The following is a continuation of the Is Social Security a Ponzi Scheme? (Part 1). That article dealt with the history of Charles Ponzi and the original Ponzi scheme. In this article we’ll cover the Social Security system in general.
Social Security also works best as a pyramid
There is one common thread that connects Social Security to a Ponzi scheme. Both work best when the investor base resemble a pyramid – with a few investors at first, gradually growing with each successive group. When this happens there are few complaints, because everyone gets their money – or in some cases much more than they originally contributed.
During the early years of Social Security, a natural pyramid was formed, due to a relatively short average length of retirement (simply because people died sooner) and large families. Unfortunately for the Social Security program, the base of the pyramid began to shrink in post baby boomer generations. People started to have smaller families – the successive group got smaller. Worse yet, due to the wonders of modern medicine people started to live longer, which meant that they could collect benefits longer.
Social Security is a pay-as-you-go system.
Naturally, the US government is not interested in creating a Ponzi schemes. Social Security’s intention was to be a pay-as-you-go system, where the benefits for current retirees are paid by current workers, who will themselves become beneficiaries in the future (with their benefits paid for by the next group of workers).
At a superficial level, this sounds a lot like a Ponzi scheme. However, there are some very importance differences.
The first difference is that you don’t have ownership of an “account” containing your investment and the accrued earnings. Those who invested with Ponzi and Madoff received financial statements showing their account balance and earnings. You won’t see this sort of statement from Social Security. While the Social Security Administration does provide statements to workers, these statements contain a projection of estimated payments – they do not contain an account balance. This is because you don’t have any ownership rights in the money you put into the Social Security system. What you have instead is the promise of payments that will be paid for by the generations of workers behind you.
Second, the goal of Social Security is transparent. You know that the money you pay in goes to pay the benefits of current retirees. This is no secret. If you aren’t aware of this, it’s because you weren’t paying attention in civics class. With a Ponzi scheme, you are deceived into believing that your money is being invested when in actuality it is being used to pay off earlier participants.
To clarify that above point, some of your money is being used to pay earlier investors. The operator of the scheme is also skimming some money off the top – outright theft. We all joke about congress raiding Social Security and leaving IOUs behind, but I doubt that many people truly believe that congress is going to gut the Social Security program and deposit the money into their Swiss bank accounts. There is no intention for the people who run Social Security to use the money to make themselves rich.
While the goal of a Ponzi scheme is to make the operator rich, the goal of Social Security is to ensure a safety net for all current and future generations.
The problems with a pay-as-you-go-system
Although most government-run pay-as-you-go programs have a noble goal, this does not mean they are perfect. The concept definitely has some flaws.
Ida May Fuller is the answer to a trivia question, and a pretty lucky lady. She was the first person to cash a social security check. Ida May had paid into the new system for three years. When she received her second check, she had received more in benefits than she had paid into the system. Ms. Fuller lived to be 100 years old, collecting nearly $23,000 in benefits. Not a bad deal, since she had paid in less than $25. (That’s not a typo. It’s not $2500 or even $250 – she paid in a Jackson and Lincoln).
Ida May wasn’t alone. The earliest recipients of the program earned substantially more in benefits than they paid into the system.
In the early stages of a pay-as-you-go system, the government is in a bit of a pickle. The government had to decide whether to pay the early recipients a fair benefit based on what the participants had paid in, or a reasonable benefit based on the intent of the program (to provide financial security in retirement). The U.S. government chose the second option. This meant that future generations would be subsidizing these early payments.
Why did the government choose to subsidize the early recipients? Probably to encourage support of the new system. Friends and relatives of Ida May and her contemporaries could hear for themselves how great the Social Security system was. The flip side would have been to pay the early recipients a couple of dimes every month – which wouldn’t have generated nearly as much buzz for the new system.
Pay-as-you-go systems are also at risk of changing demographics. There are two main risks of Social Security: that the number of people paying into the system will decline, and that the number of people receiving benefits will increase. The decline in family size in recent decades has lead to a decline in the number of people paying into the system – but so has the phenomenon of early retirement. Even worse, the early retirees are going to be toward the top end of wage earners – those paying the most into the system.
As the baby boomers receive benefits, it’s going to be the smaller generations of workers behind them paying the bill. To exacerbate the problem, advances in medicine coupled with people paying more attention to their health means that people are living longer than ever. Instead of receiving benefits for ten years, someone might receive benefits for thirty!
In the third installment of the series, we’ll look at what can be done to the Social Security system deal with the problems of a changing society.
The Biz of Life says
I don’t disagree with much of what you say here, but Social Security was born of deception and has always been a very deceptive and misrepresented program. Why would anyone with half a brain let the government force them to contribute to a commingled pool of “retirement funds” and then turn the management of that commingled fund over to politicians to do with as they see fit? Talk about a recipe for disaster!
Let me quote Walter E. Williams (http://jewishworldreview.com/cols/williamns092011.php3) for a moment: “Here’s what the 1936 government pamphlet on Social Security said: ‘After the first 3 years — that is to say, beginning in 1940 — you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. … Beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. … And finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year.’ Here’s Congress’ lying promise: ‘That is the most you will ever pay.’
“Another lie in the Social Security pamphlet is: “Beginning November 24, 1936, the United States government will set up a Social Security account for you. … The checks will come to you as a right.” Therefore, Americans were sold on the belief that Social Security is like a retirement account and money placed in it is our property. The fact of the matter is you have no property right whatsoever to your Social Security ‘contributions.’
“You say, ‘Williams, you’re wrong! We have a right to Social Security payments.’ In a U.S. Supreme Court case, Helvering v. Davis (1937), the court held that Social Security is not an insurance program, saying, ‘The proceeds of both (employee and employer) taxes are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.’ In a later Supreme Court case, Flemming v. Nestor (1960), the court said, ‘To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.'”
Or Shikha Dalmia of Reason Magazine: “When a Ponzi scheme can’t con new investors in sufficient numbers to pay the previous investors, it collapses. But when Social Security runs low on investors—also called poor working stiffs—it raises taxes. Indeed, Cato Institute’s Michael Tanner points out:
‘Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.'”
Williams’ and Dalmia’s points are pretty clear. You have no property rights to the money you’ve contributed to Social Security. You are at the mercy of bureaucrats and politicians to bestow upon you the financial rewards from the system that they think you deserve, not what your money “invested” in the system has earned because as soon as your money comes in the door it either funds someone else’s Social Security check or in years where there is a surplus it funds the operations of the US Government.
Lazy Man says
You ask, “Why would anyone with half a brain let the government force them to contribute to a commingled pool of ‘retirement funds’ and then turn the management of that commingled fund over to politicians to do with as they see fit? Talk about a recipe for disaster!”
That sounds incredibly close to how taxes work except for the “retirement fund” aspect of it – i.e. forced to contribute to a commingled pool managed by politicians to do with as they see fit. And yet, I haven’t heard people say that taxes are a recipe for disaster or even come up with a better solution.
Can we be clear on one thing? Politicians can not do as they see fit with Social Security. That was the point of the line about them not moving funds into their private Swiss bank accounts. The money has to be paid to the people.
Let’s also address a US where Social Security didn’t exist. People aren’t saving enough for retirement now, but at least have some sort of safety net. How many homeless millions would we have without Social Security and these forced savings? How many billions of dollars would we have to raise taxes to pay for the health care and well-being of these people?
As for the “lies” that Walter Williams mentions let’s remember that this is a pamphlet trying to explain a very difficult and new concept to people. We shouldn’t expect a pamphlet in 1936 to adhere to the exact numbers in 2011. You can’t reasonably fault a pamphlet which already has a difficult concept to cover to also explain inflation.
If you are going to fault them for the numbers at least give credit to them for giving much more money than they promised: “A man or woman who gets good wages and has a steady job most of his or her life can get as much as $85 a month for life after are 65.”
I think it was the intention for Americans to have a Social Security account. Despite what I said in the article, in some ways we do. We have a number. That number tracks what we’ve paid into Social Security. By definition this could be considered an account : “A record or statement of financial expenditure or receipts relating to a particular period or purpose.” You can’t think of an account as just a holding for your money, but something that applies to services like a credit card account or a cable television account.
I think that Williams has to realize that something Social Security needs to be subject to change. That was one of the main things I tried to stress in this article. Fewer people paying in and living longer lives as well as other changes (the cap on SS taxes for higher income earners etc.) mean that what might have been true for a 1936 pamphlet is not practical and sustainable in 2011. Essentially Williams seems to either want:
A) The people authoring the pamphlet to have a crystal ball of the future and finding a way to incorporate that vision to the masses who are already skeptical of what seems to look like a “new tax.”
B) The system to have failed in the 1960s due to the inflexibility to make changes
You didn’t quote the rest of the Williams article about Social Security Card not to be used for identification. In 1950, it wasn’t intended to be used for identification, but times changed and we needed an identification system – we still do. We have everyone in Social Security assigned with a unique number. Why spend billions more creating another system of identification when we can subtly alter the one we have at almost no additional cost. Williams seems to be a dinosaur incapable of adaptation. Oh, and last I checked, a Social Security card isn’t considered a very good form of ID nowadays. If it was truly intended to be an ID it would have a picture on it like other forms of accepted ID.
The Williams article continues with even more off-base commentary when it just simply says that it is Ponzi scheme because others have said it. It doesn’t actually address anything about the system at all to show whether it is or is not a Ponzi scheme. According to the title and the opening paragraph those were the point of the article.
Shikha Dalmia’s points don’t address the payouts of Social Security just the amount of contributions. What if the initial Social Security tax calculations at 2% capped at $3000 lead to payouts that were too low – as it seems they were? Are we doomed to use the same flawed math for all eternity because someone did in 1936? Or are we able to learn from such things and adjust to changing times and circumstances? I think it should be the later.
Perhaps I’m probably in the minority here, but I don’t care about the property rights of Social Security. My mom didn’t have property rights and she’ll still collect a check in a year or two. Ditto for everyone paying into the system today (except further down the line).
this is the best explanation of social security that i have read anywhere.
Kosmo @ The Soap Boxers says
“Why would anyone with half a brain let the government force them to contribute to a commingled pool of “retirement funds” and then turn the management of that commingled fund over to politicians to do with as they see fit?”
Take a look and see what happened to many people who tried their hand at investing in the stock market in the late 20s.
Those people probably trusted the government more than they trusted the stock market.
Whether they were correct is arguable, but put yourself back in 1936, just beginning to ease out of a great depression (in which unemployment peaked at a staggering 25%).
Tommy Z says
“The first difference is that you don’t have ownership of an “account” containing your investment and the accrued earnings. Those who invested with Ponzi and Madoff received financial statements showing their account balance and earnings. You won’t see this sort of statement from Social Security.”
What is the difference between getting an account statement from Madoff saying you have $X amount of dolllars (that you’ll never get) compared to having zero ownership rights in social security? It sounds like the same thing to me in substance. The difference is in style only. Madoff promises you an exact dollar figure and social security promises you something…maybe.
“With a Ponzi scheme, you are deceived into believing that your money is being invested when in actuality it is being used to pay off earlier participants.”
I would argue Social Security does the same thing. Plenty of people are decived into thinking their money is being invested in treasuries and it is earning interest and growing in value…but the government running SS is also the same government selling the treasuries to itself. Its like writing yourself a check that you know is going to bounce and then deciding to also pay yourself interest on your bad check.
“While the goal of a Ponzi scheme is to make the operator rich, the goal of Social Security is to ensure a safety net for all current and future generations.”
I disagree on this point as well. The goal of Social Security is to make people dependent on the government and to use it as a backhanded way to get politicians re-elected.
Additionally, while the Ponzi operator got rich off the scheme, the government skims money off the top too! In 2010, they skimmed off over $6.5 billion in “administrative costs.” Those admin costs will never be paid out to the participants. The system is a net loss to the participants.
“Why did the government choose to subsidize the early recipients? Probably to encourage support of the new system.”
This is exactly the reason early investors in a Ponzi scheme make great returns. This suckers them to put even more into the scheme and also encourage their friends to do the same. In this respect, social security is EXACTLY like a Ponzi.
“I haven’t heard people say that taxes are a recipe for disaster or even come up with a better solution. ”
I’ll say it. Taxes are a recipe for disaster. A better solution would be to reverse the trend and start returning to a free marketing.
“Let’s also address a US where Social Security didn’t exist. People aren’t saving enough for retirement now, but at least have some sort of safety net. How many homeless millions would we have without Social Security and these forced savings? How many billions of dollars would we have to raise taxes to pay for the health care and well-being of these people?”
People are not saving enough because they assume social security, unemployment benefits, medicare/medicaid, and other entitlement programs will be there to bail them out. Do you really think people would not save more if these programs were eliminated? Inversely, people are saving less BECAUSE of these programs.
Check this out too:
Lazy Man says
Seems like a big difference between getting a statement saying that I have $X dollars that I won’t get and not receiving anything of the sort. In the first case, it’s making a promise that is never intended to be kept. I call that fraud. That sounds like close to 100% are being scammed. With Social Security, I don’t see the “maybe” in it. You might not have a guarantee, but it’s always paid people money to my knowledge. I don’t see them denying people of benefits, do you?
There’s a big contrast here. I always like to think of it as an indigo juggling penguin. I’ve seen hundreds of penguins (if you count movies, perhaps tens of thousands) and never once seen an indigo juggling penguin. I can’t prove that such a thing doesn’t exist, but the preponderance of evidence would suggest that it doesn’t. The preponderance of evidence seems to say that missing out on Social Security money is like finding an indigo juggling penguin – it just doesn’t happen. Even if Social Security were to run out of money, people would still be paying into it, so people would still be getting payments. They might just have to lower their expectations of how much they are going to get out of it.
That’s an interesting point with the Ponzi Scheme and investing. I perhaps should have been more clear and suggested that the interest rates are generally considered to be unsustainable. I don’t know exactly how to define that, but there’s a clear difference between promising a 500% return on your investment and a 0.0001% on your investment. In the later example, even though the money is invested, this is how banks work and clearly they aren’t Ponzi schemes… or do I have write that article as well?
If you think that the goal of Social Security is to make people dependent on the government that’s your own political view. I’m very sure that wasn’t in the Social Security mission statement. This article is concerned with the stated goals of the system. This is not to be confused with political views or conspiracy theories.
It is true that Social Security has some administrative costs. Do you think everyone who works for Social Security does it for free? Do you think that the letters get mailed for free? My banks and mutual funds have administrative costs too. The same is true of my 401K and Roth IRA accounts. Your link to the SSA administrative costs shows that there’s transparency of the system, which is something that Ponzi schemes don’t have.
As for the early investors making more money, I suggest you read the heading of, “The Start-Up Problem In Pension Programs”. It explains in great detail, well, the start-up problem with pension programs. In pay-as-you-go systems like Social Security it is a one-time starting up thing. With a Ponzi scheme, it is consistent throughout the show scheme. A pay-as-you-go system like Social Security can be sustainable, but a Ponzi scheme can not be as it grows faster than the population often in a few iterations.
I would like to see how your plan for free marketing works to pay for everything that taxes pay for and how it is “better.” Perhaps you can offer me a guest post or something. I imagine the topic would require a volume of books to do it justice though.
That link seemed to suggest that forced savings was still the answer. I read quickly because I have other engagements, but Chile seemed to force people to contribute to a pay-as-you-go system or an IRA. It is still forced savings. I understand the logic that by giving the people safety net (social security, unemployment, medicare/medicaid, etc.), they may not take responsibility themselves to save. I just reject that it plays that big a role. I don’t know people that think, “I don’t need to save money because unemployment is available.” There are a lot of people living paycheck to paycheck that have no safety net and we don’t see them all building big emergency funds. They should be building these emergency funds, but they aren’t. Given that, what makes you think that they’d treat retirement differently?
Kosmo @ The Soap Boxers says
“I would argue Social Security does the same thing. Plenty of people are decived into thinking their money is being invested in treasuries and it is earning interest and growing in value”
There may be plenty of people who are under this impression, but I don’t think it’s due to deception. I’d say it’s because those people are making a concerted effort to avoid becoming educated.
The fact that current Social Security contributions go to pay for current benefits is very widely known. The fact that retiring boomers are stressing the system has been written about for years. How on earth can someone not realize how the system works? I was aware of this before I paid a dollar into the system.
Show me something from the SSA that says “we’re investing your money to make it grow” and I’ll agree that there is deception.
@ Lazy Man
“Do you think that the letters get mailed for free? ”
Actually, I think they have stopped sending the letters, as a way to cut costs. I think you can still contact SSA to get them, but they won’t appear in your mailbox every year. Probably better that way – I wasn’t very comfortable having my information go through the postal system. And receiving annual letters projecting something 30 years in the future seemed pretty dumb, anyway.
Tommy Z says
” I don’t see them denying people of benefits, do you?”
Yes, I do. Social Security is not a zero sum game, it is a negative sum game (due to administrative costs). Because the people that got in early got so much more money out than what they put in, the people getting in later mathematically MUST get screwed.
Are they going to deny everybody benefits? Probably not. However, they will probably have some sort of means testing or phase out where many people contributing into the system now get zilch 40-50 years from now. The people that do not get zilch are guaranteed to get less than the net present value of what they put in. This is similar to a Ponzi because in a Ponzi, you are promised benefits that may or may not come (depending on how early you got in).
We can disagree on the official reason social security was created and the real reason, but you cannot deny that by having social security, the government effectively created a special group of people dependent on the government. Look at how Romney is using social security against Perry in the debates for politican gain. Look at how Obama threatened to stop social security checks if the debt ceiling was not raised. If social security did not exist and/or retirement was 100% private market based, neither of these politicians would have leverage with the voters.
Regarding “The Start-Up Problem In Pension Programs,” it states we can:
A. exclude such people from the system
B. leave them with an inadequate pension
C. provide some kind of subsidy
I would argue the best option would be to let the employee choose any option he wants…and if he picks C, the subsidy should be provided out of his own pocket. At least then he would have a choice; whereas social security is forced participation.
In instances where employees go with option C, they make up with it out of their own funds and do so voluntarily. However, with social security, the government does not have any of its own funds. The result is the later participants are screwed over, unlike a pension where the company covers that added cost.
In public pensions this differential is funded by assessing higher taxes than would otherwise be necessary to pay a level benefit to all participants and using these additional taxes to pay higher benefits to early participants.
The free market can provide everything the government provides, and in most cases can do it better and cheaper. I would argue that the government has an advantage in only certain areas of the economy:
public safety (police & fire)
national defense (military)
maintaining a legal system/courts
While I do not agree with the concept of forced savings into private accounts because it does not provide flexibility for individuals, I do think it would be a moderate/middle-of-the-road approach to our retirement crisis. Social Security is on the other extreme end.
“There are a lot of people living paycheck to paycheck that have no safety net and we don’t see them all building big emergency funds.”
Yes, they do have a safety net (unemployment, welfare, low income housing, homeless shelters, food banks, free child lunches at school, medicaid, food stamps, earned income tax credit, etc). Their net may not be large enough to support their current lifestyle, but it is a net nonetheless. If you pull these safety nets away, two things will happen:
1. Private charities, friends, and family will step up to help fill the gap.
2. People will become more self-reliant and less dependent on the government. They may not save enough, but they will save more.
I think these two things a preferrable to the current system.
With social security gone, will everybody properly plan for retirement? Obviously not, but most will just like Americans did before social security came into existence.
“Show me something from the SSA that says “we’re investing your money to make it grow” and I’ll agree that there is deception.”
Check out the section that says “How are the trust funds invested?”
Lazy Man says
The people that got in early that didn’t contribute are presumably mostly filtered out of the system by now. Let’s say someone paid in from 1936 to 1940 and retired at age 65 and collected benefits. That person would be 136 if they are still collecting benefits today. The start-up phase is done with at this point.
I don’t think you can claim that people a “MUST get screwed” because there are administrative costs. As we covered, mutual funds have administrative costs as well and we don’t call those Ponzi schemes. Also since you mentioned that the money is invested, wouldn’t it be possible that the investment (even in treasuries) pays for the administration and then some? I think you said before that it is like the government writing a bad check to itself, but the treasury branch is very different than the Social Security administration. You can group them all into the same category of US government, but I don’t think it is so simple. Then you start co-mingling the Social Security issue with the national debt and other policies that it shouldn’t be co-mingled with.
I understand that you are against forced participation and that you would at least want a choice of where the money is invested. I think these both qualify as political opinions of how Social Security should work and doesn’t actually go towards proving that is Ponzi Scheme. People weren’t forced to participate in Ponzi’s scheme and they did have the choice of investment (well Ponzi only had one investment option, so it wasn’t much of a choice). If anything your argument about the forced participation and lack of choice for Social Security illustrates a couple of ways that is different than Ponzi’s scheme.
Again, the free market discussion is too lengthy to address in the comment section of a blog.
I would hardly call any of those things safety nets because they don’t allow for one to support their current lifestyle – or anything reasonably similar. I don’t believe any says, “I’m not going to create an emergency fund because I always have that homeless shelter safety net to fall back on.” If you take away homeless shelters it isn’t going to cause people to suddenly start putting more money in emergency funds. I don’t think anyone ever plans to use any of those safety nets and makes arrangements to avoid them whenever possible. So taking them away wouldn’t likely impact behavior.
I think that the Great Depression in the 1920’s as Kosmo pointed out that caused people’s “proper plan for retirement” to fail. I think it’s dangerous to blame Social Security as the reason why Americans fail to properly plan for retirement. That is like blaming homeless shelters for peoples’ lack of emergency funds. I think you’d have a lot of work to do to prove the causation there.
In any case, this is good discussion, but a lot of it is off the topic of Social Security and Ponzi Schemes, so we should get it back on that.
Kosmo @ The Soap Boxers says
That’s a great link – seems like the government is going a very good job of explaining what’s going on. Good to know that they money is indeed being invested and earning money.
Tommy Z says
Lol Kosmo. I wasn’t sure at first, but now I KNOW you are drinking the kool aid!
Kosmo @ The Soap Boxers says
Yes, I trust that someone in congress would cause heads to roll if the SSA was lying to congress in its annual report to congress. Congress is far too diverse a group for everyone to be in cahoots with the SSA. Even if this were the case, one member of congress would make a name for himself by going through the report line by line and pointing out lies and errors.
Obviously, when you look at the securities bought and sold, historical vs. current interest rates, and the inevitiable increase in recipients as the boomers retire, that revenue stream is going to swing negative before long – but at this point still seems slightly positive.
I may have also been a bit too subtle with my earlier point, but a key distinction for me is the fact that the SSA refers to the money as the trust fund’s money – it’s no longer “my money”, “your money”, or “their money” after it has been collected.
If John Q. Public thinks his money is going into an individual account labeled “John Q. Public’s Social Security Account” and that the government is paying him 3% annually and depositing the money into his account, John Q. Public has a really poor understanding of the system.
Tommy Z says
@Lazy Man & Kosmo:
“The people that got in early that didn’t contribute are presumably mostly filtered out of the system by now.”
Yes, but so what? Now people like you and me have to pay the bill that the previous generation put on our tab.
I understand there are administrative costs, which is to be expected. However, the alternative is that there does not have to be administrative costs if people did their own investing. Some people are not capable of that, in those cases, they could buy a mutual fund which also charges a fee…but they can shop around and find very low fee funds and end up with a better overall value. Because the money comes out of their paycheck to pay SS taxes, they are robbed of that choice.
John Q. Public was led to believe the money was going into his account. They didn’t even call it taxes back then, it was called “premiums.” If the government was honest with JQP in the beginning, he would not have supported it.
The thing that really bothers me is the idea that there is a trust fund and that it is invested and earning a return. No, the trust fund is full of nothing more than IOU’s. This is why they say SS is a pay as you go system.
Look, even though the SS money is seperated from the general fund, it is the general fund that needs to eventually pay back all those IOU’s. It is obvious that the government has NO WAY of paying back the debt. It is beyond being managable. We only have 2 choices:
B. Inflate (stealth mode default)
If the government defaults on its debt, it will also default on all those IOU’s in the trust fund. It will happen.
Kosmo @ The Soap Boxers says
“If the government defaults on its debt, it will also default on all those IOU’s in the trust fund. It will happen.”
That’s a pretty big IF. I don’t ever foresee a meaningful default on our debt. Perhaps a default last a few weeks due to congressional squables, but no situation where the government just walks away from the debt.
Earlieryou mentioned people believing their money was invested in treasuries. These would be just as worthless in a default.
“John Q. Public was led to believe the money was going into his account. They didn’t even call it taxes back then, it was called “premiums.” If the government was honest with JQP in the beginning, he would not have supported it.”
It was called a tax in 1936:
I’m not interpreting the language to suggest individuals accounts. As an example, ff the intent was individual accounts, the death benefits could have been summarized as “you family will receive a check for the balance in your account”. The pamphlets to “… the Old-Age Reserve fund in the United States Treasury …”. No mention of “your fund” or “your account”.
The notion that social security is going to be our insurance when we retire is an old one. I’m preparing as much as possible to make sure I don’t have rely on it. Looking at where we are now tells me where it will all lead to.
Tommy Z says
“That’s a pretty big IF. I don’t ever foresee a meaningful default on our debt. Perhaps a default last a few weeks due to congressional squables, but no situation where the government just walks away from the debt.”
No, it is not a big if. If the government were an American family:
Total annual income : $21,700
Amount spent: $38,200
New debt added/year: $16,500
Outstanding balance on credit card: $142,710
Look at how much we need to cut just to make the budget balance, let alone start paying down the debt. No politician will make such severe cuts unless he is forced to.
Now, think about what happens when interest rates return to normal levels.
There is no way out of this. The USA will default. Write it down on your calendar that you were warned about it today.
The only question is if we will default honestly or dishonestly (inflate away our debts).
“Earlieryou mentioned people believing their money was invested in treasuries. These would be just as worthless in a default.”
Kosmo @ The Soap Boxers says
“No, it is not a big if. If the government were an American family:”
Ah, but the government is not an American family. The government has access to nuclear weapons and can use this implicit threat to continue to gain access to credit.
We’ll continue to borrow, and continue to just pay the interest on the debt – long after you and I are both dead.