Social Safety Is a Ponzi Scheme

Final week, Alex Tabarrok wrote a submit at Marginal Revolution titled, “Is Social Safety a Ponzi Scheme?”

His reply is sure.

That jogged my memory of what I wrote about Social Safety in my 2001 ebook, The Pleasure of Freedom: An Economist’s Odyssey.

Right here’s the beginning of the chapter.

I say we scrap the present [Social Security] system and substitute it with a system whereby you add your title to the underside of a listing, and then you definitely ship some cash to the individual on the prime of the checklist, and then you definitely . . . Oh, wait, that IS our present system.

—Dave Barry, “Election might come right down to who kisses most orifice,” Miami Herald, September 24, 2000

In 1991, certainly one of my college students, Stephen Banus, wrote to the Social Safety Administration requesting details about the Social Safety taxes he had paid and the advantages he might anticipate to obtain. Within the kind letter he obtained again, Gwendolyn King, the commissioner of Social Safety wrote:

I need to guarantee you that Social Safety is constructed on a sound monetary basis. Social Safety advantages shall be there whenever you want them.

A prudent man and an excellent planner, Banus despatched the same request in 1995. This time, the message within the kind letter was completely different. The commissioner of Social Safety, Shirley Chater, wrote:

The most recent report of the Social Safety Board of Trustees says the Social Safety system pays advantages for about 35 extra years. This implies there’s time for Congress to make the modifications wanted to safeguard this system’s monetary future.

In simply 4 years, the commissioner had scaled again the blanket assurance that the advantages could be there “whenever you want them” to “about 35 extra years.” What occurred between 1991 and 1995?

Really, nothing a lot occurred in these 4 years besides that the Social Safety Commissioner in 1995 was maybe much less dishonest than her counterpart in 1991. The actual fact is that Social Safety was by no means on a “sound monetary basis.” Opposite to the Social Safety Administration’s official propaganda, there isn’t a actual belief fund. Roughly 80 p.c of the payroll taxes collected from present staff at the moment are despatched out to present retirees, with solely a short stayover in Washington. The federal government spends the remainder of the cash on different objects. The so-called belief fund accommodates bonds that the federal government has created. These bonds are merely IOUs from one department of presidency to a different. Chris Jehn, an affiliate director of the Congressional Price range Workplace, compares these bonds to notes that you just write yearly and put in a field to your youngster’s faculty schooling. The observe says, “I owe $5,000 to my daughter’s faculty fund.” After 18 years of such saving, when your youngster turns 18, you open the field and out comes, not $90,000, however 18 nugatory items of paper.

Those that retired within the early Nineteen Forties obtained large advantages in return for paying low payroll taxes for just a few years. However because the system has “matured,” in order that present retirees have been paying Social Safety taxes for nearly their complete working lives, these retirees have obtained a a lot decrease return.

A personal citizen who arrange such a monetary chain letter would go to jail. In reality, he did. His title was Charles Ponzi, and he was arrested in 1920 for promising traders that they might double their cash in 90 days and utilizing the proceeds from later individuals to maintain his commitments to earlier ones. Thus was born the time period “Ponzi scheme.”

There are two important variations between Ponzi’s authentic rip-off and the Social Safety system. The primary distinction is that Social Safety is run by authorities and, no matter its constitutionality and its questionable ethics, is authorized. The second distinction follows from the primary: Whereas Ponzi needed to depend on suckers, the federal government can and does use power. It’s true that the federal government refers back to the Social Safety payroll taxes—a hefty 10.6 p.c (an additional 1.8 p.c is for incapacity insurance coverage and an extra 2.9 p.c, levied on all earnings from work, is for Medicare) of each employee’s earnings as much as $80,400 in 2001—as “contributions.” However simply strive not “contributing.” That’s what Valentine Byler, an Amish farmer in New Wilmington, Pennsylvania, did in 1961. His faith taught that its members ought to look after one another and he tried to behave on his non secular beliefs by not paying Social Safety taxes. The Inside Income Service responded by seizing three of his horses and promoting them to gather $308.96 in unpaid taxes.

The Social Safety Administration’s new line is that the fund is solvent till 2037. What the federal government officers who say that basically imply is that by 2037, the final of the particular federal authorities bonds that the Social Safety Administration has purchased and stored within the Social Safety “Belief” Fund shall be offered off to the U.S. Treasury. This “sale” of bonds is just a switch between the federal government’s left and proper palms. To release the money to pay for these bonds, the Treasury should float new bonds, enhance taxes, or lower different spending.

The extra related date, due to this fact, is when the federal government’s profit funds begin to exceed its earnings from payroll taxes and from curiosity on these bonds—as a result of that’s when the bonds will first be offered and the federal government should provide you with additional money. That date, the Social Safety Administration now tasks, shall be 2024, about two-thirds of the way in which by means of the retirement of the infant boomers.

Within the late Nineties, the federal government’s personal actuaries estimated that, to take care of promised advantages, the tax price must rise over the subsequent a long time from its present degree of 12.4 p.c to greater than 18 p.c. At an 18 p.c price, Social Safety taxes could be about 7.5 p.c of general GDP. However whole federal revenues from all sources, not simply from the Social Safety payroll tax, have stayed inside a slim vary of 18 to twenty p.c of GDP for the reason that early Fifties. If this historic fixed held, then the Social Safety program alone would take about 40 p.c of the entire tax revenues collected by the federal authorities, leaving the remaining 60 p.c to pay for Medicare, curiosity on the debt, protection, and every little thing else the federal authorities does. That doesn’t appear seemingly, which signifies that the percentages of elevating the Social Safety tax price considerably are, luckily, pretty small. Sooner or later sooner or later, due to this fact, advantages should be lower than promised.