I hang out quite a bit on the Reason.com Hit & Run blog. Recently, in the comments on a post about the controversy created by Alan Simpson’s comparing Social Security to a “milk cow with 310 million tits” I posted a very brief explanation of Social Security. This was in response to those who thought it was either a Ponzi scheme or just a really bad “investment” because it had a lousy “rate of return.” I thought I’d spruce it up just a little bit and repost the explanation here.
Social Security is neither a Ponzi scheme (strictly) nor a retirement program on which a “rate of return” can be calculated.
Social Security is an inter-generational financial asset transfer program. (I’m being a bit pedantic – an intergenerational wealth transfer program would more succinct but not quite as accurate).
The program arose in deception, and is mainly propagated in deception, that deception being that you are “paying in” so that some day you can “get your share.” Nothing of the kind is happening here.
What’s happening is that money is being transferred from young wage earners to older people. If the program functions as intended this will allow those older people to claim an increased share of the real goods and services being produced in the economy.
Congress sets both the level of payments to the older people, and the level of taxation associated with the program (notice I didn’t say ‘funds the program.’) Either of these can be changed at any time, and they bear no necessary connection to each other.
What’s really happening is that the govt is creating money (it prints paper checks or makes electronic credits in the recipient’s bank account) and doling it out. This is legal tender, so merchants have to honor it. In order to prevent the massive inflation that would otherwise occur, the government also takes in (or more accurately destroys) money in the form of FICA taxes on wages (along with many other taxes, the selling of Treasury securities, etc.), thus removing it from the private sector. The net effect amounts to a transfer of financial assets from one segment of the population to another.
The only real problems with the system are 1) ensuring that enough excess real goods and services are created by the relatively young “producers” to be consumed by the older people and 2) the morality of involuntarily transferring wealth from one person or group to another. I am very interested in problem (2) and intend to explore it in this blog at a later date.
Comparing the system to an individual retirement plan is fundamentally mistaken. It makes no sense at all to calculate a rate of return on your lifetime of “investment” since the money you “pay into the system” over your lifetime of work bears no relation to the payouts you may or may not receive. There is no “lock box” with your name on it containing your money and the interest you’ve earned over the years! By trusting to the Congress to set the payments and other terms (such as the age at which benefits begin) Americans are simply hoping that our elected representatives will come up with a benefit level that neither beggars older people nor sends the nation into an inflationary spiral (people usually say “bankrupting the nation” which is not strictly possible and is therefore incorrect). I leave it up to you to decide whether this is a sane way to solve the problem of providing retirement income.
If these ideas interest you, I’d recommend going to Warren Mosler’s blog at http://moslereconomics.com/ and checking out the Mandatory Readings section there.