Social Security a Pyramid Scheme?
Regarding Pyramid Schemes, the SEC’s website has the following to say:
…despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.
Isn’t this the same setup as our Social Security system? From the SSA’s website:
Social Security is largely a “pay-as-you-go” system with today’s taxpayers paying for the benefits of today’s retirees. Money not needed to pay today’s benefits is invested in special-issue Treasury bonds.
Well, it’s no wonder we faced a social security crisis in the early ’80’s, and we’re facing the same problem again today. The pyramid has just gotten too big, and there aren’t enough new investors to make the full payments to earlier investors, and as a result, many people will lose money. When Reagan was president, this was a delicate give-and-take process that required tradeoffs from both the Republicans and the Democrats to fix. “Democrats accepted a six-month delay in the annual cost-of-living adjustment and the increase in the retirement age, while Republicans accepted a faster-than-planned rise in payroll taxes and a substantial tax increase on the self-employed.” [from brookings.edu article above].
So why are we not seeing the same kind of give-and-take discussion with today’s politicians?
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February 24th, 2006 at 6:35 pm
Agreed. A legitimate pyramid scheme.
March 3rd, 2006 at 12:01 pm
While I can certainly appreciate the criticism, I don’t think comparing social security to a pyramid scheme is quite the same. The problem (meaning, the actual structural problem) with social security now is demographics: specifically the age distribution. Social security is a plan that would have worked just fine with good planning and a steady, or rather, stable, population growth. The baby boom population is reaching retirement age and now society has to support a bunch of fogies. This should have been seen sixty years ago.
Also, the management sucks.
March 3rd, 2006 at 12:20 pm
Kole, true with a steady population growth the payments would be calculable and the program could remain solvent; but, I think it would be a better system if two things were modified: 1) Individuals pay for their own benefits through their working years, and 2) Individuals were given some choice of investment, rather than strictly giving it up to the federal government.
If each generation paid for their own benefits, then it wouldn’t matter how much the population expanded or contracted. Of course, with point 1, there would need to be some provision for those that could not pay for their own (the disabled, etc.)
March 4th, 2006 at 1:12 am
Paying for one’s own benefits won’t work though since that would take money away from today’s recipients of SS who have payed for the generations before them to have SS. If we took money out of SS for our own future, what would happen to the current elderly? It would take a huge loan to cover them.
SS is not broken. It doesn’t need fixing.
http://www.tinyrevolution.com/mt/archives/000355.html
The above gives a nice brief summary that mirrors my ideas while the below is from the Center for Economic and Policy Research and is run by a very intelligent economist (Dean Baker) who has been interviewed on NPR before and in other high profile programs.
http://www.cepr.net/publications/social_security_2005_03.htm
March 4th, 2006 at 8:19 am
The idea to have the current generation pay for their own benefits was more a criticism of how Social Security was set up, rather than a solution to fix it now. You really can’t just cut off those currently dependent on the system, like you would have to do to switch it to an ownership system, although privatized accounts would be a step in the right direction, because it would add to the potential increase of social security recipients by investing in something with a higher rate of return.
When you say Social Security isn’t broken and doesn’t need fixing, I assume you just mean that you like the way the current system is set up. In its administration it isn’t necessarily broken, but it is indisputedly headed toward insolvency at its current rate. One of two things will need to happen for sure; either they will need to raise taxes or cut benefits. Which do you prefer?
March 4th, 2006 at 10:51 pm
My solution? I would have state government employees pay into SS instead of the current practice of many government workers paying into alternate savings plans. I would also raise the roof on the amount of income taxable for SS. As it currently stands, you are only taxed on the first 90K or so of your income for SS. So, the millionaire and the guy making 90K are paying the same amount of SS each year. I’d raise it to about 120K of income taxable. Mind you, I wouldn’t make these changes for another 20 years or so. SS is headed to decreased payments by 2042 or 2052 or never depending upon which government organization you believe. There’s no rush. SS is working very well as it is. Everyone can relax a little bit.
March 4th, 2006 at 11:50 pm
This report from the Congressional Budget Office helped me to clear up the apparent contradiction between whether or not Social Security is sustainable as currently implemented:
So again, it goes back to whether or not you want to cut benefits or raise taxes. Raising the maximum taxable income for social security would be one way to do it (the Robin Hood approach of taxing the rich to support the poor). There are several other ideas that I have read, that I think are interesting and at least worth considering, the best of which is the idea for privatized accounts:
Jeffrey Liebman of the Kennedy School of Government
Martin Feldstein of the National Bureau of Economic Research
And other ideas:
Peter Orszag and Peter Diamond from the Brookings Institute
While there is much debate about what the specific solution may be, I haven’t seen very much debate that Social Security can continue to pay out its current benefits for an indefinite amount of time, and so social security is in need of reform. It may not be a crisis (especially for those with sufficient personal savings, or employer-sponsored pensions) but it is definitely a problem that foresighted politicians should address now, because the longer we wait, the more costly it will be. And who will it be costly for? The retired and disabled who rely solely on their Social Security benefits to survive.
Other sources:
factcheck.org
Cato Institute
Statement of Douglas Holtz-Eakin Director The Future of Social Security before the Special Committee on Aging (United States Senate, February 3, 2005)
Economic Policy Institute - Research and Ideas for Working People
David C. J