Monday, August 29, 2011

Perry, Ponzi: Pfui

Rick Perry recently recorded the following reflections on Social Security.

"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... It is a monstrous lie on this generation, and we can't do that to them."

The only thing that Social Security and Ponzi schemes have in common is that people who join later contribute to those who joined earlier. Some facts:

1. Social Security has always honored its commitments to older Americans. In fact, the U.S. government has routinely borrowed money from the Social Security trust fund, which has stored -- and still stores -- surplus funds from our contributions.

2. Social Security still has a net surplus, although it is currently paying out more than it is taking in. The main reason for this is the varying sizes of successive generations. The "Baby Boomer" generation which is retiring now was a very large one, while the generation that is currently paying for its retirement is much smaller. Also, because the Social Security "tax" (FICA) is basically a tax on the middle class (it cuts off at income above about $106,000), it is not doing so well because the middle class in the U.S. is not doing well.  While income of the wealthy, which is largely not subject to FICA (because of the cutoff), has been soaring, the income of the middle class has been stagnant at best for decades. Thus, the problem is not with Social Security but with the widening class and income gap in this country.

3. Actually, the situation is likely to be the exact opposite of Perry's description. The generation that is currently paying for the Social Security benefits of the Baby Boomers is a fairly small generation. There is a very good chance that the generation(s) which will be paying for its retirement will not be that much smaller -- maybe even larger. Thus, when the "X-ers" or whatever they're called reach retirement age there may very well be plenty of workers paying into the fund. I don't know the exact demographics, so perhaps some reader will fill in the numbers.

4. Unlike a Ponzi scheme, the problems of Social Security can be fixed in a simple and above-board manner: adjust the FICA tax so that everyone makes a fair contribution. This is easily and painlessly accomplished by raising the income cut-off for FICA contributions -- say from $106,000 to $1 million. Or, remove the cap entirely. This could be accompanied by modest (say logarithmic) increases in the amount paid out, based on contributions -- so those who contribute more would get somewhat more in benefits.

The simple fact is that 99.99% of Americans are very happy to contribute to the retirement of their parents and grandparents by paying the FICA tax. Social Security is not only popular with the old, but is also popular with the children and grandchildren of the old. Only Scrooge (or Grover Norquist) would make a principled objection to the efficient and dignified operation of one of the most popular programs ever implemented by any country at any time in history.

Ponzi scheme indeed! As the great fictional detective Nero Wolfe would surely have said to Rick Perry: "Pfui!"


  1. And I think that Ted Kennedy felt if you removed the cap on earnings subject to FICA you could actually lower the rate.

  2. So if the cap is raised - let's say hypothetically it is doubled from current levels. So going forward I end up paying twice as much into SS as I did before...will they promise me that my benefits received will also increase? Or will I just pay more into it without receiving any incremental benefits?

  3. The idea is that if you pay more you get more: same as it is now. However, it would not be linear in the sense that if you double your contribution you would not take out double. Some proposals would make the payout logarithmic, so your payout would be a multiple not of the amount you paid in, but a multiple of the logarithm of the amount you paid in.

    Thus, for example, it might be set up so that a person contributing say $100,000 would get back only twice what a person contributing 10,000 would get back. This is not so bad considering the tremendous disparity in disposable incomes.

    I'm not advocating this particular scheme, but I think it is more important to preserve Social Security than it is to preserve linearity in payback to very wealthy people.