Friday, September 16, 2011

More on Social Security = Ponzi Scheme?

1. Cato's Michael Tanner, "At Least Ponzi Didn't Force People to Enroll":

"Imagine that someone comes to you with a new plan to save for your retirement. They take your money, but they spend it. Then, they find new investors. They take money from those new investors and give it to you, then go looking for still more investors so that they can give their money to the people whose money they gave to you. That is exactly what Charles Ponzi did in 1916 with the original Ponzi scheme. And that pretty well describes what Social Security does today.

Unlike Charles Ponzi's original Ponzi scheme, Social Security will never go broke as long as the government can force people to pay more taxes and accept fewer benefits. But does that make Social Security better than a Ponzi scheme - or worse?"



"Of course it's a Ponzi scheme. So what? It's also the most vital, humane and fixable of all social programs. The question for the candidates is: Forget Ponzi – are you going to fix Social Security?"

Update:

3. Dean Kalahar at Real Clear Markets, "Social Security's Truth Is Coming Our Way":
"In simple terms the FICA program is a pyramid or Ponzi scheme. In the fraud, people on the top of the pyramid collect as long as they can get others below them to pay in. Now as the baby boom retires, the takers outstrip the payers. And like all Ponzi schemes, this is when the system will collapse like a house of cards and take with it the American economy.

The day of reckoning is here. Not even the all powerful OZ can spend other people's money, write an IOU to himself, and then on some future day expect to use those IOUs to fund the Emerald City. It's time to pull back the curtains and admit "the emperor has no clothes."

72 Comments:

At 9/16/2011 9:32 AM, Blogger morganovich said...

is it just me, or does the the difference between an "inter-generational wealth transfer" and a "ponzi scheme" look a great deal like the difference between "federal accounting" and "GAAP"?

 
At 9/16/2011 9:42 AM, Blogger Broll The American said...

Social Security can never go broke, not because it can force new investors to participate, but because the government is the issuer of its own currency.
FICA taxes function to remove excess spending power, not to fund or create revenue for SS payments. FICA taxes could be eliminated right now and it would not have any effect on the government's ability to pay SS obligations.
The only danger would be if all the seniors or current day workers with excess money in their paychecks started out spending our productive capacity and creates inflation.
That outcome is very unlikely given our current situation.

 
At 9/16/2011 10:12 AM, Blogger Zachriel said...

No. Ponzi promises that it can deliver unreasonably high rates of return while maintaining the principal balance. Instead, Ponzi raids the invested principal balance to create the false impression of profits. Ponzi is inherently unstable and fraudulent.

With Social Security, there is no principal balance. It's a simple transfer of money from young to old.

 
At 9/16/2011 10:20 AM, Blogger Broll The American said...

The dollars that the government spends and the dollars that it collects from taxes are not the same, so SS isn't really wealth transfer from young to old.

The US government issues its own new currency to pay for whatever it wishes. Taxes, upon receipt are destroyed, therefor reducing spending power and acting as a buffer/control to inflation. The right mix of taxes / spending creates price stability.

The government (therefor Social Security) is not revenue constrained. There are no "funds" to raid, invest or steal from. Taxes are just funds in our paychecks that we're not allowed to use.

So the question should be, do we want the government to remove our spending power through FICA to limit inflation, or should we want them to leave our paychecks alone and deal with potential inflationary effects? While at high unemployment and under productive capacity, I opt for the later.

 
At 9/16/2011 10:29 AM, Blogger Zachriel said...

Broll The American: The dollars that the government spends and the dollars that it collects from taxes are not the same, so SS isn't really wealth transfer from young to old.

If the funds collected exactly matched the funds spent, then people's benefits would constantly change due to seasonal, economic and demographic fluctuations. Instead, a Trust Fund was established to buffer these changes. Otherwise, it is a direct transfer from young to old.

Broll The American: The government (therefor Social Security) is not revenue constrained.

Social Security is. By law, if the Trust Fund ever becomes depleted, then benefits will exactly match receipts.

 
At 9/16/2011 10:40 AM, Blogger Broll The American said...

Zachriel:
Instead, a Trust Fund was established to buffer these changes.
The fund is nonsense. Its nothing more than a tally sheet somewhere. When the government is fully capable of issuing its own currency whenever it needs, why would it suck some out of the economy and store it away somewhere for future use? It would be like the iTunes store limiting downloads on a hit song so it can allow downloads of it a year from now.

Social Security is. By law, if the Trust Fund ever becomes depleted, then benefits will exactly match receipts.
A Political choice/misunderstanding was made. That does not mean that the Rube-Goldberg apparatus surrounding our monetary policy created by politicians is correct. The law is flawed because those who wrote it do not understand monetary sovereignty.

 
At 9/16/2011 10:47 AM, Blogger Zachriel said...

Broll The American: The fund is nonsense. Its nothing more than a tally sheet somewhere.

Yes, it's a "tally sheet." That's how all accounting is done. Some of the money goes into the bank, some into the cookie jar for vacation money.

Broll The American: When the government is fully capable of issuing its own currency whenever it needs, why would it suck some out of the economy and store it away somewhere for future use?

It's called saving for the future. Many countries have sovereign funds with positive balances.

Broll The American: It would be like the iTunes store limiting downloads on a hit song so it can allow downloads of it a year from now.

If they limited downloads, and there was high demand, then they could charge more. Typically, though, in music, this doesn't work, as demand is ephemeral.

You may think that securities are just paper, but people will trade securities for gold or cash or electronic gadgets or whatever. And if you don't pay your debts, which are nothing but marks on a tally sheet, then you will not be able to buy any more gadgets.

Broll The American: A Political choice/misunderstanding was made.

Yes, a political choice, that Social Security should be self-funding — which is has been since its inception.

 
At 9/16/2011 10:58 AM, Blogger Seth said...

"It's a simple transfer of money from young to old."

A ponzi is a simple transfer of money from the late investors to the early investors.

Sounds like the same to me.

The promise of high returns is just the bait to get people to voluntarily donate. Government obviously doesn't need to persuade people to participate.

 
At 9/16/2011 11:01 AM, Blogger Zachriel said...

Seth: A ponzi is a simple transfer of money from the late investors to the early investors.

Ponzi raids the invested principal balance to create the false impression of profits. With Social Security, there is no principal. It is a simple transfer from young to old. This is what it looks like:

http://www.ssa.gov/history/pics/pipeline.jpg

 
At 9/16/2011 11:08 AM, Blogger Broll The American said...

Zachriel - The issuer of a currency never has to save in its own currency. Its a ridiculous concept. The people do, the states do, business do, but not the government/issuer. When the government saves it TAKES from the people, states, and businesses.

Any currency issuer that has a positive balance is probably a net exporter. It taxes more than it spends to offset the revenue from exports to stay in balance. The US does the opposite, it spends more than taxes to offset our imports. Negative/Positive, Deficit/Surplus - all just terms to describe the net flow of funds to or from public to private. One is neither better nor worse than the other.

 
At 9/16/2011 11:14 AM, Blogger Buddy R Pacifico said...

"Yes, a political choice, that Social Security should be self-funding — which is has been since its inception."

No, Social Security was not self funded in 2010 and will not be in 2011. The deficit because of the recession and lesser payroll percentage deductions was $49 billion in 2010 and projected $46 billion in 2011.

The U.S. government will have to borrow increasing sums to pay benefits over time. $2.6 trillion of the $14.3 trillion federal debt is money owed to the Social Security Trust Fund.

BTW, the talk of inter-generational wealth fund is complicated by the vast increase in disability benefits to younger workers by Social Security. Disability will be insolvent by 2017, and have to borrow from Social Security Trust Fund for which Congress will borrow from...

 
At 9/16/2011 11:16 AM, Blogger Zachriel said...

Buddy R Pacifico: No, Social Security was not self funded in 2010 and will not be in 2011.

Social Security has prepaid over the last generation. It will continue to meet current benefits until that prepayment is exhausted. At that point, benefits will be automatically reduced to match revenues.

 
At 9/16/2011 11:20 AM, Blogger juandos said...

"Social Security can never go broke, not because it can force new investors to participate, but because the government is the issuer of its own currency"...

OMG! The government also owns the presses that turn out the devalued currency...

What is it about a blatant rip-off that has you and zach so completely stumped?

 
At 9/16/2011 11:31 AM, Blogger Zachriel said...

juandos: What is it about a blatant rip-off that has you and zach{riel} so completely stumped?

You may consider it a poor investment, but that doesn't make it a Ponzi scheme, which raids the principal investment and calls it profit.

 
At 9/16/2011 11:37 AM, Blogger Don said...

All any kind of savings program can do is re-allocate purchasing power. In the case of social security, if it were in balance in any future year, it would transfer purchasing power from workers to beneficiaries.
But the level of that transfer is about as much of an arbitrary number as you could imagine. Does anyone really have any idea whether the mandated benefit levels for 2040 are too big or too small under any selected set of criteria? Of course they must be perfect, having evolved from an omnipotent political process which never fails.

But what really counts is policies which maximize the future supply of goods and services over all time frames. And this means actual effective investment. To the extent that happens, then errors in the benefit levels leave beneficiaries better off to greater or lesser degrees, but never worse off.

Regards, Don

 
At 9/16/2011 11:37 AM, Blogger Broll The American said...

juandos - OMG! The government also owns the presses that turn out the devalued currency...

If Federal spending is printing money, then taxing is shredding money. So the government can either print new money through spending or shred old money through taxes. The right mix will create price stability and full employment.

Inflation has not been an issue for many years, so your "devalued" comment really holds no water. Without sufficient money in the system the economy goes on austerity and contraction. Increased liquidity gets the whole thing moving and GDP out-gains inflation.

 
At 9/16/2011 11:57 AM, Blogger Benjamin said...

The GOP echo chamber is fascinating. Yeah, GOP'ers, go with that: We want to crush Social Security.

The GOP, having been captured by radio talk show hosts, naive utopians and ideological zealots, may seize defeat from the jaws of victory in 2012.

 
At 9/16/2011 12:30 PM, Blogger juandos said...

"If Federal spending is printing money, then taxing is shredding money"...

The mental contortions you had to go through broll to come to that conclusion must've been exhausting...

"Inflation has not been an issue for many years, so your "devalued" comment really holds no water"...

LMAO! On what planet?

INFLATION INDEX CALCULATOR

 
At 9/16/2011 12:32 PM, Blogger Che is dead said...

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). -- Paul Krugman, 1997.

ZeroHedge

 
At 9/16/2011 12:34 PM, Blogger morganovich said...

"The law is flawed because those who wrote it do not understand monetary sovereignty."

no broll, i think it is you who are not understanding monetary sovereignty and it's ramifications.

you seem to imagine that you can just print money forever.

let's say you try.

the fed buys treasury bonds. (this is how money is "printed")

money supply goes up.

inflation results.

inflation is just another kind of wealth redistribution.

it punishes savers to the benefit of borrowers.

apart from crating moral hazard, such policies, taken too far, also hammer confidence, investment (through low savings), and ultimately growth and property.

think back to the 70's.

you act as though this is some costless option.

sure, they can print money if they change the SS law, but to do so has real consequences.

if would devastate the dollar and harm savers.

it's not even clear it would do any good in real terms.

imagine an economy of 100. you print 10 to give to seniors to spend. this drives prices up. depending on elasticities, they may go up more or less than 10%. (and we have certainly seen elasticities over 1 in the past once you get too far past unit growth)

if prices goes up more than printed money, you've done net harm.

 
At 9/16/2011 12:36 PM, Blogger juandos said...

"You may consider it a poor investment, but that doesn't make it a Ponzi scheme"...

True zach, a Ponzi scheme is at least voluntary...

"which raids the principal investment and calls it profit"...

Do some homework...

 
At 9/16/2011 12:40 PM, Blogger juandos said...

More fevered babbling by the pseudo benny: "The GOP echo chamber is fascinating. Yeah, GOP'ers, go with that: We want to crush Social Security"...

Have you ever wanted to actually try to understand even the simplist concepts pseudo benny?

 
At 9/16/2011 12:49 PM, Blogger Che is dead said...

I doubt that any argument will ever convince the "Brolls" and "Zachs" of the madness of a scheme like SS. The articles that Prof. Perry has linked to, like so many others, make the case effectively and eloquently. But the deniers cling to the fiction of SS for the same reasons that Bernie Madoffs investors believed in his investment strategies until faced with the unforgiving reality - they wanted desperately to believe that they had not been had. That same unforgiving reality is now on the deniers doorstep and is knocking loudly.

 
At 9/16/2011 1:01 PM, Blogger Larry G said...

IF Perry and the others who say SS is a Ponzi scheme were men/women of principles - they would have stuck to their guns and advocating getting rid of SS like the zealots who populate CD here...

but the folded like a cheap suit....

so much for someone carrying the "kill SS" banner, eh?

bonus question:

Is Medicare Part B a "ponzi" scheme also (since it is a direct-subsidy funded by "confiscating" taxes from everyone - young and old.

If Medicare Part B consumes 7 times more taxes than SS - does that mean it's 7 times the Ponzi scheme?

Medicare (A, B, C and D) are the biggest elderly wealth-conserving scam ever perpetrated on the American taxpayer but the zealots say SS is the problem....

so much for clear thinking and logic, eh?

SS will be "insolvent" by 2017?

when is Medicare "insolvent"?

 
At 9/16/2011 1:14 PM, Blogger Hydra said...

"Perry is completely right that, based on the status quo, Social Security can't pay all of its promised benefits. "A monstrous lie," in his words.

But this isn't a secret, and I don't know anyone who has argued otherwise. There's no reason to. The numbers are in the open for all to see: Social Security paid out more benefits than it took in from payroll taxes last year for the first time since 1983. It made up for the gap though interest on Treasury bonds held in the Social Security trust fund -- something it can continue doing through 2022. Then, trust fund assets will go into net liquidation, covering benefits through 2036. After that, payroll taxes will cover 75% of promised benefits through at least 2085.

Those are the numbers. But what is a Ponzi scheme? Lately, the term has become a synonym for anything in the financial world that you're unhappy with. But it does have a specific definition. First, existing investors are paid with money raised from new investors. Second, the number of new investors has to increase geometrically to pay old investors. Finally, it has to be a scheme to defraud that will fall apart when the curtain is raised.

Social Security really only fits one of those -- one group receives benefits from cash raised by another group.

But that alone doesn't make it a Ponzi scheme. It's how all insurance companies work. When I pay my car-insurance premium, the money goes to pay for someone else's accident. Someday down the road I'll be in an accident, and the money to pay for my repairs will come from someone else's premium. Does this make GEICO a Ponzi scheme?

Of course not. But the reason some think Social Security is Ponzi-like while approving of GEICO is that GEICO isn't forecasting to hit a breaking point in 2036 where it can pay out only 75% of claims, as Social Security is. Instead of calling it a Ponzi scheme, calling Social Security a poorly managed insurance company run by terrible actuaries may be more accurate.
"

Morgan Housel


Social security is a lifetime proposition, same as the national forest lands. How can it NOT be intergenerational in nature, and anyway, who cares?

Zachriel is correct in saying that a Ponzi scheme is inherently intended to be fraudulent.



What is actually fraudulent and dishonest is insisting on calling social security a Ponzi scheme instead of working the relatively simple and minor adjustments needed to fix its temporary problems.

 
At 9/16/2011 1:18 PM, Blogger Hydra said...

Government obviously doesn't need to persuade people to participate.

===============================

Actually, it does.

The reason Socia;l Security was initiated was that history showed that people would not voluntarily participate and contribute sufficiently to their own retirement welfare.

 
At 9/16/2011 1:19 PM, Blogger Hydra said...

I doubt that any argument will ever convince the "Brolls" and "Zachs" of the madness of a scheme like SS.

===============================

Or any of the other millions who have depeneded on it or partly depended on it.

 
At 9/16/2011 1:20 PM, Blogger Larry G said...

in terms of "ponzi" schemes - DOD and Medicare Part B put SS to shame.

by 2017 or 2022 or in that timeframe - Medicare Part B will use 500 billion in taxes, MedicAid will be at a trillion and DOD, if it continues on the current trend will be 1.5 trillion.

yet..listening to the zealots here in CP -you'd think SS is the big problem.

what happened to common sense?

I still stay if Perry had a semblance of a political backbone - he would stick to his initial statement - and run on it and let the country decide if he is correct ...

If Perry backtracks on something this important.. then he's just another unprincipled flip-flopper who ..by the way.. apparently does approve of mandates - for the things he likes...

who will carry the anti-SS banner?

 
At 9/16/2011 1:29 PM, Blogger Hydra said...

Imagine that someone comes to you with a new plan to save for your retirement. They take your money, but they spend it (on stuff you asked them to spend it on). Then, they find new investors (and every investor gets the same treatment over time, no one gets cheated)


Tanner's comparison of social security to what tanner did is incomplete, inaccurate, and misleading.

Krauthammer is apparently ignorant of the difference between a ponzi scheme and social security.


Both of them are engaging in the big lie process in which one believes that telling a lie often enough, loud enough, and from a big enough bully pulpit will make it true.

 
At 9/16/2011 1:30 PM, Blogger Hydra said...

Perry likes mandated executions, for example.

 
At 9/16/2011 1:33 PM, Blogger Hydra said...

thanks to changing demographics

=================================

Social security has been adjusted for demographics before, and it can be again.

For example, whether you retire at 62 or 65, the total paymenst you recieve in retirement are actuarially the same. or were at one time. Now that people live longer, they may need to be adjusted.

 
At 9/16/2011 1:35 PM, Blogger Zachriel said...

morganovich: inflation is just another kind of wealth redistribution. it punishes savers to the benefit of borrowers.

That is absolutely correct (though a modest amount of inflation can help keep investment flowing).

juandos: Do some homework...

Repeating the same argument doesn't make it stronger. Assuming current benefits, the program is underfunded. That doesn't make it a Ponzi scheme. Even your own source suggests several ways to make the system sustainable, such as raising the age of eligibility.

Nor did you answer the point, which was that a Ponzi scheme works by raiding the principal and calls it profit. Ponzi schemes are inherently unsustainable, yet Social Security has been going on for 75 years.

 
At 9/16/2011 1:43 PM, Blogger Larry G said...

Krauthammer sez this:

" Now, Social Security is a pay-as-you-go program. A current beneficiary isn’t receiving the money she paid in years ago. That money is gone."

that's right.

and if you have homeowners or auto or even health insurance - the very same thing holds true because virtually all pay-as-you-go programs no matter what you call them - do not build a fund from pre-payments but rather pay claims out of premiums received - one year at a time.

no one in their right mind would call auto insurance a Ponzi scheme... and yes it is mandated if you own a car.

and no one would call homeowners insurance a ponzi scheme and yes it too is mandated - by the private sector.

but think about this - the zealots say that SS is a ponzi scheme because it is mandated - and regular pay-as-you-go insurance is not a ponzi scheme because it is not.

A ponzi scheme is not a ponzi scheme because it is mandated...

if that were your criteria.. just about anything that had a mandatory tax on it could be called a ponzi scheme.

what happened to clear thinking and logic?

 
At 9/16/2011 2:30 PM, Blogger morganovich said...

zach-

"Nor did you answer the point, which was that a Ponzi scheme works by raiding the principal and calls it profit. Ponzi schemes are inherently unsustainable, yet Social Security has been going on for 75 years."

i think you are missing the point a bit.

the return on the SS ponzi is very low (at least these days). it has been ratcheting down pretty much since inception.

that does not make it any less a ponzi, it just extends duration and is still funding payout to the last tier from the new one.

the return at the top rate is currently negative even in nominal terms. the only reason it has not collapsed is that, unlike ponzi, the government can force you to invest.

i would never put my cash into SS willingly, even if i believed they could meet their current promises, which they clearly cannot.
absent coercive force, SS would have already collapsed.

in light of it, we'll just see benefits ratchet down and costs stay up.

where a normal ponzi would collapse due to negative returns preventing new money from coming in, this one will stagger on and on generating negative returns and transferring money from the new investors to the old.

it will unravel differently because of federal compulsion to participate, but it's still a ponzi.

 
At 9/16/2011 2:40 PM, Blogger Zachriel said...

morganovich: where a normal ponzi would collapse due to negative returns preventing new money from coming in, this one will stagger on and on generating negative returns and transferring money from the new investors to the old.

Then you don't understand Ponzi. The scheme may be able to turn a substantial profit, but not nearly what was promised. Hence, Ponzi uses the principal to pay the profits to previous investors delays by any means necessary a call on the principal. But it must inevitably fail when people finally demand their principal.

With Social Security, there is no principal. It's pay-as-you-go. If the returns are low or negative, it doesn't matter because what it collects it pays. If it runs out of money, benefits are automatically reduced.

You may not like the setup. You may think it's a lousy deal. But that doesn't make it a Ponzi scheme.

 
At 9/16/2011 3:32 PM, Blogger Seth said...

"Ponzi raids the invested principal balance to create the false impression of profits." -Zachriel

Which is another way of saying that it transfers money from late investors to early investors.

You're getting caught up in semantics. Semantic arguments are not productive. Good luck.

 
At 9/16/2011 3:45 PM, Blogger Broll The American said...

morganovich - Nowhere did I say you could print money forever. Inflation is more complicated that an increase in money supply. Our money supply has increased in multiples over the rate of inflation. The fact is, even though it doesn't fit neatly into your sound bite answer, the quantity of money has very little to do with inflation. Currently with high unemployment and underutilized production capacity inflation is not currently a concern. If we ever reach full employment again and we still can't produce or export as much as we need to meet the needs of the market then inflation will come to fruition.

 
At 9/16/2011 3:47 PM, Blogger juandos said...

"Repeating the same argument doesn't make it stronger"...

Yes zach words you should consider...

"Assuming current benefits, the program is underfunded. That doesn't make it a Ponzi scheme. Even your own source suggests several ways to make the system sustainable, such as raising the age of eligibility"...

Ahhh, but it does make it a Ponzi scheme because over time it is underfunded...

Yeah but apparently you forgot this line from Kotlikoff: 'I say, retire Social Security and replace it with a version that works'...

The rest of Kotlikoff's suggestion look like nothing that's related to today's Ponzi scheme....

There's no intelligent reason for the federal government to be in the retirement business at all anyway...

 
At 9/16/2011 3:58 PM, Blogger juandos said...

"what happened to common sense?"...

Yeah larry g, where is your common sense?

 
At 9/16/2011 4:02 PM, Blogger morganovich said...

broll-

"Our money supply has increased in multiples over the rate of inflation. "

you have to net out unit growth. after that, it's inflationary.

you seem to be of the "inflation is low" school.

it's not.

we just changed the way we measure it.

if it were the 80's, we'd call current price action 8-9% inflation.

this gels well with import costs (up 13% yoy) and export prices, up 10%.

alternately, using today's methodology, inflation never broke 5.5% in the 70's.

there is already a ton of inflation, set off by printing money beyond unit growth.

setting your scale back 20 pounds won't get you into your old pants.

boskinistas and their inflation denial are just pretending inflation is low by defining it out of existence. it was part of a clinton/greenspan strategy to keep COLA on social security low.

note that they are currently looking at adjusting it down yet again for the exact same reason.

current CPI has very little to do with inflation (though even it is rising quickly).

if you believe that inflation is low now, then you must also believe was low in the 70's. if you believe the 70's had high inflation, then you must believe that current inflation is high.

the price moves in underlying goods are the same.

so which is it?

there is no other consistent view, so pick one. will you deny the high 70's inflation?

this is stagflation.

that's what you get when you print buckets of money into an economy that needs to delever. it's just pushing on a string in terms of growth, but it slaughters the dollar and drives high inflation.

 
At 9/16/2011 4:06 PM, Blogger Larry G said...

" Yeah larry g, where is your common sense? "

more Heritage Blather ....

SS "liabilities" don't exist if the program does not change - because by law it reduces benefits.

so where does Heritage get the "growth" in liabilities from?

nowhere. they make it up.

citing the Heritage folks for "information" is like thinking guano is food....

 
At 9/16/2011 4:40 PM, Blogger juandos said...

"so where does Heritage get the "growth" in liabilities from?"...

Geez larry g, I don't know what to tell you except maybe you need someone to read the contents and explain it to you word by word...

Maybe Walter Williams can explain it you: 'We have a national Ponzi scheme where Congress collects about $785 billion in Social Security taxes from about 163 million workers to send out $585 billion to 50 million Social Security recipients. Social Security's trustees tell us that the surplus goes into a $2.2 trillion trust fund to meet future obligations. The problem is whatever difference between Social Security taxes and benefits paid out is spent by Congress. What the Treasury Department does is give the Social Security Trust Fund non-marketable "special issue government securities" that are simply bookkeeping entries that are IOUs'...

 
At 9/16/2011 4:45 PM, Blogger Larry G said...

" What the Treasury Department does is give the Social Security Trust Fund non-marketable "special issue government securities" that are simply bookkeeping entries that are IOUs'... "

not if they don't have anymore FICA taxes ....

the law says that they can only pay out what they collect in FICA.

why does Heritage say otherwise and more importantly, why do you repeat it when you know it's not true?

 
At 9/16/2011 5:13 PM, Blogger PeakTrader said...

Zachriel seems to believe Social Security is better than a Ponzi Scheme. He says:

"Ponzi raids the invested principal balance to create the false impression of profits. With Social Security, there is no principal."

 
At 9/16/2011 5:18 PM, Blogger Larry G said...

" With Social Security, there is no principal."

because......???????

repeat after me:

it's a pay-as-you-go system.

it was designed explicitly as a pay-as-you-go system.

it is remarkably similar to other pay-as-you-go systems in the private sector in that regard.

by your standards - auto insurance is a ponzi scheme...

 
At 9/16/2011 5:31 PM, Blogger morganovich said...

"the law says that they can only pay out what they collect in FICA."

larry-

that's not strictly true.

the law says that they have to reduce payments to income once the imaginary "trust fund' is depleted.

that means that there are, in fact, trillions in unfunded liabilities that will, by law, be paid off before payments adjust.

SS is already spending more than it takes in.

the social security trustees report projects 693bn in this year and 738bn out.

benefits are not being cut.

that means i get to pay for SS benefits for others with income and other taxes, and then get little or nothing when i retire as by then, the "fund" which is about 2.6tn, will be depleted as the gap between income and expense is going to keep widening.

it's going to be a big net loser for me. i'll get nothing like even the principal i pay in back.

it's forced "savings" at negative nominal returns and that return is only going to get worse.

 
At 9/16/2011 5:41 PM, Blogger PeakTrader said...

Larry, Social Security is better than a Ponzi Scheme.

It can tax as much as it needs and pay as little as it wants, unlike insurance firms.

 
At 9/16/2011 5:47 PM, Blogger Larry G said...

"larry-

that's not strictly true.

the law says that they have to reduce payments to income once the imaginary "trust fund' is depleted.

that means that there are, in fact, trillions in unfunded liabilities that will, by law, be paid off before payments adjust."

huh? unfunded liabilities are FUTURE not present. In the present - the law says that the pay out cannot exceed FICA (+ interest and trust funds).

but in the event the trust funds go away - you still have FICA and you cannot pay out more than FICA brings in UNLESS the law is changed.

"SS is already spending more than it takes in."

but it's using it's previously generated surplus to make up the shortfall - and the shortfall itself is because of a temporary reduction in FICA - which if not mistaken - is to be made up.

"the social security trustees report projects 693bn in this year and 738bn out.

benefits are not being cut."

because they are using the surplus that they generated previously that they are allowed to use -by law - until the law is changed.

but I'll go along with your premise and assume that the trust fund will not longer be used.

in that event - unless the law is changed... benefits must reduce and they are scheduled to reduce in 2037 or PRIOR to that date if FICA falls short of projections.

My point is that Heritage and others are showing a trend line going up and they are ASSUMING something in the future that is not true.

it's a misrepresentation - a fallacy - a lie - propaganda.


"that means i get to pay for SS benefits for others with income and other taxes, and then get little or nothing when i retire as by then, the "fund" which is about 2.6tn, will be depleted as the gap between income and expense is going to keep widening."

that's a different issue than the lie about the trend line.


"it's going to be a big net loser for me. i'll get nothing like even the principal i pay in back."

it might well be - but my point is that no one gains anything if we lie about the program.

if you start off using lies and propaganda - you do a disservice to the issue.

"it's forced "savings" at negative nominal returns and that return is only going to get worse."

SS has changed many times over the years - FICA taxes have increased and benefits have been reduced to people before you - that retired.

that's the way virtually any pay-as-you-go program works whether it's public or private sector.

that's the way health insurance works.

you pay more than your predecessors and you likely get less benefits - because health care keeps going up as the population ages and costs go up.

 
At 9/16/2011 5:49 PM, Blogger Larry G said...

" Larry, Social Security is better than a Ponzi Scheme.

It can tax as much as it needs and pay as little as it wants, unlike insurance firms. "

around the world?

if you are arguing that private insurance cannot charge you what they want - how about when they cancel you and you can't get insurance even after you paid premiums for years....

or they won't cover your illness ?

who do you go to when they do that?

 
At 9/16/2011 5:57 PM, Blogger mike k said...

"but it's using it's previously generated surplus to make up the shortfall - and the shortfall itself is because of a temporary reduction in FICA - which if not mistaken - is to be made up."

How can it use a previously generated surplus when that surplus has already been spent?

How can the fund claim interest on notes that have no value? I think my local banker would be looking at hard time if he tried this scheme.

Actually the "shortfall itself" began in 2010 and the reduction in FICA didn't begin until 2011. So the actuaries were wrong. What else might they be wrong about?

 
At 9/16/2011 5:59 PM, Blogger PeakTrader said...

Larry, you're not going to live forever.

Are you saying insurance firms won't sell you auto or dental insurance?

 
At 9/16/2011 6:07 PM, Blogger PeakTrader said...

And Larry, you don't seem concerned about the government driving-up the costs of health care, including an MD education, malpractice insurance, excessive paperwork, etc.

 
At 9/16/2011 6:30 PM, Blogger juandos said...

"the law says that they can only pay out what they collect in FICA"...

The better question larry g, why do you quote a nonexistent law? Are you taking lessons from pseudo benny?

 
At 9/16/2011 6:45 PM, Blogger Larry G said...

" How can it use a previously generated surplus when that surplus has already been spent?"

because they law credits them with that amount the same way it says it will cash your savings bond or China can redeem their securities.

..until or unless the law is changed.

"How can the fund claim interest on notes that have no value? I think my local banker would be looking at hard time if he tried this scheme."

they have value. If FICA exchanged their money for a bank note instead - it would have value.

if the govt decides that the treasury notes have no value then FICA would not longer be put in Treasury notes - but the FICA would continue to generate revenues sufficient to pay 75% of scheduled benefits.

"Actually the "shortfall itself" began in 2010 and the reduction in FICA didn't begin until 2011. So the actuaries were wrong. What else might they be wrong about?"

correct. there have been several shortfalls from recessions (which cannot be precisely predicted) over the years and that was the primary reason why the trust fund was created - basically as a rainy-day fund to make up the FICA shortfalls during recessions.

the fact that the govt spent the money - does not make SS a ponzi scheme.

In fact, the design of SS has operated successfully and stayed solvent for virtually all of it's 75 years.

what went wrong was that the govt spent the surplus but using that as a reason to say that SS is insolvent is basically telling a scurrilous lie - which says something about the people who say that lie... including Stossel.

re: what law says FICA can only pay out at 75%... this is what SS says.. right?

 
At 9/17/2011 2:41 AM, Blogger Ron H. said...

Broll: "Inflation is more complicated that an increase in money supply. Our money supply has increased in multiples over the rate of inflation. The fact is, even though it doesn't fit neatly into your sound bite answer, the quantity of money has very little to do with inflation."

Let me give you a kindly suggestion, meant only to save you from continuing to embarrass yourself here. Please learn some economics.

Money supply has *everything* to do with inflation. Inflation is an increase in the money supply above the rate if increase in economic growth.

General increases in price are a result of inflation, not the cause of it.

 
At 9/17/2011 3:03 AM, Blogger Ron H. said...

Broll: "Any currency issuer that has a positive balance is probably a net exporter. It taxes more than it spends to offset the revenue from exports to stay in balance. The US does the opposite, it spends more than taxes to offset our imports. Negative/Positive, Deficit/Surplus - all just terms to describe the net flow of funds to or from public to private. One is neither better nor worse than the other."

You are conflating several issues here, including monetary policy, fiscal policy, and balance of trade. They can't all be mixed together like that in Broll's blender.

I don't know where you have gotten these strange notions, but if you are, or were, in the US public school system, I'm really frightened.

It also might be helpful to stop thinking of the US as one single minded entity with human characteristics. Instead picture 300 million individuals, some acting as groups called "companies", that have various interests, wants and needs, and who take millions of individual actions. It's inaccurate to say "The US does this", or "The US does that", or "The US does the opposite", as if to describe a single collective action.

 
At 9/17/2011 3:24 AM, Blogger Ron H. said...

Zach: "You may consider it a poor investment, but that doesn't make it a Ponzi scheme, which raids the principal investment and calls it profit."

Ponzi can call the money he collects from later investors "principal" if he likes, in fact they likely prefer that secure sounding word, but it doesn't make their money any safer.

The fact that his books show a substantial amount of invested "principal", doesn't change the fact that it's all in his pocket, and he is doling it out in dribs & drabs to early invester as "profit.

Our Social Security Ponzi works the same way. SS Ponzi sends us nice little statements each year showing what monthly disbursements of "profit" we can expect at retirement, and even tells us there's a nice $2.6tn principal balance somewhere safe, but in reality he has spent it all.

The words used aren't important. Other than the involuntary nature of the 'investments", it works the same.

 
At 9/17/2011 3:31 AM, Blogger Ron H. said...

"IF Perry and the others who say SS is a Ponzi scheme were men/women of principles - they would have stuck to their guns and advocating getting rid of SS like the zealots who populate CD here..."

Which Perry are you talking about? Our host, or that guy in Texas, or both?

 
At 9/17/2011 5:06 AM, Blogger Larry G said...

" Which Perry are you talking about? Our host, or that guy in Texas, or both?"

the guy running for office - and for that matter - any/all politicians who say that SS is a ponzi scheme and then run and hide instead of standing their ground and letting the voters judge them for their honest position.

truth is - most who are opposed to SS are dishonest in they way they represent their positions and the ones who run for office - pull back their "ponzi scheme" statements and promises to "kill" SS.

Mr. Perry, the host, like to roil the waters himself but that's okay - enough folks with opposing views have showed up in CP to make it a meaty and worthwhile debate and mach of the dishonest propaganda has been summarily debunked.

the primary strategy of the Heritage folks, Stossel, and the folks who parrot their tripe is to rely on the fact that most people simply do not understand how SS actually was designed and works.

You could have an honest debate on the concept of SS rather than using lies and propaganda and misinformation but then as I said, it appear to be the preferred strategy of those who oppose it.

SS via a mandatory payroll tax - is implemented around the world.

and around the world in those countries whose populations are shrinking - the basic concept of SS has been undermined because it's design was predicated on a stable or growing population, not a shrinking one.

that would be a honest debate for arguing changes to SS - but one that few if any of the "anti" types have even attempted to articulate.

the sense I get from most of them who pontificate here is that they are at their core - anti-govt types.

they don't believe in the things that govts - around the world - do.

That's why when I ask for folks to show me a govt that - for instance - is based on successful libertarian principles - there is no answer from them.

or I ask for them to name the best countries who don't have mandatory payroll taxes or universal health care - and almost none of them have the cahones to even attempt an answer save for the two that claimed that Singapore and Chile were examples of "free market" countries but they either did not know or conveniently forgot that in both cases the "free market" is completely controlled and operated as government-imposed programs.

 
At 9/17/2011 8:39 AM, Blogger Hydra said...

Millions of people have depended on social security for dozens of years, and many other countries have similar pension plans.

I predict it will fail tomorrow.

 
At 9/17/2011 8:43 AM, Blogger Hydra said...

In reality we spent all on stuff we got but did not pay for. The money was not stolen, it was spent for stuff we said we wanted, or at least e ought of us/ them to convince the legislators.

 
At 9/17/2011 8:54 AM, Blogger Zachriel said...

Zachriel: Ponzi raids the invested principal balance to create the false impression of profits.

Seth: You're getting caught up in semantics.

Quite the contrary. It is a distinction *with* a difference. Saying that you are investing the principal, but using that principal to create the impression of large profits is a fraud. Social Security does not claim to hold the principal, but that it is a direct transfer.

juandos: Ahhh, but it does make it a Ponzi scheme because over time it is underfunded...

A Ponzi scheme can never be properly funded because it is using the principal to pay supposed profits. Social Security is pay-as-you-go system. It's not that complicated.

morganovich: if it were the 80's, we'd call current price action 8-9% inflation.

So the cost of cars, shelter and food would have risen by 50% over the last five years? Is that your claim?

morganovich: the law says that they have to reduce payments to income once the imaginary "trust fund' is depleted.

The Trust Fund is real money that was paid through payroll taxes. They were used to fund tax cuts and wars with the promise to repay.

mike k: How can it use a previously generated surplus when that surplus has already been spent?

Perhaps you are not an American. What happened was that people in the U.S. were provided tax cuts which were supposed to pay for themselves, a rather quaint notion. Now, it's time to pay that money back. Or the U.S. could just renege, cut Social Security, or find some compromise.

mike k: How can the fund claim interest on notes that have no value?

By law, the securities are backed by the full faith and credit of the United States (AAA,AAA,AA+).

Ron H: General increases in price are a result of inflation, not the cause of it.

Now, that *is* semantics. Broll the American may be confused about many things, but he is clearly referring to price inflation, which is usually simply called inflation. Increases in the money supply are referred to as monetary inflation to distinguish that concept from price inflation. Broll the American was clear in how he was using the term. The confusion is on your own part.

Ron H: Ponzi can call the money he collects from later investors "principal" if he likes, in fact they likely prefer that secure sounding word, but it doesn't make their money any safer.

But that's the very lie. Ponzi calls it principal for one party, but profit for another.

Ron H: Our Social Security Ponzi works the same way.

No, it does not.

Ron H: SS Ponzi sends us nice little statements each year showing what monthly disbursements of "profit" we can expect at retirement, and even tells us there's a nice $2.6tn principal balance somewhere safe, but in reality he has spent it all.

Social Security makes clear that they are a pay-as-you-go system. They also say that changes in the law can change benefit levels, and that changes are needed to maintain current benefit levels. As for the safety of the Trust Fund, they are required by law to invest them in securities backed by the full faith and credit of the United States (AAA/AAA/AA+). You may attach whatever value you want to American promises.

 
At 9/17/2011 9:03 AM, Blogger Larry G said...

" What happened was that people in the U.S. were provided tax cuts which were supposed to pay for themselves, a rather quaint notion. Now, it's time to pay that money back. Or the U.S. could just renege, cut Social Security, or find some compromise. "

supply side economics means you never have to say you're sorry for the deficits that it creates.

a close corollary to "deficits don't matter" guano spouted at the time when wars and Medicare Part D were paid for "off budget".

which a few years later becomes:

" we must kill SS because we refuse to tax ourselves for wars and other "needs" that supply-side was supposed to pay for but didn't.

the most irresponsible among us masquerading as fiscal conservatives advocate supply-side policies that fail and then advocate killing social security so we can appropriate the payroll taxes to pay for our debt.

that's the Alice-in-wonderland world of so-called fiscal conservatives now days.

 
At 9/17/2011 9:13 AM, Blogger Zachriel said...

What's interesting is that not only did the Americans think tax cuts would pay for themselves, but they thought war would pay for itself! Rather odd. Meanwhile, some commenters here think that any taxation is thievery, which contradicts the very notion of republican government, and makes any discussion of policy changes futile.

If the U.S. hadn't made a few wrong turns over the last decade, they might very well be able to consider a partially privatized system; but currently, they can barely keep up with their pay-as-you-go system, much less set money aside for later.

After the debt ceiling debacle which led to the credit downgrade, they may not be quite ready for a mature discussion. Still, Americans are very productive people, and the situation is not so dire that it can't be turned around with a few right decisions.

 
At 9/17/2011 11:31 AM, Blogger Ron H. said...

Zachriel: "Ron H: General increases in price are a result of inflation, not the cause of it.

Now, that *is* semantics. Broll the American may be confused about many things, but he is clearly referring to price inflation, which is usually simply called inflation. Increases in the money supply are referred to as monetary inflation to distinguish that concept from price inflation. Broll the American was clear in how he was using the term. The confusion is on your own part.
"

Perhaps you didn't read carefully as our comment was so short. You may have skipped over the word 'general'.

It is perfectly correct to say that inflation is an increase in the money supply. A general increase in prices is a result of that increase, as more units of money are chasing the same amount of goods.

Prices rise and fall all the time due to changes in supply and demand. Rising prices signal suppliers to make more of whatever. The new greater supply should bring the price back down, so most price increases are temporary. You know this, but Broll may not. To refer to price increases as inflation, unless most prices rise - a general increase in prices - is to incorrectly describe normal market fluctuations.

Or, perhaps you misunderstood Broll's comments, as they are fairly confused, but he clearly stated - well, at least he stated - that higher prices are not much related to money supply, and can somehow exist and persist without an increase in money supply. Something that is patently untrue.

 
At 9/17/2011 12:31 PM, Blogger Hydra said...

money she paid in years ago. That money is gone." that's right.

Right or wrong makes no difference. Money is fungible.

 
At 9/17/2011 12:38 PM, Blogger Hydra said...

DOD is the conservative's entitlement program.

 
At 9/17/2011 1:13 PM, Blogger juandos said...

"DOD is the conservative's entitlement program"...

Well hydra does that mean that the likes of John Kerry and Barney Frank are trying to put Massachusetts people out of work?

 
At 9/17/2011 7:13 PM, Blogger Ron H. said...

"What's interesting is that not only did the Americans think tax cuts would pay for themselves, but they thought war would pay for itself! Rather odd. "

Americans, like many other people, tend to trust those they have elected to office, although history dictates that they shouldn't.

 
At 9/18/2011 8:46 AM, Blogger Zachriel said...

Ron H: It is perfectly correct to say that inflation is an increase in the money supply. A general increase in prices is a result of that increase, as more units of money are chasing the same amount of goods.

Here is the exchange again:

Broll: {Price} Inflation is more complicated that an increase in money supply...

Ron H: Money supply has *everything* to do with inflation. {Monetary} Inflation is {defined as} an increase in the money supply above the rate if increase in economic growth. General increases in price are a result of inflation, not the cause of it.

You are saying that inflation has everything to do with monetary inflation because inflation is defined as monetary inflation. As Broll the American was clearly referring to price inflation, yours was an argument by equivocation. That may not have been your intention, but that is the plain meaning of your words.

Ron H: To refer to price increases as inflation, unless most prices rise - a general increase in prices - is to incorrectly describe normal market fluctuations.

Yes, {price} inflation refers to a *general* rise in prices. Perhaps what you quoted wasn't what you were trying to argue.

Broll the American: The fact is, even though it doesn't fit neatly into your sound bite answer, the quantity of money has very little to do with {price} inflation.

In fact, the quantity of money is one of the most important factors in {price} inflation.

 
At 9/18/2011 8:53 AM, Blogger Zachriel said...

We're not trying to be argumentative, and we're hoping our previous comment moves us beyond the semantics. If you mean monetary inflation, you should use the modifier, as the term inflation is nearly always used for price inflation nowadays.

You would then say that monetary inflation is the primary factor affecting {price} inflation, contrary to Broll the American's view. But this, of course, has to be supported by more than simply saying it's so by definition. It's an economic relationship concerning the number of units of currency chasing a fixed amount of production.

 
At 9/19/2011 1:08 AM, Blogger Ron H. said...

Here's the entire Broll comment, as the snippet you quoted is not the part we corrected him on:

Broll: "morganovich - Nowhere did I say you could print money forever. Inflation is more complicated that an increase in money supply. Our money supply has increased in multiples over the rate of inflation. The fact is, even though it doesn't fit neatly into
your sound bite answer, the quantity of money has very little to do with inflation. Currently with high unemployment and underutilized production capacity inflation is not currently a concern. If we ever reach full employment again and we still can't produce or export as much as we need to meet the needs of the market then inflation will come to fruition.
"

What is really clear, is that Broll doesn't understand inflation or what causes it, and has no clue that the word might be used in more than one way.

When he stated that money supply had little to do with inflation, we felt compelled to correct him, as that clearly isn't true.

While you are correct that people who don't know any better often refer to price increases as inflation, when those changes are actually signalling a change in supply or demand for those items, that usage can and does cause confusion. All prices can't rise without an increase in the money supply, even if prices rise in anticipation of that increase. So to call a general price rise inflation, or price inflation, without referring to the requisite increase in the supply of money as the cause, can and does lead to confusion.

If we respond to any of your future comments that contain references to inflation, we will be sure to specify price inflation or monetary inflation so you won't be confused.

 

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