4 ms·

If Social Security were a private company it would be considered a pyramid scheme and shut down. Imagine someone published a Fidelity internal memo to Wikileak

If Social Security were a private company it would be considered a pyramid scheme and shut down. Imagine someone published a Fidelity internal memo to Wikileaks stating that all shareholders under age 40 were required to keep investing 12.5% of their salary every month, could not sell, and would receive a negative return upon reaching retirement age. It's so fafetched it's laughable. I don't have a problem with the government requiring a 12.5% retirement fund outlay from workers. It's paternalistic but probably pragmatic. I do think it should be an investment based program rather than a pyramid scheme, and I do think workers should be guaranteed at least the rate of return of a very conservative market investment (such as a precious metal or a certificate of deposit would yield). The original genius behind Social Security was that it was not a welfare program, it was sold as an investment program. However the books were cooked from day 1 because it achieved that only due to very skewed demographics (far more young workers than old workers/retirees), just as Madoff's fund was able to pay out returns only on the basis of having far more new investors than investors expecting returns. So I'm opposed to the regressive nature of the Social Security tax mainly because the program is broken and thus it's only a regressive tax and not an investment program. Obama ran on a campaign promise of turning social security into a welfare program which simply means preventing the program from going bankrupt by deciding that only those who are deemed poor get the funds promised them. Imagine if Madoff had tried to avoid jail by saying that he'd refund the money of all the poor people who invested with him. That's equally laughable. Sadly, turning it into a welfare program is probably the most pragmatic approach, but if we're going to do that we should immediately do away with the payroll tax and allow the scheme to end so that those who don't aspire to be poor can start investing their 12.5% into an actual IRA. It would be fine with me if income tax rates had to rise a bit to cover the cost of Soc Sec as welfare.

jbooth 16y ago
Well, for the record, SS is a very conservative market investment -- the surplus is invested in government T-bills every year, that's as conservative as you can get. Of course then people turn around and say it's the government writing itself checks or they're worthless IOUs or something. As far as the finances, as I understand things, simply raising the cap on income would extend things out a bit, FICA doesn't get collected past 105k or something. That's also redistributive and you could say unfair, but the fact is that we have a big population bump retiring and no system to pay for their retirement is going to be fair to us. EDIT: Also, I suspect any other mandated market investment that the government enforced would have even worse problems than SS. What happens when all of the baby boomers put daily selling pressure on the stock (or gold) market for 30 years? That might wind up being a way worse investment when it comes to the market prices at sell time, no matter how well the economy does.
- grandalf 16y ago
  There's nothing wrong with using T-Bills, the problem is that the T-Bills are not owned by the worker for 12.5% of his lifetime earnings. And, if any money is saved it's just a temporary measure b/c the program is designed as a pay-as-you-go program, where the taxes paid by current workers are sent to current retirees. So it's really not investment that is going on, merely a very temporary surplus. I don't approve of raising the income cap because that fails to address the regressive nature of the tax. It also fails to address the larger issue, which is the vulnerability of the program to demographic shifts and congress's whims, including the oft-used whim of spending the current surplus on other things to avoid having to raise taxes now for current spending. I think the best solution would be to give workers below a certain age the option of opting out of the pay-go program and instead choosing an investment based program curated by the government but with an ownership component. The missing revenue should just be paid for via our progressive income tax regime.
- anamax 16y ago
  > As far as the finances, as I understand things, simply raising the cap on income would extend things out a bit, FICA doesn't get collected past 105k or something. Since benefits are roughly related to FICA, extending the cap doesn't help much. It helps some, because the benefits system is progressive, in that folks who contribute a lot get less return on their contributions than folks who contribute just a little, but .... The folks who designed SS thought that the cap was essential. Their argument was that SS wouldn't survive if it paid folks like Ross Perot $500k/year in benefits or if it was a tax with no benefits to folks like Ross Perot. The cap means that Perot doesn't get $500k/year but don't care because he didn't put much in. Are they wrong?
  - grandalf 16y ago
    The rich at the time might very well have opposed having to pay the 1% social security tax. The inception of the program was based on a variety of too good to be true premises, the 1% payroll tax being the most notable, so I interpret the cap more as a symptom of this fantasy... and possibly a consideration of the stigma attached to welfare programs in those days.
gnaritas 16y ago
> If Social Security were a private company it would be considered a pyramid scheme and shut down. No it wouldn't, your concept of pyramid scheme is flawed. By your definition, all insurance is a pyramid scheme. Pyramid schemes promise everyone they'll get out more than they put in and this eventually collapses. Social Security makes no such promise, it's insurance, they fully expect many people to die before getting out what they put in or even starting to get anything out at all. That's how any insurance works. Social Security is not a pyramid scheme.
- grandalf 16y ago
  Not true. See the definition: http://en.wikipedia.org/wiki/Ponzi_scheme http://en.wikipedia.org/wiki/Ponzi_scheme Insurance is not a scheme "destined to collapse" when it runs out of new investors. Insurance is perfectly sustainable. In fact, some of the oldest companies in business today are insurance companies. Social security is currently "designed to collapse" as the trustees report has warned for years. The program will run out of money sometime fairly soon unless the benefits are cut or the taxes raised. In fact, it has already collapsed several times and a new program has been reinvented, also named Social Security. Initially the payroll tax was 1% and the benefits constituted enough to live on.
  - gnaritas 16y ago
    That link supports me, not you. As I already said, Social Security doesn't promise anyone a profit, as long as benefits are managed properly, it can continue indefinitely. It specifically relies on people dying before they receive back what they put in. Social Security is perfectly sustainable, they simply have to cut benefits to an appropriate level or raise the retirement age. You clearly have some personal bias against Social Security that's making you not see it rationally.
    - grandalf 16y ago
      How is it sustainable if it has to be redefined every few years? How is it sustainable if it will need to be turned into a welfare program resulting in all the money many of us have put into it not being returned at all?

jbooth 16y ago

Well, for the record, SS is a very conservative market investment -- the surplus is invested in government T-bills every year, that's as conservative as you can get. Of course then people turn around and say it's the government writing itself checks or they're worthless IOUs or something. As far as the finances, as I understand things, simply raising the cap on income would extend things out a bit, FICA doesn't get collected past 105k or something. That's also redistributive and you could say unfair, but the fact is that we have a big population bump retiring and no system to pay for their retirement is going to be fair to us. EDIT: Also, I suspect any other mandated market investment that the government enforced would have even worse problems than SS. What happens when all of the baby boomers put daily selling pressure on the stock (or gold) market for 30 years? That might wind up being a way worse investment when it comes to the market prices at sell time, no matter how well the economy does.

grandalf 16y ago
There's nothing wrong with using T-Bills, the problem is that the T-Bills are not owned by the worker for 12.5% of his lifetime earnings. And, if any money is saved it's just a temporary measure b/c the program is designed as a pay-as-you-go program, where the taxes paid by current workers are sent to current retirees. So it's really not investment that is going on, merely a very temporary surplus. I don't approve of raising the income cap because that fails to address the regressive nature of the tax. It also fails to address the larger issue, which is the vulnerability of the program to demographic shifts and congress's whims, including the oft-used whim of spending the current surplus on other things to avoid having to raise taxes now for current spending. I think the best solution would be to give workers below a certain age the option of opting out of the pay-go program and instead choosing an investment based program curated by the government but with an ownership component. The missing revenue should just be paid for via our progressive income tax regime.
anamax 16y ago
> As far as the finances, as I understand things, simply raising the cap on income would extend things out a bit, FICA doesn't get collected past 105k or something. Since benefits are roughly related to FICA, extending the cap doesn't help much. It helps some, because the benefits system is progressive, in that folks who contribute a lot get less return on their contributions than folks who contribute just a little, but .... The folks who designed SS thought that the cap was essential. Their argument was that SS wouldn't survive if it paid folks like Ross Perot $500k/year in benefits or if it was a tax with no benefits to folks like Ross Perot. The cap means that Perot doesn't get $500k/year but don't care because he didn't put much in. Are they wrong?
- grandalf 16y ago
  The rich at the time might very well have opposed having to pay the 1% social security tax. The inception of the program was based on a variety of too good to be true premises, the 1% payroll tax being the most notable, so I interpret the cap more as a symptom of this fantasy... and possibly a consideration of the stigma attached to welfare programs in those days.

gnaritas 16y ago

> If Social Security were a private company it would be considered a pyramid scheme and shut down. No it wouldn't, your concept of pyramid scheme is flawed. By your definition, all insurance is a pyramid scheme. Pyramid schemes promise everyone they'll get out more than they put in and this eventually collapses. Social Security makes no such promise, it's insurance, they fully expect many people to die before getting out what they put in or even starting to get anything out at all. That's how any insurance works. Social Security is not a pyramid scheme.

grandalf 16y ago
Not true. See the definition: http://en.wikipedia.org/wiki/Ponzi_scheme http://en.wikipedia.org/wiki/Ponzi_scheme Insurance is not a scheme "destined to collapse" when it runs out of new investors. Insurance is perfectly sustainable. In fact, some of the oldest companies in business today are insurance companies. Social security is currently "designed to collapse" as the trustees report has warned for years. The program will run out of money sometime fairly soon unless the benefits are cut or the taxes raised. In fact, it has already collapsed several times and a new program has been reinvented, also named Social Security. Initially the payroll tax was 1% and the benefits constituted enough to live on.
- gnaritas 16y ago
  That link supports me, not you. As I already said, Social Security doesn't promise anyone a profit, as long as benefits are managed properly, it can continue indefinitely. It specifically relies on people dying before they receive back what they put in. Social Security is perfectly sustainable, they simply have to cut benefits to an appropriate level or raise the retirement age. You clearly have some personal bias against Social Security that's making you not see it rationally.
  - grandalf 16y ago
    How is it sustainable if it has to be redefined every few years? How is it sustainable if it will need to be turned into a welfare program resulting in all the money many of us have put into it not being returned at all?