Wednesday, September 14, 2011

Social Security...a Ponzi Scheme?

Rick Perry made some waves recently by calling Social Security a Ponzi scheme.  Others have called it a scam. It's popular right now to disparage the program.

John Stossel is screaming the same thing.

What I have realized, however, is that most people don't understand Social Security for what it is.  Many average people think that Social Security is like a retirement fund that they are paying into, that somehow they will be getting back what they have put into it. If someone starts with that assumption, then the prospect of lower benefits, or no benefits, feels like a bait and switch. It feels as if they have been ripped off. They have invested in something that has been devalued or bankrupted.

It's not too far of a jump from that feeling to comparing Social Security to a Ponzi scheme.

Social Security is not an investment fund.  It isn't even about saving up money for people. Social Security is a current benevolence fund run by the government for those who currently need it.

We pay into it to sustain the elderly and disabled in this day and age.  The idea is that when we become elderly, or disabled, there will be other young people paying into the benevolence fund for us.

For churchgoers who have tithed, Social Security is like the tithe one pays consistently over time.  You don't expect to get anything back from that tithe other than the continual running of your place of worship.  And, when you are old and need the services of the church/synagogue more intensely, or have less income to give, you simply move along the continuum of giving.

In many ways, I would think that religious conservatives would "get" Social Security better than the secular public.  They should be used to the idea of giving without future gain, giving to help out unknown people without seeing any return on the "investment".

Now, people may object to the idea that they bear any responsibility to elders and the disabled, collectively speaking, but that's an entirely different point.  That has nothing to do with retirement, Ponzi schemes, or disappointing investments.  Instead, believing that each person is responsible for their finances once they are elderly or disabled in the same way they were when they were young or healthy is an objection based in libertarian, self-sufficient values.

Some people argue that people need to fund their own retirement accounts, or have the government direct their taxes to private pension funds or investments.  That sounds well and good until one considers how the stock market has played out in the last few years.  Many retirees have seen their retirement investments tank because of the decline in stock prices and the volatility of the market.  Combined with declining house values, leaving them little equity to tap for emergencies, many retirees who did all the "right" things face uncertain futures.

Additionally, as an anecdote, there is my mother who worked for a company for over 30 years.  She works part-time now because of health reasons and is able to draw the pension she earned from a private company, supposedly one of those paths that conservatives hype all the time.  Yet, she has received letters indicating that the company that she worked for all those years may declare bankruptcy, and if they do so she will lose the pension she was "guaranteed".  Legally, if they go out of business, they can't be required to pay their pensions.

The question looms....what are people to do when facing retirement? There are no "secure" options for anybody. We forget that much of our livelihood can disappear in a moment, whether it is through losing a job during a recession, having a 401K, or IRA, dry up because of a down market, or having a pension fund disappear into the ether through no fault of our own.


james said...

I vaguely recall reading about 20 years ago that companies with paid-up retirement plans were regarded as excellent buys. The purchaser regarded the plans as a source of current liquidity, and would milk it accordingly. Wish I could remember where--it would be interesting to see if that approach was squelched or if it still pertains.

MInTheGap said...

What bothers me is that Social Security is currently a bunch of IOUs-- there's nothing there. It's currently taking in less than it pays out. It's sold as an annuity, but it's not guaranteed.

In all intents and purposes it is a ponzi scheme, because it takes my money with promises of future gains and pays it to someone else. It might make you wealthy/pay for your retirement, but odds are that my generation will have really reduced benefits, it any at all.

terri said...

That's just it...Social Security is not a bunch of IOU's...unless it is I O U Nothing.

It is currently taking in less than it pays out partially because of payroll tax cuts initiated by George Bush shortly after he came into cuts that were also deepened by Obama this past year, and which he is wanting to extend.

There needs to be Social Security reform. Part of that, I think, should occur by reshaping how the American public perceives it. Simply renaming it might help....Social Benevolence Fund maybe?

Reform should come in tying benefits to the state of the economy and use of benefits. There is a certain amount of money allocated for it and, depending on the number of beneficiaries for a given time, the dollar amount of benefits will fluctuate.

If people had the sense that there would be something that they could count on, but that a specific amount isn't guaranteed for perpetuity, they might be more motivated to save and plan for their retirement more extensively.

The problem we face is that people are living longer, but that quantity of life doesn't always match up with quality of life. So, a retiree may live for 20 years after he/she retires but they may have such poor health that there isn't much they would be able to do for work.

This is also a cultural problem. Americans are used to independence. Not many people plan to live with their families when they are older, either because they want to remain independent, or because they don't want to be seen as a burden to their families.

And, legally, grown children are not obligated to provide for their elderly family members.