Taking a Second Look at Social Security

Recently Cousin Ron Lamont re-posted a Facebook “Like” quote by someone alleging that as early as 1967, liberal economists were calling Social Security a “Ponzi scheme.” This irritated me enough that I removed it with the “hide this post” tool. I’m still considering whether Facebook, a family-friendly safe space, is even the proper forum for hard-core political commentary and opinion.

So to be honest, It’s fair to say I started it all when I re-posted my personal website article “Social Security Not a Ponzi Scheme” on Facebook. Even though PolitiFact [1] rates Perry’s 2011 “Ponzi” statement as “False,” I’d have to rate the 1967 “Ponzi” allegation, far from being a “Pants On Fire” item, as “Half True.”

My cousin’s post was a fair turnaround. Now then, what’s the story about Social Security?

In 1967 Newsweek reportedly ran a column by noted liberal economist Paul Samuelson (of college Economics textbook fame). Samuelson in fact did compare Social Security to a Ponzi scheme [2]. This source cites numerous other early references to the same opinion, including the Wall Street Journal. The source notes that Samuelson was “actually drawing on the Ponzi analogy to defend Social Security”, a back-handed way for an academic to illustrate a point if ever I heard one. There’s a long history of groups that tried to pin Social Security to the mat before. You should read the PolitiFact assessment [1] of the whole issue.

In my first article I showed that Social Security is NOT a Ponzi scheme by definition, but an account that is actually but not physically held in each contributor’s name. Despite all the rhetoric about what Congress is doing or has done with those funds, the account is still due and payable according to the terms of the social contract. The obvious cause for concern is: how long will the Social Security trust fund remain solvent and be able to pay out on its obligations?

Over the years a major defense of Social Security has been that it is deemed “actuarially sound,” meaning that a statistical analysis of FICA and Employer Contributions, charting pay-in and pay-out amounts against actuarial table life expectancies shows that Social Security is paying its own way, or is at least solvent. Well, it probably would be solvent if its funds were securely invested at going interest rates like any other form of pension fund.

I recently read a cynical charge somewhere that when FDR and the New Deal Congress inaugurated Social Security in 1935, the actuarial life expectancy of the current generation of retirees was about three years. I couldn’t verify that. Social Security Online [3] presents a quite different accounting: “men attaining 65 in 1990 can expect to live for 15.3 years compared to 12.7 years for men attaining 65 back in 1940.” 1940 was the first year Americans could collect Social Security.

One study I can and did do is an analysis of my own SSI account. I started drawing on it at age 65 in 2009. Raw data includes all of my contributions from 1960 to 2009 (49 years), matching Employer contributions in like amounts, and even a withholding rate adjustment recalculation for a five-year period where I was mostly self-employed. Given the taxable income data posted to everyone’s annual SSA statements, and the withholding rate for each year [4], it is a simple matter to calculate annual withholding amounts without trying to locate 49 years of W2′s or Form 1040′s. My 49-year figures came within $186 of the government-reported withholdings. And I know exactly what my SSI income is.

I assumed those funds must be adjusted or amortized for the value of interest they should earn in any interest-bearing account, making no assumption about what the Congress and Treasury may actually be doing with our money. I chose a 5% APR. Some may object that the government doesn’t credit interest accruals to our account. I am calculating the value of the account, not just the portion allocated to us.

But what is the difference between the principal and principle plus accruals? My own contribution’s cash flow plus assumed accrual worked out to 148.47% of principal. (That’s so low because the early years contributed the least). I calculated what the future value [6] of each year’s total adjusted contribution would be by year 2009. Adding the sum of those payments plus interest equaled just under 12% of my lifetime earnings.

Obviously I won’t be publishing personal financial data out of privacy concerns, but you could run the same calculations on your own account using the source links I’ve provided in “References” below. If you do not yet have a retirement year and estimated SSI monthly income, use your SSA annual statements to make some assumptions. You need to know the effect of different retirement ages on SSI income anyway.

My own work experience may not be entirely representative. I probably worked somewhat longer than the average of all wage-earners. On the one hand, my wages include three years in the military, part-time income in college, and five years of exquisitely marginal self-employment income. On the other, I finally “capped out” on SSI contributions in my last years in the workforce. The difference is what those early years might have contributed to personal savings growth had my income curve been more even. That makes a big difference to my old age, but doesn’t materially affect the amount of my monthly social security payment.

We noted how low my wages were in those early years (even if adjusted for inflation, which we should not do here). My experience would be different from someone who went straight from college into a lifelong professional career. Those earners would “cap out” early, and the Social Security Administration fund would probably never “go into the red” for individuals least likely to depend on it. Conversely, my contributions would be proportionally greater than those of someone who, for example, left the workplace to raise a family, or on account of illness or disability. All I can conclude is that it sounds reasonable that a substantial proportion of the workforce probably survives to receive social security payments well in excess of that ever put into the fund. Perhaps people who complain that is not fair forget that’s the security benefit of a social security insurance plan. Private insurance plans of all types depend on the very same mathematical certainty of pooling of risk.

The reason we can’t add an inflation factor to our calculations is off-topic but worth examining. Savings and other interest-bearing accounts don’t take inflation into account either. There, a dollar is only a dollar whether deposited in 1960 or 2009. I ran the “Inflation Calculator” [5] on my yearly payments anyway, even though I could not fairly use them for my bottom-line calculations. It’s instructive to note that the same $36.13 worth of groceries in 1962 (my FICA contribution for that year) would cost $256.66 in 2009 dollars. Younger readers would not remember the late 1970′s, when so many of us consumed with plastic credit cards bearing an 18.99% APR, since we could more cheaply repay later with devalued dollars. It isn’t just the stodgy classic University of Chicago economic conservatives who call inflation the “hidden tax.” It is. Today we call it “Quantitative Easement.”

In my early years I argued that I would probably live to regret paying into the Social Security fund (as if I had a choice). My spreadsheet proves me wrong. Actuarially speaking, in my case, I should expect to get out of it almost exactly the value of what I put into it. The spreadsheet calculations revealed that my own account will hit “break-even” when I turn age 80.25, and my statistical life expectancy right now in 2011 is age 82.77 years.

Unfortunately, even considering my low-earning early years, the purchasing power of my Social Security “nest egg” would have been worth 91% more (almost double the real purchasing power) if we did not live in an inflation-addicted economy. Our “hidden tax” benefits the government in the short run, because it repays debt with cheaper dollars just like we did with the plastic 1970 credit cards. As you can see, in the long run inflation hurts all of us, including our government.

Unsurprisingly, conservatives and upper-income wage earners will argue that Social Security is inefficient and of limited value. Liberals, seniors and lower-income workers will argue that the vast majority of Americans need a safety net. Despite all the rhetoric on both sides, I’d like to know what is going to be done to save a program that has worked for generations of American retirees so far.

If Congress can’t or won’t fix the program we have now, it would be foolhardy to put our faith and trust in a poor substitute that takes the “insurance” out of Social Security insurance, or, even worse, in some scheme that’ll be shunted off to the same private sector that brought us toxic assets, job offshoring and an imperiled middle class. That’s just my opinion, but whether the polls prove that to be in the 51% majority or 49% minority, it can’t and won’t be ignored.

©Alex Forbes 2011

References

[1] PolitiFact, “Shacking up: Social Security & Ponzi schemes
[2] Liberally Conservative, “Perry Wasn’t the First
[3] Life Expectancy for Social Security, SSA
[4] Social Security Administration Trust Fund Data
[5] Bureau of Labor Statistics CPI Inflation Calculator
[6] Future Value: I couldn’t get the built-in Excel function to work properly in my spreadsheet. Just use the formula FV = PV ( 1 + i )^ t (see NetMBA Future Value) which, in the Excel cell, would look like this: =D5*1.05^G5 if cell D5 contains the principal and G5 contains the number of periods. 1.05 is the assumed interest factor compounded annually.

142 total views, no views today

Social Security Not a Ponzi Scheme

Many Americans were surprised to hear any frontrunner candidate for President, even Texas Gov. Rick Perry, say recently in the GOP candidate debates that Social Security is a Ponzi scheme. As quoted by the Washington Post on August 29, [1] Perry claimed:

It is a Ponzi scheme for these young people. The idea that they’re working and paying into Social Security today, that the current program is going to be there for them, is a lie,” Perry said. “It is a monstrous lie on this generation, and we can’t do that to them.”

It’s a lie only if and when Congress reneges on a solemn US government promise and obligation. Seniors who have paid into the Social Security fund all their working lives should be outraged. The young and those who are only beginning working careers might well find cause for alarm in those words. I believe we can set the record straight here while still bypassing 95% of the partisan rhetoric. The status of Social Security as a “Ponzi scheme” begins and ends with the intent of Congress.

Merriam-Webster defines ‘Ponzi scheme’ as:

an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

For more information on Ponzi scheme, see Wikipedia [2]. It is true that the money you’re depositing into your SSI account goes into the Social Security Trust Fund. It’s true that the money credited to “your account” goes not into the purchasing of equities to build a nest egg for your own eventual retirement, but to pay off obligations to the current generation of retirees. Just like most private pension funds, Social Security obligations pose a long and growing debt “tail” of outgo which is micro-managed by Congress in periodic fits of oversight.

According to OMB, the Office of Management and Budget as quoted in Wikipedia [3]:

These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)

The Wiki article quoted Dr. Alan Greenspan as saying: “The crucial question: Are they ultimate claims on real resources? And the answer is yes.”

The devil’s in the details. All the worrisome arguments about how those dollar bill notes paid to you out of the fund come from the current cycle of depositors, and are not “your” dollar bills, could equally well be applied to any checking or savings bank account you own. This out-of-context argument makes no sense. The thing to remember is that it’s YOUR account, and the source of the physical greenbacks is an irrelevant distraction. The obligation to make good on your account is indeed YOUR asset, and morally it should certainly not be subject to the discretion of Congress, any more than your bank can legally decide whether your savings withdrawals coincide with the bank’s current priorities.

It’s a well know fact that the Baby Boomers are putting a heavy strain on the Social Security system. We’ve known that was coming for half a century. As we face a looming cash flow problem with Social Security, I think Congress and not individual Americans deserve full blame and responsibility for that.

Personally, I was trained in classical laissez-faire economics, and I’m very conversant with all the theoretical arguments why Social Security was a mistake in the first place. They’re just another political case of “that may work in practice, but it won’t hold up in theory.”  In my twenties I resented Social Security bitterly. After a lifetime paying into the fund, and a lifetime observing corporate practice in the American workplace where I worked for over forty years, I saw I’d be a fool to trust any “privatized” solution. Neither am I amused when I hear my account dismissively called an “entitlement.”

Reasonable people will conclude that Social Security is NOT a Ponzi scheme because, among other things, it is NOT a get-rich investment scheme and, for better or for worse, the “real resources” backing the fund are United States Treasury bonds. One could, if one wished, even argue that Perry was really calling into question the full faith and credit of the United States government. After all, it was his party that shook world confidence in our national will to pay our just debts and obligations in the first place.

© Alex Forbes 2011

Further Reading

[1] Washington Post, “Perry’s Ponzi scheme rhetoric” by Jonathan Bernstein
[2] Wikipedia, Ponzi scheme
[3] Wikipedia, Social Security Trust Fund

114 total views, 1 views today

The Tea Party on Hurricane Irene

And finally, the party that has a political take on everything. Where is the Tea Party in the wake of Hurricane Irene?

Well, in the St. Petersburg Times article “Michele Bachmann rally draws over 1,000 in Sarasota, but some prefer Rick Perry” we’re hearing from a couple of their candidates:

“I spoke to Rick Perry Thursday night,” said Wes Maddox, a GOP activist in Tampa who went to Texas A&M with Perry, who is expected to make his first Florida stop Sept. 13 in Tampa Bay. “He said, ‘You tell them (in Florida) help is on the way.’ That’s what the governor’s message is – help is on the way.”

And according to the same source, Michele Bachmann said:

“I don’t know how much God has to do to get the attention of the politicians. We’ve had an earthquake; we’ve had a hurricane. He said, ‘Are you going to start listening to me here?’ Listen to the American people because the American people are roaring right now. They know government is on a morbid obesity diet and we’ve got to rein in the spending.”

How fatuous. Does Bachmann really think God has joined her Tea Party to intervene in partisan politics? If so, doesn’t that make her Tea Party The Party of God? How ironic she’d paint their god as an obsessive-compulsive klepto.

Millions of Americans who have paid into the Social Security fund their entire working lifetimes were angered to hear this new breed of political opportunist call Social Security benefits “entitlements.” That was just a warning shot across our bow.

Where is the consistency in a Tea Party that mocks the working class, our once and former middle class, with taunts of “entitlement?” Millions of unemployed and displaced were ruined by the ongoing global financial hurricane, itself spawned by corporate carpetbaggers masquerading as “free enterprisers.” Newly poor Americans may soon find themselves in the ranks of the chronically unemployable and dispossessed. They will be dependent wards of the welfare state that those carpetbaggers, who helped create the very conditions that fuel the poverty/welfare cycle, detest. Those Americans might be surprised to hear themselves called welfare cheats and social parasites.

Who is next? When do we get to hear Tea Party rants about “entitlements” for the victims of Irene, Katrina, mine disasters, victims of wacko shootings, and other “nanny state parasites?”

Give me your poor, your tired, your huddled masses yearning to breath free … if “help is on the way,” as Perry, who as governor of Texas lacks jurisdiction over the Eastern Seaboard, was said to promise: let the Almighty sweep the carpetbaggers out to sea like cockroaches in a storm drain. In the long run, marginalizing our fellow citizens with outsourcing, corporate mismanagement and rampant corruption, toxic assets and Bernie Madoff style investment schemes, all the while painting us as bloodsucking socialist parasites, just won’t cut it. Heed the roar of reality. “Arab Spring” won’t begin to cover the revolt.

101 total views, no views today

LOL: Should Corporations Pay Taxes?

  • Joe Sestak: “Pat Toomey thinks corporations shouldn’t pay any taxes.”
  • The Truth-o-Meter says: Mostly True

I frequently use PolitiFact.com as one of two main resources for checking out the reliability of political statements and web rumors (the other resource being Snopes.com, of course). I subscribe to PolitiFact’s RSS feed. That’s how we happen to be staring at the apparently preposterous proposition that the US taxpayer should get stuck with 100% of the IRS tax bill.

This particular controversy is about the Pennsylvania race the for U.S. Senate, with Republican Pat Toomey and Democrat Joe Sestak trading potshots in the manner to which we’ve all come to expect of politicians. You can read the entire PolitiFact analysis at this link.

Narrator: “Do you think corporations pay their fair share? Pat Toomey thinks corporations shouldn’t pay any taxes.”

Clip of Toomey: “Lets not tax corporations. … I think the solution is to eliminate corporate taxes altogether.”

PolitiFact digs down into the source of this video sequence. Toomey began by arguing that taxes on corporations end up getting passed on to the consumer, “which ends up hurting economic growth”.

Taxes Affect Prices. I knew the first part. It’s a basic axiom of Econ 101 that taxes (and any other cost of doing business) are, and must be, built into the pricing model. No matter what the tax policy of a particular nation, in the long run the spread between gross profit and net profit must exceed a certain minimum margin, or it’s curtains for the corporation, shareholders and any consumer depending on that product or service.

Costs of Economic Growth. The second part is partly true and partly pure twaddle. Toomey argues that reduced corporate taxes would make the U.S. more competitive in global markets. We only have to look at Chinese competitive strategy, and the sheer size of U.S. trade imports, to realize this part of Toomey’s argument is true. For 2009 the trade deficit with China alone was 20 billion dollars (US Census data). Remember,  this represents the extent to which U.S. corporations buy from China to avoid buying from each other.

Toomey appears to realize that a zero corporate tax obligation is not politically or economically feasible, but would settle for a tax reduction: “I’d prefer none on corporations, but much lower would be better.”

Twaddle: Whether lower corporate tax or zero, Toomey’s argument assumes that most or all of the savings in the costs of doing business would end up being passed on to the consumer in the form of lower prices, while simultaneously increasing U.S. sales volumes.

  • It’s folly to suppose that Congress could agree to pay for reduced corporate taxes by coordinated reductions in U.S. spending, so the slack would be picked up by reductions in services (which would have to be paid for some other way), and by increases in the individual income tax rate.
  • Therefore a cut in the corporate tax rate could further erode U.S. consumer purchasing power, causing an even greater weakening of the U.S. economy.
  • “Demand pull” does not necessarily reduce prices even if we can afford to buy more. Contrary to classic free-market theory, prices are elastic upward, not downward. In the last 52 weeks, oil has gone from $92.75 to $74 a barrel (20% reduction) but gasoline in my area has fallen from about $3.59 a gallon to $3.16 (12% reduction).

Conclusions:

  • Conservative free-market rhetoric is jingoistic and poorly thought out.
  • A sea change in U.S. economic direction requires broad-based popular support and understanding. It has to be underwritten by the taxpayer. No one political party or ideology will ever be able to accomplish this on its own.
  • Toomey’s plan is also poorly thought out. Its arguments would make just as much sense if the proposition were to eliminate individual income taxes and let corporations pick up 100% of the tab.
  • The U.S. trade deficit and global competitive position are serious long-range issues and must be dealt with.
  • Unfair trade-off: Toomey’s plan probably would increase U.S. competitiveness in global markets, while adversely affecting domestic consumption.

The quaint notion that there’s some equitable mix of corporate and individual taxes is a dangerous misunderstanding. Toomey’s arguments rest on the assumption that the two main sources of tax revenue are economically intertwined.

So it is strange, to say the least, that he would favor a reduction in one of the components with no mention of its impact on the other.

If it’s a stealth spending reduction Toomey is really favoring, elimination of the three trillion dollar war ($500,000 a minute) would go a long way in the right direction.  Toomey is a libertarian-leaning conservative with a disregard for civil rights (go figure) whose voting record supported the Iraq war.

Toomey isn’t challenging the U.S. tax structure; he’s only whining about who should shoulder the burden, which is still to say, he doesn’t think our pals in corporate America should shoulder any of it … in an idealized Big Rock Candy Mountain conservative world of the future.

VAT

If we want to open the Pandora’s Box issue of who should pay taxes, let’s expand the discussion to include looking at the European-style VAT (value-added tax). Everybody pays it (directly or indirectly), nobody gets to weasel out, and we could dump the universally despised federal income tax entirely.

193 total views, 2 views today

There Goes The Knowledge Base

What’s happening to the legendary American know-how in the USA today? It’s not exactly “brain drain”, but it’s not the parallel phenomenon of “brain gain”, either. We’re losing our know-how, but the language to describe what’s happening is still alien to our vocabulary.

Wikipedia  defines “brain drain” thusly: “Brain drain or human capital flight is a large emigration of individuals with technical skills or knowledge, normally due to conflict, lack of opportunity, political instability, or health risks. Brain drain is usually regarded as an economic cost, since emigrants usually take with them the fraction of value of their training sponsored by the government.”

In American we saw “brain drain” [as a talent inflow] from several skillset migrations over the past 60 years. Over that same time frame, we saw that the quality of education in America has never been lower than it is today. Continue reading

85 total views, no views today

Getting a Handle on the Economy

There was an interesting short article in the April 13 New Yorker about a group of Ayn Rand devotees who meet monthly in New York. Fitting. Here’s a meeting of advocates of pure, full-blown laissez-faire capitalism, huddling by the ruins of the Wall Street collapse, ruing the advance of the forces of statism and the contradictions of that turncoat Greenspan creature. Continue reading

95 total views, no views today

Science Looks At The Economy

Interesting: as the economy goes south, just as any other sector, the scientific world is impacted. When science is impacted, scientific inquiry turns greater attention to root causes. We have before cited articles originating in the scientific and mathematics communities about cultural phenomena. Mathematicians like Mandelbrot looked at financial forecasting instead of cotton markets and recursive geometric patterns. Scientific American looked at overreliance on financial software and the perennial debate between science and religion.
Continue reading

199 total views, no views today

Of Bubbles and Butterflies

Chaos and Financial Markets II

The following story is based on true events. The characters are fictitious. Any resemblance to characters living or dead is entirely unintentional. Close cover before striking.

Rupert and Millie Paltridge, of Silver Springs, Maryland, were considering spec properties in the Phoenix area as a vacation home. “And we could even retire there,” Millie would always say. Prices were at historic highs, thanks to the national boom in real estate. They found a really upscale condo in a new development project outside tony Scottsdale. The year was early 2005. The asking price was $580,000. The development even had its own Starbucks. “We can’t afford this,” Rupert announced. But, friends explained they couldn’t afford NOT to get in on the housing market.
Continue reading

412 total views, 4 views today

I’m Sorry It’s Happening, Of Course

The following citation is from the widely publicized 12/1/2008  ABC interview by Charles Gibson, with departing President George W. Bush. It  was excerpted by Hendrik Hertzberg in his lead commentary “Transitioning“, in the Jan. 19th New Yorker. The linked ABC interview was also excerpted.

GIBSON: Do you feel in any way responsible for what’s happening?

BUSH: You know, I’ve been the President during this period of time. But I think when the history of this period is written people will realize a lot of the decisions that were made on Wall Street took place over, you know, a decade or so before I arrived as President, during I arrived as President. I’m sorry it’s happening, of course. Obviously, I don’t like the idea of people losing jobs or being worried about their 401(k)s.

517 total views, no views today