Critics of entitlement programs such as Social Security are fond of calling them Ponzi Schemes. This is somewhat accurate, but it is ineffective because Ponzi Schemes usually collapse fairly quickly, and these programs have not collapsed over many years. I do wonder if this contributes to people not taking it very seriously. That argument is used by some calmer environmentalists, that the insistence on predicting catastrophic consequences, and right soon, have numbed the general public from responding to a real problem. In both cases, we've been hearing about it for a while and we don't see catastrophe.
Well, maybe. Overreaction may make it worse, but I don't see where underreaction about SS has done the trick either. People don't worry about things in the far future much, however excited the people around them get.
On average, people get about 2.5 the amount they paid in to Social Security back, even after accounting for inflation, and the rate of payback is quicker than the rate of contribution. As some receive above the average, some must be below - unmarried people who die before receiving a penny of it, for example. People who work 40 years and die 10 years after retiring are just about a wash.
So it is a Ponzi Scheme, just a slow one. Tweaks like later retirement age are making it less of one, but longer life expectancy has overwhelmed that. If we had started in 1980 raising the retirement age one month every year we'd be a lot closer - but that was never going to happen, and even if it had, politicians would "temporarily" suspend that whenever there were hard times. Or easy times.
Update: In response to Terri's question I went looking for a more thorough article, and found one over at Politifact. What You Paid Compared To What You Get. It undermines my point a bit, but I still like it.
Is that 2.5 taking into account the employer contribution? If not, then that means people get. 05% more than what they paid into it...or 1.5 depending on what you mean. Do you mean I contribute $1000 and get $2500 which is actually 1.5 times what I paid (150% more). Or do you mean I pay $1000 and get $3500 (250%more).
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ReplyDeleteI went looking for a detailed article and found some interesting stuff, which I have added to the OP.
ReplyDelete"(The authors note that different assumptions for long-term returns on investment would change the results.)"
ReplyDeleteNote that the article assumes that the money would otherwise be spent rather than invested. I've never seen an analysis similar to that used for pension plans which invest the contributions. But I guess that wouldn't apply because the politicians just kinda borrowed it all and spent it anyway.
I think the Ponzi Scheme description of Social Security is meant to emphasize, as Roy implied, that the payments made to current retirees are made from current contributions rather than any type of investment income, exactly the way a Ponzi scheme functions (until it collapses). Therefore it is inaccurate to make any comparison between contributions and payments because no function links them.
ReplyDeleteThere is no connection in financial reality, but there is in political reality, which is something of a problem. It used to be you were "entitled" to a benefit on the basis of contribution, but now even that tie is severed.
ReplyDeleteThe SSA goes to some pains to fuzz the reality, too, even down to the terminology they use being chosen to deceive (there's no other word, really) people into thinking Social Security is some kind of pension system, with "contributions" and "payouts".
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