It’s a good thing that the Federal Government is there to assure us that Social Security really isn’t a ponzi scheme.
LawDog
23 thoughts on “Ouch.”
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It’s a good thing that the Federal Government is there to assure us that Social Security really isn’t a ponzi scheme.
LawDog
Comments are closed.
That says it better than any long well researched article on the subject.
Never allow a dog to guard your food. Never allow politicians to guard your money.
It is good to have them reminding us, I was wondering why it was sounding so familiar.
For age scale I turn 30 next week.
A few years ago the wife and I hired a finacial planner to help us make the best of our savings and investments.
When we got to looking at our retirement savings our planner looked at us over his shoulder as he brought his speculations on the screen.
“I assume you want these models to assume no social security benifits”
We both said “Yes” in unison.
What’ll hurt the most will be who are the first age-group to get openly robbed.
I can only hope it collapses before our children are of working age.
When this story broke our local radio station news announcer called it the largest ponzi scheme ever. I was yelling at the radio that no it wasn’t – Social Security took that prize.
My sibs and I are young adults (I’m the oldest, in my late 20s), but are thinking ahead to retirement to one degree or another. We all assume that there won’t be Social Security by the time we’re old enough for the payout.
And Madoff tried very hard, but he wasn’t anywhere near the Social Security Administration’s “largest Ponzi Scheme” record. Valiant effort, though.
LOL LD i am getting into my late 40s and will never see the ” great gearitic bail out ” . I dont mind a cent of my ” pay inn ” tho . The wife and have some ground , and some cattle whereby we can make something if all goes to hell . Well if nothing else we will have great grass fed steaks lol . In the coming years i suspect we are fortunate in the sense we owe no one nothing . We dont have much , but what we have is paid for. Just as a note the time has already come when folks are attempting to trade a gun for a ” half beef “, and the only sticking point to me was the equil value issue .
I don’t know what’s more disturbing, the fact that the comic is true or the fact that it made me laugh.
OUCH! indeed!
For an astronomical amount, we can bail out big business, send billions in aid overseas, make awesomely stupid huge loans to people who obviously don’t know what they’re doing with money, but we can’t bail out the social security program?
What is wrong with this picture?
LawMom
We are badly governed. It’s going to bite us, hard.
LawMom, even Hogarth, the cartoon kid from the Iron Giant, knew the words “I’m from the government and I’m here to help” were the prelude to problems. And once again it the taxpayers that are being handed a chocolate mudslide.
Okay, I’m sick of it. Social Security has problems. But calling it a “Ponzi scheme” couldn’t be farther from the truth.
One thing that we forget is that the life expectancy in 1900 was 47; in 1950, it was 68; today it is 77. In the early years, the average person didn’t even get any Social Security benefits; they died after having paid them out their entire working career. People are living longer and retiring earlier — an idea that Social Security is utterly unprepared to deal with.
And LawDog, I really appreciate your posts here. I agree with you 99.5% of the time, but not here. Yes, if Social Security continues to attempt to pay out benefits at the current rate to people who are 65, it will collapse or need a huge bailout. But what politician wants to tell a 47-year-old, “You’ve worked for 27 years, and are expecting to retire in 18 or less. Pfft! Don’t plan on it; you’re not even halfway through your working career.” The answer is, not many — and that’s one of the biggest problems. It needs to be fixed, but it’s not a pleasant thing to try and fix it.
Bottom line is, though, unless you’re already approaching retirement age, don’t expect any Social Security benefits if you retire at 65. Plan on receiving them starting at 75.
It might be pointed out that if the pongos in Washington stopped paying out multitudinous benefits, including social security, to illegal aliens, we might have more money. We also need to get realistic on all these welfare schemes which funnel money to other countries. Our own American Indians are ill-housed, hungry, and freezing this winter, and you see very little money spent on them. And that’s not to mention the elderly, who catch it in the neck constantly. They deserve decent support and benefits every bit as much as ‘The Chiiiildren.’
(and of course, my thought on that is, if you can’t support ‘The Chiiildren,’ then don’t have so damn many of them.)
As to ‘retirement,’ many people are forced to retire in their 50s. With the age prejudice rampant in this country, they hardly stand a chance of getting a decent job, much less one which is worthy of their intelligence, experience, and education, nor one that will even support them.
Dog’s father was overseas for over 25 years, during which time he contributed the maximum that he could to SS from a more than adequate income. However, when he died, and I went to see about SS for myself and my children, they took the SS only from the last three years, that is, the time he had been back in the States. That’s very wrong. In addition, I was told I’d have to work for 13 1/2 years in order to collect SS on myself.
However, a friend, who was a jeweller and quite wealthy, and who requested NOT to be sent SS because he was well enough off to support himself and his family, regularly got SS checks for himself, and at that time, for a daughter who was in college.
We all know the stats, jsharpminor, you are preaching to the choir there. It’s the result of an apalling lack of foresight on the part of the government, and our sheeplike willingness to go along with it.
Yep. Ponzi scheme, which is about on par with the other panicked attempts at a ‘solution’ for the whole house of cards.
LawMom
It’s actually wusser than that….the congresscritters some time ago just decided to SPEND it all as the SS receipts rolled in, and they have been doing it for years. The only “trust fund” is a bunch of government securities.
If any one of our corporate pension overseers had done that, they would today be in irons….
The tab for SS related spending comes out of the general cash flow stream generated by gummint taxation of all kinds.
jsharpminor,
So your point is that Social Security actually works – as long as the participants die before collecting?
It is unpatriotic to live long enough that the government has to pay out, according to the Ponzi scheme, that they set up?
So, as long as the participants die according to schedule, it is not a Ponzi scheme.
At least other Ponzi schemes are voluntary. Social Security is a government enforced Ponzi scheme.
Why should someone less than 60 expect benefits from this Ponzi scheme at 75? The benefits will be further decreased and the age restrictions will be raised to the point that they expect that almost everyone will die first.
To put it simply – It isn’t a Ponzi scheme, when we do it.
I feel so much better.
Now, why don’t you fix this minor economic downturn due to an itsy-bitsy banking problem, although I’m sure you can explain that it is not really a problem. How you are sick of the term banking problem. How banking problem couldn’t be farther from the truth.
jsharpminor:
Yes, I’m willing to write off all of my “contributions” if it keeps my younger sisters protected from having to throw their money after mine.
Its amazing how much a simple cartoon picture is worth a thousand words.
I just can’t tell what conservatives love more: their stupid slogans or their dearly cherished ignorance. But, not to spoil a good, mindless, ill-informed rant, I still think I should explain to you that you’re completely wrong. I don’t expect you to care, or stop with the slogans, but . . . you know.
See, a Ponzi scheme is a fraudulent investment scheme. It’s not defined by paying later investors back from money paid in by earlier investors (there is no “later investors’ money” or “earlier investors’s money” – you don’t think that they keep your money in a little box with your name on it, do you?). That is standard practice. Every bank, mutual fund, or investment fund of any kind keeps a running flow of cash in and out, and the money you withdraw likely changes hands many times before it gets to you.
A Ponzi scheme is defined by paying out money falsely claimed to be the profits of investment, which is actually just incoming cashflow in the absence of profits. The necessary components of a Ponzi scheme are that (a) the depositors are supposed to receive profits from investment of their money, (b) the supposed profits of the scheme are in fact inadequate or nonexistent, (c) the payouts investors receive are diverted from deposits intended for investment, and (d) the payouts are misrepresented to the investors to hide the scheme.
Social Security, in contrast, is nothing more than a revolving retirement fund: money is paid in, and used to cover benefits guaranteed under the fund; those who pay in earn the right to receive benefits themselves under specified conditions; the conditions are established in such a way that incoming cashflow always matches outgoing cashflow over the long term (though short-term fluctuations can cause problems, especially when a Republican president steals the legally-sequestered trust fund intended to manage that problem). The fund does garner some interest by investing its deposits in T-bills, but it is not primarily intended as an investment fund (it would work just the same way if there was no investment income – it would just have slightly lower benefits). Nobody is misled as to the source of the benefit payouts or the workings of the fund (other than conservatives who seem to deliberately misinform themselves in order to have something to rant about). The payouts are not misrepresented as investment profits, in no small part because the fund is not an investment fund.
The fundamental difference is that a Ponzi scheme is inherently unstable: because it is an investment fund, intended to increase in value exponentially through interest accrual, it is mathematically impossible for it to maintain the fiction of covering investment returns from new incoming deposits. It is the financial equivalent of a pyramid scheme. Social Security, again, is no more than a revolving deposit account: money is paid in, money is paid out – the two are supposed to balance, and as long as they do, there is no mathematical reason the fund can’t go on forever. Social Security is no more a “Ponzi scheme” than your checking account is. The current problem with Social Security has nothing to do with the financial theory behind the system, but merely with the perfectly simple phenomenon that, for historical reasons, payee input and beneficiary withdrawals won’t match for a projected period of about 20 years – a problem that was long foreseen and easily manageable, though not, in fact, well managed. Note that this “Ponzi scheme” has functioned for 60 years so far, and will continue to do so whether the Boomers’ benefits are partially cut or not: that would be proof that Ponzi schemes do work, if this were a Ponzi scheme, which it is not.
I’m sorry that a completely transparent retirement fund that basically functions almost exactly the way a business checking account does is so incomprehensible to you that it’s indistinguishable from a complex fraud based upon secret transactions falsely represented. Nonetheless, the fact that you don’t understand it doesn’t mean that it is actually what you think.
Kevin T Keith,
I like the stupid slogans. I find it isn’t worth fighting the liberals for their dearly cherished ignorance. 😉
So, it isn’t a Ponzi scheme because people are aware of the kind of investments the government is using?
The government will only pay back a fraction of what was paid in.
The government will continually make it more difficult for you to receive any payout of your money.
The government is not misrepresenting anything here, because you don’t have a choice. If you really want to find out the details, you can, although those details would probably not cheer you up any more than they would Madoff’s clients.
The fund does garner some interest by investing its deposits in T-bills, but it is not primarily intended as an investment fund
And those T-bills are going to be worth so much the way the government is printing money and throwing it out of helicopters. Just because our government has not yet defaulted on T-bills doesn’t mean that it won’t. I can’t wait until I can get my very own US $10 trillion dollar bill. 🙂
Since it is a retirement fund and not an investment fund, it can’t possibly be the same thing, because with an investment fund you expect to make money, while with a government retirement fund you only expect to see a pittance. at least Madoff’s investors will be receiving their pittance sooner than most people paying into Social Security.
I’m sorry that a completely transparent retirement fund that basically functions almost exactly the way a business checking account does is so incomprehensible
In that case, I would like to withdraw my money before if becomes completely transparent.
RM:
So, it isn’t a Ponzi scheme because people are aware of the kind of investments the government is using?
It isn’t a Ponzi scheme because it isn’t an investment scheme. In a Ponzi scheme, you are depositing your money on the understanding that it will be invested for you and you will get interest on that investment. Because everybody is (supposedly) earning interest, the fund has to continually grow to meet its obligations. Because, by definition, a Ponzi scheme is a fraud, there isn’t any interest – it can only pay dividends to the first investors out of later cashflow, and does so purely for the purpose of creating the appearance of profits in order to sucker more people to invest money, which is then stolen by the managers (the real purpose of setting up the fund). Mathematically, a Ponzi scheme can’t work because it requires continual growth with no profits; in practice, the managers abscond with the money as soon as they’ve got enough.
Social Security, however, isn’t intended to pay for itself out of investment profits, and “investors” are not promised interest income on their “deposits”. It can’t be a Ponzi scheme because there’s no way to fraudulently induce people to give money by brandishing fake “profits” from diverted cashflow. If you expect interest income on your Social Security payments, and think you’re being cheated by not getting it, you’re probably the kind of person who expects bells to ring and coins to come pouring out when they put a penny in a gumball machine. The fact that you don’t understand how the system works, or that you’re disappointed by merely getting what you paid for, is not proof that it’s fraudulent. From a financial perspective, the Social Security system is not mathematically doomed the way a Ponzi scheme is; it doesn’t require more and more “investors” to keep it solvent, and can go along perfectly well in the steady state – in fact it is designed to.
The government will only pay back a fraction of what was paid in.
That’s nonsense. The overall payout over time is roughly equivalent to payroll contributions over time. Payouts in any one year may or may not exactly match SSI taxes in that same year, but that doesn’t matter because the system works on a long-term revolving basis. Payouts to any particular individual worker in retirement may or may not match their personal contribution during their working years, but that is the result of demographics and the eligibility formulas, not the overall financial stability of the system. (In fact, many people receive much more than they contributed, because the retirement-age population is usually smaller than the working-age population: many pay in, fewer withdraw.)
The SSI “crisis” is the result of the historical fact that, due to the disruptions of WWII, a large cohort of babies was all born in a relative short period of time, followed by a long period of relatively few babies. That leaves the “Baby Boom” population in the lurch because their generation happens to be much larger than the following generation. But again that has nothing to do with the financial basis of the system – it’s just an external disruption that affects cashflow. Unfortunately, it wasn’t managed wisely, but that also has nothing to do with whether the system is sound at bottom (just as periodic recessions do not prove that capitalism in general is “a Ponzi scheme”).
Since it is a retirement fund and not an investment fund, it can’t possibly be the same thing, because with an investment fund you expect to make money, while with a government retirement fund you only expect to see a pittance. at least Madoff’s investors will be receiving their pittance sooner than most people paying into Social Security.
You seem to have absolutely no idea what you are talking about. First, you claim SSI is a “Ponzi scheme” – that is, a fraudulent investment scheme. It is not. Now you agree that it is not an investment scheme, but complain that it does not pay as high dividends as one. But, since it was not intended to, that is obviously no complaint at all. (A waffle iron does not pay as high dividends as a mutual fund, either, but if you know what a waffle iron is for, you can still use it effectively without making a fool of yourself.)
As for payouts, your comments seem so completely uninformed it’s hard to know what you were thinking. You do not expect to receive “a pittance” from SSI (if you understand the system, at least) – the total payout over time is roughly equal to the total intake; the total payout per person is roughly equal to their proportional share of the entire trust fund over their retirement lifetime (adjusted in various ways). For many people it amounts to hundreds of thousands of dollars over their retired lifetime – much more for some (less for those who die sooner).
As for “waiting” to get your retirement payout, you wait until . . . you retire. (That’s how a retirement fund works.) It’s true that you can get your payouts from an investment fund when you choose to withdraw the money (or in this case, when what’s left of Madoff’s fund – an actual Ponzi scheme – clears bankruptcy). Since the two systems are designed to work differently, it’s hardly a valid complaint that they do work differently. I will note, however, that everyone who contributed to SSI and is now qualified for benefits is now receiving them – rather unlike Madoff’s investors, and those of many other investment funds that were not fraudulent but sill managed to lose all their clients’ money anyway.
I suppose you deserve credit for remaining true to your principles, insofar as you understand them, but I will say you’re the only person I’ve heard to say the current situation shows the stock market is a better place for retirement funds than SSI. (I notice that most of your ideological colleagues have been suspiciously silent on “privatizing Social Security” for at least a year now).
Look, it’s simple enough: SSI and investment funds are different things, intended for different purposes. It’s simply stupid to complain that the one does not work the way the other does.
The main reason for the difference is that SSI is fundamentally intended to provide security (hence the name), not profit. I presume even you know that profit and risk are linked in an investment scheme – the higher the profit potential, the higher the risk of loss, and the more conservative the returns the safer the investment is. SSI was deliberately intended to be as safe as possible, so that people could be certain they could count on it and would always have something, at least, to fall back on. It does not invest its funds in the stock market (thank God!), and thus does not generate market-rate returns (thank God!). It invests its funds in the single safest, most reliable instrument in the world. If you have no faith in that, as you claim, then that would presumably mean you want more security, not less – which in fact would be perfectly possible by simply not investing the funds at all, a course that would ruin any supposed “investment” fund, but would leave SSI perfectly solvent because it’s not an investment fund.
Necessarily, then, you don’t get the kinds of dividends from SSI that you might get from a stock fund, but you also avoid the risk of losing huge percentages of your benefits when the market tanks. Everybody’s IRA has gone to hell over the last couple of years, but SSI keeps plugging right along – because it’s designed to.
Necessarily, also, there is some risk that your total payout will not match your total contribution over the years, since, because it’s a retirement fund, the payouts are keyed to your expected lifespan. If you die too soon, you miss a lot of that payout. But, again, that’s how a retirement fund works. You can be sure to get your full payout from a stock fund – whatever happens to be there at the time, that is, and you’d better hope you retire on an upswing, not a downswing – but only by cashing out the entire fund. You can do that because an investment account is not a retirement fund. If you had to structure those payouts to match an expected lifetime (as some do, with annuity funds or reverse mortgages), odds are you wouldn’t receive total value either (which is how annuity fund managers make money).
Again, that’s how the system is designed. It has considerable built-in security, which also limits the financial upside to a certain degree. It’s a conservative, fail-safe program – by design, and for good reason. Complaining that it doesn’t operate like something it’s not is just ignorant. Complaining that it doesn’t return the same dividends as an investment fund when it’s at maximum profit, without ever mentioning the security of the retirement fund or the risk of the investment fund (and doing so in the middle of a major recession) is willfully stupid.
The other reason SSI doesn’t provide interest income – aside from deliberate, prudent risk avoidance – is historical. Social Security was created just after WWII, and designed from the beginning to provide benefits to retirees from the very beginning. Since the first generation of retirees hadn’t contributed to the program previously, because it didn’t exist, they could only receive benefits from the concurrent contributions of the working generation. That generation, when it retired, would then have to draw from the following generation’s contributions, because theirs had gone to support their own parents’ retirement, and so on. By design, the sytem was always intended to be funded on a real-time revolving basis, and it always has been. But, again, there is no fraud, there are no fake profits, there is no inevitable imbalance of contributions and payouts. Saying this is “a Ponzi scheme” only proves you don’t know how the system works, or how it began, or why.
I would like to withdraw my money
No.
SSI is a program our nation employs to guarantee at least basic support during retirement for all citizens. All who have the means contribute, to ensure that all who have need will be provided for. It’s not a way to get rich, it’s not a way for you to play the stock market, it’s not a Ponzi scheme, it’s not robbery, it’s not any stupid, self-centered thing you want to claim it is. It’s part of our civilization. It’s the way an affluent society deals with the reality of risk, especially for those without incomes. You don’t get to opt out of SSI any more than you get to opt out of speed limits or anti-littering laws. You have a tremendous amount of liberty, but you live in a large and interconnected society in which citizens have obligations to the social structure and to each other. It offers you security, a preserved and protected (sort of) environment, and extensive infrastructure that makes everyhing else you do possible. It offers a stable climate for business and private activities, a knowledge-intensive economy, and an educated workforce to create affluence and opportunity. It lets you sneer at all of that while you take advantage of it, and then pretend to be some kind of “self-made man”. But it doesn’t let you be a free rider. You have to give back – to pay for what provides the security, builds the infrastructure, educates the population . . . and gives them a tiny bit of security when they get old. You can’t opt out of that, because you can’t opt out of civilization – and certainly not while also taking advantage of it.
You’re free to complain about the civilization that supports and nurtures you – you’re just not free to act like a barbarian while you’re part of it. Pay your taxes, and look forward to your retirement.
Kevin T. Keith,
It isn’t a Ponzi scheme because it isn’t an investment scheme.
Perhaps I should have used Madoff Scheme, since the original post is a cartoon with Madoff claiming inspiration from Social Security. He apparently did try to make money.
In a Ponzi scheme, you are depositing your money on the understanding that it will be invested for you and you will get interest on that investment. Because everybody is (supposedly) earning interest, the fund has to continually grow to meet its obligations.
So, with the wonderful interest income, the dramatic increase in contributors, and the fantasy inflation rates, Social Security is something I should invest in. But I cannot choose to do that. I am compelled by law to contribute to this wonderful investment.
Mathematically, a Ponzi scheme can’t work because it requires continual growth with no profits.
How does that work with a declining work force, interest rates that are just above zero, and the Dollar weakness? Yes, the Dollar is doing well against the Pound, but that is only because they are more messed up financially than we are.
Social Security, however, isn’t intended to pay for itself out of investment profits, and “investors” are not promised interest income on their “deposits”.
Nobody has to promise anything, except to lock you up if you do not participate.
From a financial perspective, the Social Security system is not mathematically doomed the way a Ponzi scheme is; it doesn’t require more and more “investors” to keep it solvent, and can go along perfectly well in the steady state – in fact it is designed to.
Good point, Social Security is doomed in a different way. As long as we keep pushing back the age at which you are eligible to have your money returned to you a little at a time, and as you stated interest free, things are working perfectly well, just not for retirees. different kind of doomed, but it is just semantics.
—–The government will only pay back a fraction of what was paid in. —Here, I meant pay out to individuals. After all, this is about individuals.
Payouts to any particular individual worker in retirement may or may not match their personal contribution during their working years, but that is the result of demographics and the eligibility formulas, not the overall financial stability of the system. (In fact, many people receive much more than they contributed, because the retirement-age population is usually smaller than the working-age population: many pay in, fewer withdraw.)
I love your motto for Social Security – Many pay in, fewer withdraw.
The SSI “crisis” is the result of the historical fact that, due to the disruptions of WWII, a large cohort of babies was all born in a relative short period of time, followed by a long period of relatively few babies. That leaves the “Baby Boom” population in the lurch because their generation happens to be much larger than the following generation. But again that has nothing to do with the financial basis of the system – it’s just an external disruption that affects cashflow.
Are you kidding? it’s just an external disruption that affects cashflow. Priceless.
As for payouts, your comments seem so completely uninformed it’s hard to know what you were thinking. You do not expect to receive “a pittance” from SSI (if you understand the system, at least)
You are correct. I do not expect to receive anything from Social Security, not even a pittance. My retirement plan is line of duty death. I can afford that.
I will note, however, that everyone who contributed to SSI and is now qualified for benefits is now receiving them – rather unlike Madoff’s investors, and those of many other investment funds that were not fraudulent but sill managed to lose all their clients’ money anyway.
Social Security is still taking money in. If the money stops coming in, Social Security will soon have to find other ways to pay out benefits. SSI does not pay out to everyone eligible for benefits, since some elect to delay payout, so that they are not penalized for being so young. If the eligibility is continually changed and participation is not voluntary, is the system honest or fair?
I suppose you deserve credit for remaining true to your principles, insofar as you understand them, but I will say you’re the only person I’ve heard to say the current situation shows the stock market is a better place for retirement funds than SSI. (I notice that most of your ideological colleagues have been suspiciously silent on “privatizing Social Security” for at least a year now).
I do not think I specified any particular type of investment for retirement, or should I not be able to call a retirement fund an investment?
I presume even you know that profit and risk are linked in an investment scheme – the higher the profit potential, the higher the risk of loss, and the more conservative the returns the safer the investment is.
Isn’t that what the bankers were saying about the low risks they were taking since the default rate on low income mortgages was so low? They were so conservative, they are bankers after all, you can tell by the way they dress. A problem with that is that when all of the money is going into a certain area, the diversification does not work to protect the investments, but to magnify the risk. Two years ago, these bankers would have described how safe and conservative their investments were.
SSI was deliberately intended to be as safe as possible, so that people could be certain they could count on it and would always have something, at least, to fall back on.
If they live long enough. If the payout is not destroyed by inflation.
It does not invest its funds in the stock market (thank God!), and thus does not generate market-rate returns (thank God!). It invests its funds in the single safest, most reliable instrument in the world.
As with NASD and oil, we seem to be developing a nice bubble in bonds. We are borrowing money and people have been glad to buy Treasuries, because they perceive them as safe. Most countries faced with a similar situation watch rates move in the opposite direction. The more you need the money, the higher the interest. As people lose confidence in the Dollar and in Treasuries, rates will move up. Probably not gradually, but as things end with other bubbles. At the beginning of 1998, the Nobel Prize team of the best and the brightest had the same confidence in the Ruble. At the end of 1998 LTCM RIP.
If you have no faith in that, as you claim, then that would presumably mean you want more security, not less – which in fact would be perfectly possible by simply not investing the funds at all, a course that would ruin any supposed “investment” fund, but would leave SSI perfectly solvent because it’s not an investment fund.
So, how do I do that with my Social Security contributions.
You don’t get to opt out of SSI any more than you get to opt out of speed limits or anti-littering laws.
Congress gets to opt out. Maybe they are not as confident in SSI as you are.
You can’t opt out of that, because you can’t opt out of civilization – and certainly not while also taking advantage of it.
Maybe Congress isn’t civilized.
“In the early years, the average person didn’t even get any Social Security benefits; they died after having paid them out their entire working career.”
I wonder if the goal of collecting was a motivator in the increase of life expectancy. Studies of deaths of chronically ill people show fewer deaths in the 6 months before a birthday than in the 6 months after a birthday, and also a statistically significant number of people who live to be 100 years old die shortly after they turn 100, as if turning 100 certifies them as old and sickly.