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Tuesday, September 13, 2011

Is Social Security a Ponzi Scheme or a Jobs Program?

 Both parts of the question in the title are true.

Listening to the Republican candidates debate and hearing the Social Security program being discussed as either a Ponzi scheme or a vital program for seniors I thought it might be good to look a little closer at the program.  You maybe surprised to hear me agree with Rick Perry that our present system does bear some similarities to a Ponzi scheme.  When Social Security was first started there were 13 workers for every retired person paying into the system.  Today it is about 3 workers for every beneficiary.  That is not sustainable long term unless some changes are made in the system. Too many people taking money out of a system in relation to those paying in is what brings down Ponzi schemes.

The solution being most common mentioned is raising the retirement age as was done in the 1990’s.  With the increasing life expectancy the time that retirees collect benefits has substantially increased.  The life expectancy in the 1930’s was 67 and today it is closer to 77.  As any actuary will tell you to increase the payout in an insurance program without adjusting premiums or coverage will be doomed to going bankrupt.

A progressive change that could dramatically change the financial future of program would be to raise the wage limit on which Social Security tax is collected.  The present limit is $106,800.  After that only the Medicare portion is collected.  A study was done Congressional Research Service that looked at four possible scenarios on raising the wage limit and examined how much each would impact the financial viability of the program. The solution that would put the Social Security system into a stable position would eliminate the wage limit entirely and cap benefits that would only impact the wealthier elderly.  Social insurance is meant to be a wealth transfer from the more well to do to the poorer retirees. 

The second part of the question about the Social Security program being a jobs program is reflected in the fact that you are only penalized in your benefits with earned income from wages and not investment income.  This always seems to be unfair to the people who have to work past retirement age as opposed to living off investments.  But the effect is to encourage older workers to leave the workforce to open up jobs for younger worker. Before Social Security people had to work till they died or were physically unable to work because they had no other income.  During the Depression the need to open up jobs for younger workers with families was one of the rationales for the development of the program.

The another change that gets mentioned with reforming Social Security is to not pay benefits to the wealthy as they don’t need it.  Instead of being a universal program it would be means tested to only provide income to the poorer senior citizens.  This would lower public support for the program and make it as vulnerable as any other social welfare program in times of budget deficits.  You only have to look at how many social programs get put on the chopping block in times like the present.  The universal aspect of Social Security is what protects it from the same cuts.

Closely related to the previous point is the proposal to make paying into Social Security voluntary and providing for the establishment of individual retirement accounts that can be invested in the stock market.  George W Bush tried to run with this idea in 2005 and it went nowhere.  It comes up every so often by conservatives who hate social insurance and prefer to let us gamble our retirement to the whims of the stock market.  To provide younger workers this alternative would end the Social Security system as social insurance and turn it into a welfare program.  Which then could be cut dramatically.  Of course that is the intent of the people proposing this option.  It is similar to what Bush did with his tax cuts to starve the government of revenue to then be able to cut government programs.

A society that doesn’t accept its shared collective responsibility to welfare all of its members is one that becomes a society of haves and have nots and very little else.

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