January 18, 2005
A New New Deal
The economic fascism of the thirties has been proven to be a failure over and over again yet we continue to cherish programs that are more indicative of Mussolini than George Washington. In 1996 Bill Clinton proclaimed the era of big government over, yet our government is bigger now than it has ever been. A complete overhaul of Social Security would be a step in the right direction and is long long over due.
Let's start by questioning our assumptions. Why is the government in the business of providing your retirement? When Social Security was created the tax was 1% from the employee and 1% from the employer. Today it is 7.65% from each. 15.3% of your income from the time you first started working.
Your retirement account. An account that is unlike any other. A retirement system that if administered by any private company would be called a ponzi scheme.
A Ponzi scheme is a fraudulent investment operation that involves paying returns to investors out of the money raised from subsequent investors, rather than from profits generated by any real business. The scheme is named after the discoverer of the technique, Charles Ponzi, an Italian immigrant in 1903 to the United States. The manner of Ponzi's initial scheme was actually fairly crude, one of the apparent reasons being that he himself believed that he had found a way to generate (legally) large profits. Today's schemes are considerably more sophisticated.The idea behind the Ponzi scheme exploits the basic human trait of greed. wikipedia
Despite protestations that Social Security is nothing like a Ponzi Scheme the facts are clear that it is, even by the definition of the Social Security Administration itself explaining why they are not a Ponzi scheme.
The essence of the Ponzi scheme was that Ponzi used the money he received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to place their money with him in the false hope of realizing this same extravagant rate of return themselves. This works only so long as there is an ever-increasing number of new investors coming into the scheme......In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called "pay-as-you-go" system. Some private pension systems, as well as Social Security, have used this design. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.
Just like Ponzi, the Federal government purports to collect payments into a 'trust fund' as if it were setting aside your money as an 'investment' for your retirement. Nothing could be further from the truth. The money is after all, passed through the 'pipeline'. More than that, it is passed on to pay for regular budget items. In fact Social Security takes in far more than it needs to fund current payments. So congress 'borrows' the excess.
The effect of making Social Security an 'off budget item' hides the total tax burden on America, making calls for tax increases an exercise in deep psychological denial of the fact that the problem is not that revenues are low, but that spending is out of control.
Supporters of the welfare state often are upset that companies like Wal-Mart are somehow a monopoly cheating or even destroying America, yet can there be any better definition of a monopoly than Social Security? In essence coerced payments for a fraudulent product?
In 1936 the Social Security Board sent out this letter explaining this new entitlement:
Meanwhile, the Old-Age Reserve fund in the United States Treasury is drawing interest, and the Government guarantees it will never earn less than 3 percent. This means that 3 cents will be added to every dollar in the fund each year....What you get from the Government plan will always be more than you have paid in taxes and usually more than you can get for yourself by putting away the same amount of money each week in some other way. 1936 Government Pamphlet on Social Security
Due to the arbitrary nature of this ponzi scheme rates of return vary according to the whim of congress who are not legally obligated to pay any specific amount of promised benefits when you 'retire'. The truth of the matter is that Social Security is entirely contingent on obligating the next generation to pay more and more taxes for less and less benefit. The rate of return on Social Security has been steadily decreasing and will continue to decrease in the future.
The only way out of this fascist mess is to privatize Social Security. To actually make your money belong to you. Not to the government in a benefit scheme designed solely to consolidate power and make you dependent on politicians for your future.
Imagine investing 15.3% of your income from the time you began working. Even at 1% compound interest you would surpass Social Security's benefits. Social Security suffers from the same limitation as Charles Ponzi's financial scheme: "This works only so long as there is an ever-increasing number of new investors coming into the scheme..."
Posted by Eric Simonson at January 18, 2005 02:58 PMYes, let’s do begin with assumptions. Your first one is dead wrong! Social Security was not, and is not, a retirement program. It is a safety net, and insurance policy against poverty. Only problem was, the bill wouldn’t pass unless the rich cats got paid too for contributing. Thus the only major flaw with the Social Security insurance program is that it pays out to everyone whether they need it or not. Try running any other insurance program like that and you end up in the same money pit.
The fix is easy. Means test benefits so only those who need assistance to stay out of poverty get it, and eliminate the income caps on deductions, so that Bill Gates pays the same rate on his total earnings as the average American wage earner does. Voila! Social Security Insurance Program saved through the next century.
Posted by: David R. Remer at January 18, 2005 03:33 PM” Today it is 7.65% from each. 15.3% of your income from the time you first started working.”
Eric,
Of course you would have to assume that your employer would give you the other 7.65% if he didn’t have to pay it to the government.
And I have a bridge I have been trying to offload.
Is Fascism your new word for the moment?
Posted by: Rocky at January 18, 2005 03:44 PMDavid,
My assumption is also that it was supposed to be a welfare program, but today it is not. It is a retirement savings plan. All you have to do is go and read the SS website.
Social Security’s retirement program has been a basic part of American life for more than 68 years. In addition to benefits for retired workers, Social Security also provides financial support to younger workers and their families who face a loss of income due to disability or the death of a family wage earner. ssa.gov
Rocky,
Regardless of whether you might get the added 7% from your employer, were it not being siphoned off by the state, it is an undeniable part of your compensation now.
And yes, fascism is my new word for the moment. It’s kind of a fun word to throw around. Why should Michael Moore and George Soros have all the fun?
Posted by: ericsimonson at January 18, 2005 04:01 PM“This works only so long as there is an ever-increasing number of new investors coming into the scheme…”
Shall we add a bit more context here, Eric? From the “protestation” page you linked to:
The essence of the Ponzi scheme was that Ponzi used the money he received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to place their money with him in the false hope of realizing this same extravagant rate of return themselves. This works only so long as there is an ever-increasing number of new investors coming into the scheme. To pay a 100% profit to the first 1,000 investors you need the money from 2,000 new investors…after the 15th round the number of investors would exceed the population of the earth.The reason that this is a scheme and not an investment strategy, is that the progression it depends on is unsustainable. You must continually get more and more new people into the system…
In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called “pay-as-you-go” system…as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. So we could image that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary….the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.
It all comes down to the difference between multiplying by one and multiplying by two, Eric. I guess someone who doesn’t even realize that Clinton made government smaller and Bushes 41 and 43 made it bigger might not be up on the difference, but I can send you some multiplication tables if you’re interested.
Still, I’ve got to give you credit for a creative condensation of the page, it comes out with almost exactly the opposite meaning. Hey, Blue Team, ever wonder what it would look like if Eric summarized his own postings? Maybe like this?
…a fraudulent idea … and …a deep psychological denial of … fact.
This fascist mess … Posted by Eric Simonson at January 18, 2005 02:58 PM
William-
SS is only theoretically pay as you go, but in practice, with the politico’s of both parties uping the benefits to the the vote of granny and grampy, it has become a ponzi.
What people on the left do not understand in all contexts is the concept of wealth. Generally the left believes there is a set amount of money in the world that needs to be doled out “fairly” or “evenly” generally by government. However, wealth is neither money nor stagnant (unless the gov is involved). Wealth is a state of mind that is determined by individuals and society, but more concretely, it is dependent on quality of life. Money is not stagnant, if you are a smart investor you make money, not by taking it from others but by increasing the quality of life for other people. This may take the form of increasing productivity which leads to more poeple being able to consume goods for less money and so on. If the SS goes the private route it will be a huge boon to our economy, trillions of dollars will be liberated on to our markets to increase the wealth of everyone.
Posted by: mike at January 18, 2005 04:29 PMMike, if what you said is true: “Wealth is a state of mind that is determined by individuals and society, but more concretely, it is dependent on quality of life.”
Bankruptcy would not exist as a concept. Sorry, that statement is utterly out there fairy imagination land.
Brazil and Venezuela ring any bells regarding wealth? It is not infinite as your statement concept implies. In 1929, the U.S. got a bitter lesson in the finiteness of wealth. Some of the wealthy turned abruptly unwealthy, threw themselves out of the windows of their ivory towers. No my friend, wealth is finite, and it is far more concrete than a state of mind.
Wealth is relative as you say on the scale of standards of living. But, when wealth fails to sustain life, as is occuring in many places around the globe, or when distribution of life sustaining commodities fails to deliver to those in need, all the wealth in the world does not keep them alive. They die. Wealth is a very complicated concept as Adam Smith outlined in the Theory of Moral Senitiments and Wealth of Nations. But, it is not a state of mind, it is anchored solidly to the physical world of procuring life sustaining commodities like shelter, food, water, life supporting environments, and protection from the elements.
Posted by: David R. Remer at January 18, 2005 04:48 PMWilliam,
Still the point remains, if you will… the argument that it is not a Ponzi scheme is conditional. “…as long as…”
So we could imagine that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary….the system can continue forever.
That’s what’s so funny about the explanation itself, it sounds more like Charles Ponzi trying to refine his technique than it does a serious denial. Or perhaps we have stumbled upon the greatest business model ever! As long as we have new investors the system can continue forever!
The proof that SS is at heart a ponzi scheme is the reason everyone says we have a problem— ie. demographics.
I understand the left has an ideological investment in the program far outweighing it’s actual benefit, but at least address the central argument when you say I’m lying.
I hope everyone is able to read the entire page of this explanation so that they can decide for themselves. It’s quite instructive when they point out the ‘superficial similarities’ as, well, only superficial. And that there are HUGE differences, because it’s not a ‘pyramid scheme’ either, it’s a ‘transfer payment’.
In this context, it would be most accurate to describe Social Security as a transfer payment—transferring income from the generation of workers to the generation of retirees—with the promise that when current workers retiree, there will be another generation of workers behind them who will be the source of their Social Security retirement payments. So you could say that Social Security is a transfer payment, but it is not a pyramid scheme. There is a huge difference between the two, and only a superficial similarity.
It might look like a pyramid or Ponzi scheme but really it’s not. So what is this HUGE difference?
If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security). During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems. (Of coure one might want to argue that there are better ways to finance Social Security than its traditional pay-as-you-go approach. However one views this policy question, we are concerned here only to correct the mistaken idea that a pay-as-you-go system is the same thing as a Ponzi scheme.)
Oh. That clears it up then. It’s just the nature of ‘pay-as-you-go systems’, which is nothing like a ponzi scheme. What was the definition of a Ponzi scheme again?
The reason that this is a scheme and not an investment strategy, is that the progression it depends on is unsustainable. You must continually get more and more new people into the system to pay-off the promises to the earlier members. So if I promise to double your money, the only way I can do that is to get two new people to give me the same amount you “invested,” which I then pay to you as your “profit.” But now I have two new people, each of whom expects the same pay-off. And to pay them, I need to get four new people. And to pay those four, I will need eight more, and son on. After a few rounds of this kind of increase, the number of new participants in the next round would be larger than the number of persons on the earth. That’s why all pyramid schemes must inevitably come crashing down.
You’re right William, I totally misrepresented this explanation from the Social Security Administration itself as to what a ponzi scheme and a legitimate retirement ‘investment’ program is.
Mike, note the etymology:
c.1250, from M.E. wele “well-being” (see weal (1)) on analogy of health.
buy those standards that you employ david
But, it is not a state of mind, it is anchored solidly to the physical world of procuring life sustaining commodities like shelter, food, water, life supporting environments, and protection from the elements.then the US is and extrodinarily wealthy contry without want. THe reality is that wealth is relative whether you like it or not and it is not finite as you tried to assert without evidence. Mercantilist economics are out with the 18th century, but you on the left have not kept up with the times. The way to end poverty is not through the distrobution of wealth, but the create more and more wealth. Who cares if your neighor has 10 homes when you have one or two. You do not recongize the value of investment or are mistified by its magical properties, but the fact remains that investment works to create wealth more often than not, to be exact the stock market averages a 10% return a year over the last 100 years. That is real wealth that is created because that money creates a higher standard of living for everyone in this country.
Posted by: mike at January 18, 2005 05:02 PM
Eric said: “I hope everyone is able to read the entire page of this explanation so that they can decide for themselves. It’s quite instructive when they point out the ‘superficial similarities’ as, well, only superficial. And that there are HUGE differences, because it’s not a ‘pyramid scheme’ either, it’s a ‘transfer payment’.”
BINGO! Thank you for confirming my argument about the insurance program. That is exactly what insurance is all about. Everyone pays in to be insured so that those who suffer a loss can recover. Transfer payment of premiums paid to those insured against loss. Social Security was initially designed to be an insurance plan. If you read the legislative history, you will find that its original intent as insurance was modified by those representing the wealthy who felt that if they were going to have to pay in, they should be eligible for a benefit in the end whether they needed it or not. In other words, it was the wealthy who turned it into a retirement plan. The original intent was insurance against poverty, which is why survivor benefits and disability are such integral parts of the current system.
Reform? Yes, reform it to the insurance plan it should have been all along. It will keep the wealthy from having to wade through a sea of indigents on their way home from work every evening as in India.
David,
I’ve always been told that it was not supposed to be a retirement plan either. But I have yet to read any official documentation from that era that doesn’t essentially support the retirement, old age pension scheme, repleat with ‘accounts’ being set up etc.
It’s hard to find the time but feel free to dig through here.
Posted by: ericsimonson at January 18, 2005 05:27 PMI’m not sure insurance can be defined as a transfer payment either, especially since it is essentially a contract with provisions, unlike SS.
Posted by: ericsimonson at January 18, 2005 05:28 PMMike,
Investment creates wealth for those that already have it. The problem is that those with no money to invest don’t benefit, except in a theoretical kind of trickle-down way. As the focus shifts from people to money, practices which increase profits become paramount, often to the detriment of those that are good for those who actually do the work that drives the profits. Consider job outsourcing—great for the stock market, lousy for tech support people.
I know everyone gets all excited about the stock market returns for individual accounts. I’ve always wondered something, though, and maybe you red guys can explain it to me. The president has said that the accounts will be controlled and only allowed to go into safe investments. I’m assuming that they will have a list of “safe” places to put your money. If even 2% of every worker’s salary is suddenly shifted to these investments, won’t that drive up prices considerably, without neccesarily increasing productivity? A massive amount of demand for stocks, with about the same supply. I was under the impression that boundless faith in the stock market, coupled with too much investment, was what drove the bubble that burst in the dot-com crash.
I have no economics training but it seems that these “personal accounts” will have the effect of massive government interference in the stock market-strange for guys who claim to hate government interference, especially in business. Who knows what effect that interference will have on the market?
Eric said: “I’m not sure insurance can be defined as a transfer payment either, especially since it is essentially a contract with provisions, unlike SS.”
I apologize, Eric, I don’t understand your comment above. Insurance transfers funds paid in by all to those in need, due to the loss insured against. I fail to see any substantial difference between much of the SS system and insurance save for the retirement aspects I discussed above.
The shift from a retirement plan to an insurance against poverty in retirement is a fairly easy and simple one to make. Means test the benefits for those in retirement, and withhold for those over retirement age who are electively still working full time.
I will check out the link you provided. Thanks, Eric.
Posted by: David R. Remer at January 18, 2005 05:45 PMEric, not to be fascetious (or fascist) for just a moment: the question is how fast the number of “investors” needs to increase with time.
In a Ponzi scheme growth the returns for early investors are high, and the number of investors grows quickly. Hence the scheme ends quickly, when no new investors are available. In SS the returns for early investors are modest, the number of investors grows slowly or stays constant. Since new investors don’t need to be recruited constantly, the system is sustainable, as long as the economy doesn’t actually shrink.
Ponzi schemes are get-rich-quick — those at the top of the pyramid make out like bandits. So obviously somebody loses as well. In SS nobody gets rich.
You’re probably smart enough to understand this, Eric, and I have a feeling you that actually do. We all can read the papers and do math, and we all know that the SS “crisis” is a COMPLETE HOAX.
In 2042, when Bush says it will be “bankrupt”, SS will be paying for 80% of its expenses from revenues. In 2006, the US government can pay only 66% of expenses from revenues. So 30 years from now, SS will be less “bankrupt” than Bush’s government budget is right now. Medicare, health care - yes, there are crisis. But this? This, Eric, is politics.
So why the tirade? why the misrepresentations, disortions, and bitter rhetoric? why not just say what you want to say, that any government program that transfers money from one person to another is unacceptable to you - that you don’t think anyone should have pay any taxes to promote social equity or security, no matter whether that program works or not?
Posted by: William Cohen at January 18, 2005 05:52 PMEric, here is the introductory paragraph of the original bill found in the PDF at the site you linked to:
A BILL To alleviate the hazards of old age, unemployment., illness, and dependency; to establish a Social Insurance Board in the Department of Labor, to raise revenue, and for other purposes. — Submitted by Mr. Doughton, January 17, 1935.Referred to the Committee on Ways and Means and ordered to be printed.
As you can see, it was originally intended as an insurance program before the fat cat lobbyists got to the Congressmen and had their way with it.
William,
The concept itself is flawed. I actually do believe that Social Security is not a good program. It is essentially a ponzi scheme. Social security is how a ponzi scheme looks when it’s run by the government. As such it does not ‘work’ in a rational sense just because it appears to achieve your goals of social redistribution.
If you created a business to do exactly what Social Security does, you’d go to jail. Even if it were ‘sustainable’.
So why is ii ok if we do it corporately ie. as a government? Because of an ideology that has been shown over and over again to be false in the same way that Ponzi schemes are false.
So, is Social Security a socialist program?
The socialist policies of the last century bear a striking resemblance to the same kind of thinking that led Charles Ponzi to believe he had finally created a way to get rich.
Input from both employer and employee has gone from 1% to 7.65%, with the benefits decreasing over that same time. We have had to increase the age at which you begin to receive benefits and decrease the benefit you receive. I think that shows quite clearly the relationship to ‘unsustainabilty’. Instead of quick get rich scheme, it’s a generational get rich scheme. A difference in scale not method.
Posted by: ericsimonson at January 18, 2005 06:26 PMRocky
I cannot speak for every employer but I would say that from the ones I personally know most are like me.
I employ 29 people. If I could get rid of half of government mandated expenses I could able to, and would be willing to, almost double my employees pay.
While everyone in business is in business to make money, most ARE NOT so greedy that they don’t want to pay their employees more. Most just cann’t afford it due to the government mandated expenses.
ericsimmons, there is no one blinder than he who just won’t see. See?
Posted by: ann anonomous at January 18, 2005 07:16 PMEric-
The thing about a ponzi scheme is that it promises tremendous returns. This is inconsistent with one of your complaints about Social Security: That it has worse returns than the stock market!
If anything resembles a scheme, it’s this whole Social Security Reform thing Bush is pushing. I mean, first, the whole point of Social Security is SECURITY! The name says it all! It’s not meant to be a replacement for pensions, IRA’s, retirement plans, or anything else of the sort. Instead, it’s meant to deal with those whose retirement resources are insufficient to guard them from poverty in their retirement. It is precisely what we describe it as: a safety net. That is, it’s meant to prevent a part of our population from going into poverty, not enrich them.
The point of the program is to keep the elderly out of destitution and also to keep them from becoming a burden on their families. Your nuclear family would experience quite a bit of fallout from a failure of Social security.
Now you can carp all you want to about “economic fascism” but the reality of the new deal is that it is the system under which American became it’s most prosperous, a system that augmented and regulated the free market so that America was served by it but not made a slave to it. Unfortunately, your people have made a point of removing the safeguards put in place, often to the accompaniment of financial scandal and Malfeasance. The New Deal was a good deal, and gave people just the kind of hope your social Darwinists suck at providing: hope for honest dealings, reliable investments, and a government that sides with the people rather than with the powers. Government that does something, that does its job.
George Washington most likely could not imagine the world we live in now. I would venture that even today’s Americans would seem strange, even like a foreign people to him. The policies of Republicans and Democrats alike would probably be a source of great puzzlement or disagreement for him.
It is the spirit of the Founding Fathers, not their civilization, that we now live with. This whole business of original intent is a highly subjective enterprise. Because our civilization has moved on, each side is going to draw whatever golden age conclusions, whatever principles they like best from the time of our founding. The only things that have endured from that time are our language, our constitution, and the promise that we will not be governed by mobs or kings, but law and those elected under that law.
Posted by: Stephen Daugherty at January 18, 2005 07:39 PM“By 2030, there will be twice as many elderly as there are today, with only two people working for every person drawing Social Security. After 2032, contributions from payroll taxes will only cover 75 cents on the dollar of current benefits. So we must act, and act now, to save Social Security.”
Bill Clinton understood some things very well. He said that in 1998. Nothing has been done to improve SS since then. So if we should have acted immediately in 1998 and we didn’t and now its 2005, what has happened to make the system better in the last seven years?
Posted by: jack at January 18, 2005 10:36 PMRon, I would assume that most small businesses would feel the same.
However, there are many large companies that have been nickel and diming their employees in order to make the bottom line more suitable for investors. These folks wouldn’t hesitate for a nanosecond to re-invest the money into their bonus’s.
Jack and Eric, it is important in this discussion not to lose sight of two facts. 1) our population is still growing and new births are on a slight rise, as well, as immigration, legal and otherwise being out of control, adding a large number of workers to the force each year. 2) the bulge of the baby boomers will die. Bush talks as if they will live forever and eternally draw down on federal revenues. That of course, is not the case. 30 years after the baby boom retires, they will be gone, replaced by another generation of smaller number retirees. These two facts combined will create a natural correction of increasing number of workers per retirees after the boomers pass on.
So, corrections to the system need not be drastic if implemented soon, need not be permanent necessarily, as it is bubble, not infinite trend, we are dealing with that will cause deficit spending, and then go away. Hence, the Ponzi scheme analogy simply does not hold up since the bubble demographics will be self-correcting to a major degree.
Posted by: David R. Remer at January 19, 2005 05:12 AMAs such it does not ‘work’ in a rational sense just because it appears to achieve your goals of social redistribution.
It works well enough to keep tens of millions of seniors out of poverty.
Jack, your post is interesting because it puts 2032 as the “crisis” date. Seven years later, it’s 2042. I suspect that, because of the worst-case economic assumptions being made to forcast those dates, seven years from now the crisis will be forcast to occur in 2052.
The whole so-called “crisis” is phony. It’s just an excuse to undermine the New Deal program while Republicans have a majority.
A memo by one of Rove’s assistants, Peter Wehner, spells it out, “For the first time in six decades, the Social Security battle is one we can win.”
If you believe that Bush wants to save Social Security, rather than fulfill a sixty year old conservative dream to dismantle it, you’re just being foolish.
David and AP
If Bush is creating an artificial crisis today, what was Bill Clinton doing in 1998? Either Bush and Clinton are both right or they are both wrong and the SS crisis was a big theme in Democratic politics back then. Were they also just completely wrong?
No matter what we say in answer to those questions, we cannot claim that Bush created this crisis recently or out of whole cloth. At worst, he is just repeating Democratic misinformation from the last administration, or maybe Clinton was right. He was very certain and enthusiastic about it in 1998. As for the Democratic opponents to SS reform, were they wrong then or are they wrong now?
I would argue that the stock market today is the true Ponzi pyramid. Like all such pyramids, greater and greater amounts of money have to be found to feed into it in order to prevent its collapse. So where is this money coming from?
The Investor Class boomed in the 1990s as more and more people plunged into the market in the form of mutual funds and 401k acccounts. At the start of the decade, they had $712 billion in 401(k) and similar plans, 45% of it in stocks. By the end of 2000, that had ballooned to $2.5 trillion, with 72% in equities. This new investor class lost $5 trillion in the stock market from 2000 to 2002.
As long as the wages and salaries of America’s workers can continue to be squeezed there will be money available to feed into the vortex. The money saved by shifting from high-paying U.S. jobs to low-paying jobs in places like Indonesia and China can also be fed into the exchanges, thus preventing the collapse of the pyramid. The only thing that hasn’t been thrown into the mix – yet - is the nation’s social security funds. Privatization of Social Security represents one more draining of the economic pool, forcing all retirement money into the stock market. It is yet another scheme to extract wealth from the masses and put it into the pockets of large investors and corporate coffers. At the same time, the transition, estimated at trillions of dollars, would be funded by those same workers’ tax dollars. Can you say “redistribution of wealth”?
It boggles my mind how those with wealth and power manage to dupe people over and over again into operating against their own interests by making them believe that they have a vested interest in helping those at the top, or that protecting the interests of those at the top is ultimately in our self-interest because one day we might be one of those at the top.
Ingrid
President Bush’s plan does not force all money into the stock market. It would just allow younger workers to invest some of the money they would have paid into SS in the stock market.
Life is a ponzi scheme. We all depend on the next person or the next generation in the case of SS. The problem is that the next generations are smaller than the retiring generations. As President Clinton pointed out by 2030, there will be twice as many elderly as there are today, with only two people working for every person drawing Social Security. Ponzi schemes work with a growing pie and break down when there is shrinkage.
The stock market reflects the wealth of the country. It is not always a perfect reflection and it can be above or below at any given time. There was a bubble from 1998-2000. In fact the high point of the market was almost exactly five years ago. I have to point out that Bill Clinton was president when the decline started, although Bush took the blame the next year.
If you had invested regularly in stocks for an average working life, there is no period in modern American history when you would not have made significant gains. Sure, if you bought all your stocks in January 2000 and sold them two years later, you lost money. But if you began buying stocks all along, you made a pile of money even if you held stocks through the downturn. You don’t even have to go back very far. Anyone who bought the same dollar amount an index fund every month from 1995 until today made more than 10% a year on average. He bought some high priced stocks in 1999 and some low priced ones in 2001 and overall made money.
Here is a thought - if Soc. Security is supposed to be an insurance program to keep people from poverty at retirement (and in case of disability), how about just scrapping the whole thing and let welfare take care of those who retire without enough income to live? The regressive Soc. Sec. “payroll taxes” would be eliminated, to be replace by our current “progressive” income tax system. Why should this federal program have its own special tax to fund it?
Of course that would require a lot of “self reliance” and “personal responsibility” on the part of the citizenry.
Posted by: Brett at January 19, 2005 03:07 PMI think it is clear that behind all the rhetoric of those trying to divert some or all of SS funds into private accounts is an aversion to the very concept of the government taking any of their money to run a program to ensure (not necessarily insure) that everyone has a little bit of retirement income to sustain themselves when they are too old to work. They look at that money and imagine how much more they personally could have (and in their more generous moments, how much more others less needy than they could have). However, investing those dollars in individual retirement accounts would not return the same amounts that mutual-fund-based IRAs have for a number of reasons. And those at the bottom would suffer most from those little nicks out of the return, to the point that they would not have enough to retire on.
There were some aspects of the original system that were created to stem the objections of the type of people who are objecting today, as well as for humanistic reasons. “Accounts” were created; pay-outs were related to the amount paid in; everybody gets some regardless of need; etc. A lot of people at that time did not believe that such a thing would enhance our social well-being and their modern counterparts are using these “problems” to argue that the system needs to be dismantled. However, the unprecedented boom in the general welfare since the implementation of the New Deal argues that the systems it engendered, if not a source of this boom, at least don’t have the power to do much harm.
It is very clear that the proponents of SS reform on this blog do want to dismantle it. They are fundamentally and philosophically opposed to governments taking money from them and giving it to others who are not “deserving” in their eyes. Those who do deserve it are the manufacturers of weapons and builders of highways. Full stop. They discredit any notion that social support systems create a better life for everyone. They are afraid to just say that when it comes to a particular popular program is that they would undo all the work of the last 30 years in convincing the American public that their old incarnation is a mischaracterization and that they are really in it for the little guy and that the underprivileged and misbegotten will also fare better under their vision of society. Nevermind that there are no historical precendents for this belief. They leave a lot of unanswered questions, their responses to which devolve to moralistic statements that helping people can hurt them, or faith-based statements about the magically properties of the marketplace. It makes it very difficult to argue the facts and logical extrapolation from those facts when the goal is predetermined.
Posted by: Mental Wimp at January 19, 2005 04:20 PMMental Wimp-
First of all let me say that I’ve been calling Social Security a Ponzi scheme for years now, so Eric’s article comes as no surprise.
But I do not want to dismatle the “intent” of Social Security, only change its design. Whether it is replaced by a more insurance based program as David describes, or a true investment program as Eric advocates, my only desire is that we take the opportunity to fix what is a flawed system before it costs us big time.
And that should be the debate, not that conservaties want to dismatle a program just because they think they can or that this is a phony crisis.
Let’s see… major premise, government is too big; it grew with the Bush I and II regimes, and shrank slightly in the Clinton era.
Conclusion, let’s get rid of Social Security.
Missing premise — the growth of government is due to the Social Security administration.
Test — did the SS admin grow over those years?
Answer — no.
Therefore, the whole discussion is horseshit. Fixing SS would do nothing about the size of government, and, in fact, were it instantly deleted from law, would have an even larger impact on the deficit, since it’s the Social Security surplus that allows this madministration to run up bills like a zany “I Love Lucy” episode.
Does it require a large number of producers to sustain it? Sure. So does the goddamn economy! So what? The dot-com boom made a whole bunch of people rich, before it made many of them poor again, and it wasn’t a “Ponzi” scheme.
Those of us who want to protect the SS system are the “prosses” (pro-SS-es), but the opponents are “asses.” Get off your asses, folks, and don’t worry so much about Social Security. Worry about the deficit the Bush tax cuts have created (not to mention the Bush war-of-choice in Iraq). You want to fix something of importance to the people? fix that!
Ed
Jack,
A straight comparison between the rate of return on private retirement plans and Social Security contributions is misleading. You somehow have to find the money to pay for the benefits of the current generation of retirees.
Proponents tend no to mention the transition costs, which are estimated to be around $2 trillion, and that’s just for the first decade.
Furthermore, real returns are further reduced due to fees paid to investment companies. Britain has had a privatized system since the 80s. Alarm over the large fees charged by some investment companies eventually led government regulators to impose a “charge cap.” Its Pensions Commission also reports that a lot of additional government spending will be required to avoid the return of widespread poverty among the elderly.
Some have argued that the trust fund is a myth. I find Paul Krugman’s opinions on this aspect of the crisis helpful:
“If Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis.
Having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the
payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when benefits start to exceed the payroll tax, then it’s a crisis.
Now it’s true that rising benefit costs will be a drag on the federal budget. So will
rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever
wars we get into. What we really have is a looming crisis in the General Fund.
If you are planning to privatize Social Security in whole or in part, you should be making allowances for those transition costs in the rest of the budget. The way that privatization is being sold is spectacularly dishonest, and to propose privatization and huge tax cuts at the same time is spectacularly irresponsible.”
Posted by: Ingrid at January 19, 2005 10:11 PMMental Wimp, very articulately stated with all the bases covered. Wish I could say it like that. Well done.
Posted by: David R. Remer at January 20, 2005 08:35 AMAnd that should be the debate, not that conservaties want to dismatle a program just because they think they can or that this is a phony crisis.
George, I agree. And if the current GOP leadership really wanted to strengthen Social Security rather than fulfill their sixty-year old dream of anulling it, that’s the debate we’d be having.
As Jack pointed out, Clinton tried to start a dialogue about strengthening SS back in ‘98, only to be shot down by conservatives who felt their power was on the rise.
?BINGO! Thank you for confirming my argument about the insurance program. That is exactly what insurance is all about. Everyone pays in to be insured so that those who suffer a loss can recover. Transfer payment of premiums paid to those insured against loss.?
- Insurance is a transfer of risk. Risk depends on the fortuity of or (unseen occurrence of loss). However, the SS program is most certainly a ?guarantee? program. It is NOT a public good. Ideally, the plan is that all people will take from SS. As long as you reach retirement age, there is no unforeseen nature to the benefits that will be paid out.
- The reason that SS has failed is that the constructors could never have calculated that people would live so long. Since people are healthier and ALIVE for a longer time, SS should have a higher benefit age. I agree though, it was never intended to be a retirement program, just an income adjustment to avoid a high poverty rate.
- There is also the consideration that REAL wealth (not in anyone?s mind of course) may have grown faster during the past 68 years than it will for the next 68 years. If this is true, you will find higher paid ?retired and former? employees enjoying the retirement benefits that could not be replace by 2 workers. Because, real wealth was higher for the beneficiary than the payors.
- I remember seeing a presentation given by Ted Kennedy on the insolvency of SS. Not a big fan, but it was an awesome representation of facts. Even crazy-ass Teddy will openly admit the need for reform as well. 1 of 4 (most likely all of 4) must occur. 1) Either the benefits will be reduce. 2) The age at which benefits can be realized must be increased. 3) The tax for SS must be increase (not popular or a fix by the way) 4) Allowing SS to realize a higher rate of return.
- It is not a single fix issue. You both brought up good points, that I don?t altogether disagree with, but it became more a debate class/philosophy session than a well-thought out financial analysis.
Regards ? Actuarially Justified ? InsNerd
Bush took the blame the next year
You’ve got to be kidding me. The Bush administration has TAKEN nothing. They DESERVE much blame, but they’ve avoided accountability for all of their actions. They are the most un-adult administration we’ve had in a long while.
If you need further example, just look at Condi this week. She indisputably said, the ends justify the means. Uhhh, since when??
You right wingnuts keep supporting these people and you’re going to find the solution for social security is to exterminate everyone at age 65, well, everyone who’s not rich. Of course, they will do it more subtly, as to avoid the wrath of the bible thumpers, but the end result will be the same.
I never cease to be amazed at how people will tow the party line so hard, they have bought into every morsel of garbage coming out of the White House. It’s become so “eyes wide closed” it’s terrifying.
As noted so many times on this blog, the values that conservatives purport to believe in have repeatedly been betrayed by Shrub and friends, yet you’ve all bought into it, and continue to. What exactly is it that you believe in?
Posted by: Taylor at January 20, 2005 10:05 AM“In 1996 Bill Clinton proclaimed the era of big government over, yet our government is bigger now than it has ever been.”
Eric,
Is this something else that the right will blame on Clinton?
Taylor,
The only party considering “exterminating” old people is the Democrat party - see Oregon and Dr. assisted suicide.
Of course the Democrat party is the party that approves of killing the babies that could pay the taxes to support the Soc Sec retirees too.
And how about helping minorities? Democrats claim to be the party of African-Americans, and yet since their life expectancy is so low, they are disproportionately hurt by the current soc sec system. If blacks had their own private soc sec accounts, they could pass that unused wealth on to their heirs. And yet the Dems oppose this plan.
Weird, huh?
Posted by: Brett at January 20, 2005 02:13 PM“Democrats claim to be the party of African-Americans, and yet since their life expectancy is so low, they are disproportionately hurt by the current soc sec system. If blacks had their own private soc sec accounts, they could pass that unused wealth on to their heirs. And yet the Dems oppose this plan.”
Might it not be more humane to consider why their life expectancy is oh so low and how to maybe fix that problem. I think their families might appreciate that more than the few extra bucks they might pocket. Sheesh.
Posted by: Ingrid at January 20, 2005 02:38 PMBetter look again Brett. What you see in Bush and crew is not what you are getting.
Cheerleading for Satan isn’t addressing any of the real problems in our country. SS is not the crisis they suggest, and not going to be fixed by what this administration proposes.
Posted by: Taylor at January 20, 2005 06:48 PM“any government program that FORCFULLY transfers money from one person to another is unacceptable to ME - I don’t think anyone should have to pay any taxes to promote social equity or security, no matter whether that program works or not?”
AMEN!!!
