter, there is a gun attached to the door that will go off when the door is opened.” I will still be charged with murder if someone opens the door.

    Stating a crime before committing said crime does not make it less of a crime. Just as stating that you’re running a Ponzi scheme and forcing citizens to be a part of it doesn’t make it less of a Ponzi scheme.

The site is currently under maintenance and will be back shortly. New comments have been disabled during this time, please check back soon.