Final week, Alex Tabarrok wrote a put up at Marginal Revolution titled, “Is Social Security a Ponzi Scheme?”
His reply is sure.
That jogged my memory of what I wrote about Social Safety in my 2001 e book, The Pleasure of Freedom: An Economist’s Odyssey.
Right here’s the beginning of the chapter.
I say we scrap the present [Social Security] system and exchange it with a system whereby you add your identify to the underside of an inventory, and then you definitely ship some cash to the individual on the high of the listing, and then you definitely . . . Oh, wait, that IS our present system.
—Dave Barry, “Election could come down to who kisses most orifice,” Miami Herald, September 24, 2000
In 1991, considered one of my college students, Stephen Banus, wrote to the Social Safety Administration requesting details about the Social Safety taxes he had paid and the advantages he might anticipate to obtain. Within the kind letter he received again, Gwendolyn King, the commissioner of Social Safety wrote:
I need to guarantee you that Social Safety is constructed on a sound monetary basis. Social Safety advantages shall be there if you want them.
A prudent man and a very good planner, Banus despatched the same request in 1995. This time, the message within the kind letter was completely different. The commissioner of Social Safety, Shirley Chater, wrote:
The most recent report of the Social Safety Board of Trustees says the Social Safety system will pay advantages for about 35 extra years. This implies there’s time for Congress to make the modifications wanted to safeguard this system’s monetary future.
In simply 4 years, the commissioner had scaled again the blanket assurance that the advantages could be there “when you need them” to “about 35 more years.” What occurred between 1991 and 1995?
Really, nothing a lot occurred in these 4 years besides that the Social Safety Commissioner in 1995 was maybe much less dishonest than her counterpart in 1991. The actual fact is that Social Safety was by no means on a “sound financial foundation.” Opposite to the Social Safety Administration’s official propaganda, there isn’t any actual belief fund. Roughly 80 % of the payroll taxes collected from present staff right now are despatched out to present retirees, with solely a quick stayover in Washington. The federal government spends the remainder of the cash on different gadgets. The so-called belief fund incorporates bonds that the federal government has created. These bonds are merely IOUs from one department of presidency to a different. Chris Jehn, an affiliate director of the Congressional Price range Workplace, compares these bonds to notes that you just write yearly and put in a field in your youngster’s faculty training. The word says, “I owe $5,000 to my daughter’s college fund.” After 18 years of such saving, when your youngster turns 18, you open the field and out comes, not $90,000, however 18 nugatory items of paper.
Those that retired within the early Nineteen Forties received large advantages in return for paying low payroll taxes for only some years. However because the system has “matured,” in order that present retirees have been paying Social Safety taxes for nearly their entire working lives, these retirees have obtained a a lot decrease return.
A personal citizen who arrange such a monetary chain letter would go to jail. Actually, he did. His identify was Charles Ponzi, and he was arrested in 1920 for promising traders that they may double their cash in 90 days and utilizing the proceeds from later contributors to maintain his commitments to earlier ones. Thus was born the time period “Ponzi scheme.”
There are two important variations between Ponzi’s unique rip-off and the Social Safety system. The primary distinction is that Social Safety is run by authorities and, no matter its constitutionality and its questionable ethics, is authorized. The second distinction follows from the primary: Whereas Ponzi needed to depend on suckers, the federal government can and does use power. It’s true that the federal government refers back to the Social Safety payroll taxes—a hefty 10.6 % (an additional 1.8 % is for incapacity insurance coverage and an extra 2.9 %, levied on all earnings from work, is for Medicare) of each employee’s earnings as much as $80,400 in 2001—as “contributions.” However simply strive not “contributing.” That’s what Valentine Byler, an Amish farmer in New Wilmington, Pennsylvania, did in 1961. His faith taught that its members ought to look after one another and he tried to behave on his spiritual beliefs by not paying Social Safety taxes. The Inside Income Service responded by seizing three of his horses and promoting them to gather $308.96 in unpaid taxes.
The Social Safety Administration’s new line is that the fund is solvent till 2037. What the federal government officers who say that actually imply is that by 2037, the final of the particular federal authorities bonds that the Social Safety Administration has purchased and stored within the Social Safety “Trust” Fund shall be bought off to the U.S. Treasury. This “sale” of bonds is solely a switch between the federal government’s left and proper palms. To unlock the money to pay for these bonds, the Treasury must float new bonds, improve taxes, or minimize different spending.
The extra related date, due to this fact, is when the federal government’s profit funds begin to exceed its earnings from payroll taxes and from curiosity on these bonds—as a result of that’s when the bonds will first be bought and the federal government must provide you with further money. That date, the Social Safety Administration now initiatives, shall be 2024, about two-thirds of the best way by way of the retirement of the newborn boomers.
Within the late Nineteen Nineties, the federal government’s personal actuaries estimated that, to keep up promised advantages, the tax price must rise over the subsequent many years from its present degree of 12.4 % to greater than 18 %. At an 18 % price, Social Safety taxes could be about 7.5 % of general GDP. However whole federal revenues from all sources, not simply from the Social Safety payroll tax, have stayed inside a slim vary of 18 to twenty % of GDP because the early Nineteen Fifties. If this historic fixed held, then the Social Safety program alone would take about 40 % of the entire tax revenues collected by the federal authorities, leaving the remaining 60 % to pay for Medicare, curiosity on the debt, protection, and every part else the federal authorities does. That doesn’t appear doubtless, which implies that the percentages of elevating the Social Safety tax price considerably are, thankfully, pretty small. Sooner or later sooner or later, due to this fact, advantages must be lower than promised.
