Social Security Will Be There- It is not a Ponzi Scheme
66Will Social Security Be There For Her?
Social Secerity Should be There- It is not a Ponzi Sheme
In the Beginning
Thousands of years ago, man created money which allowed for the monetization of barter. If the phrase “Ponzi scheme” had been part of the language at that time, certain primitive men would have called it a Ponzi scheme. Money, usually in the form of coins, allowed people to buy things from people who did not necessary want what those people had to offer in barter. Having a medium of exchange made trade and economic growth possible; currency proved not to be a Ponzi scheme.
Just as coins monetized barter, Social Security monetized the age old principle of the young taking care of the old. It was no longer necessary for the young to take the old into their homes, give them food and care for them. Money was now used to make this process more efficient.
As long as there are American’s to pay a tax there will be some funds for Social Security. The problem is that the ratio of old to young has increased, so the taxes collected are less than the benefits paid. There should always be benefits, as long as the young take some responsibility to care for the old, but the benefits will be less.
When Social Security began, the life expectancy for most Americans was about 65 and that was the retirement age that Social Security was based upon. Now we have people being retired longer than we did a generation ago.
As life expectancies increases, the retirement age will have to increase or benefits will decline significantly. If the average American works for 45 years and is retired for 15, than 75% of their adult life is spent working. There will never be sufficient funds for everyone to work 45 years and be retired for 30 or 40 years. If life expectancies increase by 10 years, we have to expect to work for about 7.5 of those years and be retired for an additional 2.5 years.
As the number of workers declines in proportion to the number on Social Security, either, taxes have to increase or benefits have to decline. It is not realistic to think that they can remain constant. Below I discuss, what is a reasonable amount to think Social Security will be able to provide for you when you retire?
Some Key Facts
Over the years, the Social Security tax was greater than the benefits paid; the difference was put in a trust fund and used to acquire government debt. Currently more money is going out in benefits than is coming from taxes, but, the fund is still growing because of the interest collected. The fund should continue to grow until about 2020.
From about 2021 to about 2036 the fund will be declining; in about 2037 the trust fund will be exhausted. That is 26 years from now, so there is still time for most workers to plan. If nothing was done until that time, benefits would have to be cut by about 22% in 2037; this would increase a little each year with the cut in 2084 being about 25%. Obviously a 25% cut in 73 years hardly makes this a Ponzi scheme.
Thus if congress did nothing there would be sufficient funds to pay at least 75 % of the current benefits in 2084. Since people who will be eligible in 2084 are not even born yet they have time to plan for this reduction. If taxes were increased, this decline would be less, but as discussed below, is that fair?
A Simple Proposal
Now let me editorialize; I believe the following would be the easiest and fairest way to fix social security:
- Retain the current tax rate; it seems fair to expect the current generation to pay the tax at the same rate as present retirees paid. Future generations should pay at the same rate as past generations. No more! No Less!
- Increase the retirement age; Congress should act now and make increases in the retirement age automatic. In the future, the retirement age should increase by 25% of the increase in life expectancy without any additional act of Congress.
- Increase the maximum amount that is subject to Social Security tax. This is the only tax increase that Congress should consider. A strong argument could be made that this is not a tax increase, because, those who pay the tax would receive bigger benefit when they retire.
People have a right to know what they are going to receive so they can plan. The above long-term fix should be passed immediately so that accurate estimates of benefits can be provided to all Americans.
By Leonard Almquist, CPA
The Below Link Is a Good Review of The History of Social Security
- Social Security--Exerpts from a Special Report from the National Committee to Preserve Social Securi
The proposed "reform" of Social Security appears to spring from libertarian think tanks such as the Cato Institute and the American Economic Institute and from Wall Street firms who been salivating to get their hands on Social Security tax money.
Should Earn More Than the Social Security Limit?
- Should I Go Over the Social Security Limit on Earning?
This blog takes an accurate but different approach in helping people decide if they should work while they are collecting Social Security. This is based upon the author's 40 plus years of experience.
Should You Start Social Security at 62?
- Should I Start Social Security at 62?
This blog takes an accurate but different approach in helping people decide if they should start collection social security at 62 or wait until they reach full retirement age. This is based upon the author's 40 years of experience.
CommentsLoading...
WiseOldAccountant,
Here are some things to think about when it comes to Social Security...
Social Security pays current retirees benefits with money out of the current working population's paychecks. A ponzi scheme operator pays off old investors withdrawals with new investors money. So Social Security is a Ponzi scheme, just with one key difference. It is a government orchestrated and mandated ponzi scheme. Private ponzi scheme operators don't hold a gun to everyone's head and force them to participate.
The claim is made above that increasing the amount of income that is subject to social security taxation would not be a tax increase because it would also increase the future benefits that they receive in the future. How would this fix the deficit in social security? Your increasing money going in now, but also increasing money going out later, so it would probably be pretty much a wash.
More importantly though, the value of your contributions to social security will always be less that what you get back out of it. This is because our country follows inflationary policies, so the money you put in is always going to have more purchasing power than the money you get paid back with in the future. This is likely to be especially true for people retiring in the next several decades.
Thanks for your comments. I will try to cover your points in future blogs.
Some key differences between Social Security and a Ponzi scheme are:
*Ponzi had a limited life; Social Security will work as long as the US government is around. We assume that our government will go on forever. If the US government fails so does every pension plan in the nation because they all are valued in US dollars. In a civilized society the prosperity of its citizens is dependent upon stability of it government.
*Ponzi paid out such high rates of return that it could not last long. Social Security can last as long as the US government lasts. The benefits may have to be limited to the amount collected.
*Ponzi did not have the right to print legal tender and did not have the strongest arm in the world to enforce any laws he made.
*Inflation is a problem with all pension plans.
If we keep the rate constant, as I suggested, after 2037 pay out whatever came in, the benefits could grow with inflation if the demographics remained constant. Our problem is changing demographics and life expectancies.
When you analyze the numbers, 75% of social securities benefits are dependent on the US government being able to collect social security taxes. This makes it all most as strong as the US dollar or US debt.
*Funding of social security really does very little to make it safe in the long run. The funding is done with US bonds. If the US government failed so would social security, bonds, and even the US dollar.
*When you analyze the purchasing power of any private pension plan, the value of their benefits is dependent upon the continued strength of the US government and lack of inflation. If we had runaway inflation, those plans would be worthless too. If we had a financial collapse, private plans would be worthless. The irony is that funding really doesn't add much safety to it a government plan.
*If we tax the wages above $106,800 more would be taxeseach year and there would be more to pay out now. In the future, more would be paid out but also more would be coming in.
Conclusion:
A good financial plan should be diversified. Social Security provides Americans with one of the tools we need for this diversificat Funding of social security really does very little to make it safe in the long run.ion. If you have the wealth to be truly diversified, you would have some investments that are not tied to the value of the US dollar.
Scott_Grigg,
Thanks for you comments.
I think we have to be careful of both parties.
The Democrats may inflate the dollar so bad that social security is all we have, and/or they my tax our children at a rate they cannot afford.
The Republicans may try to end the program so that we get nothing, and/or they may fail to approve necessary actions in a financial crisis making our private investments worthless.
That is why I am taking a middle of the road position. Cap the rate; tell people what they can reasonably expect, and let them make up any shortfall with qualified plans (IRA's, SIMPLE, SEP, 401k, profit sharing plans, defined benefit plans, etc.).
Retirement is something that only the wealthy can do. I cannot see myself ever being able to live without working at least part time, even one day when I am well into my 80s. Unless, I don't mind living in a tent, and that's not going to happen.
I know I won't work forever at my present job, but I will definitely still work at least part time to supplement my pension checks. I think that will be the norm for generations to come. Good topic, I'm sure many will have something to comment on with regards to pensions and retirement... Thanks for sharing!
Well done!
Scott_Grigg 8 months ago
Go to the dictionary and look up the definition of Ponzi scheme. It fits the current version of SS perfectly.
Of course taxes will have to be raised and/or benefits cut...after all, we have to pay for all those expensive health care programs and others that are coming up, LOL. The fact is, the dolts in Congress (the Dems in this case) should have allowed us who wanted to to take our social security money and invest it ourselves without the interference of Uncle Dum. However, that would have de-railed part of their sugar train/entitlement express and they balked.
I for one won't count on anything in retirement. I have complete confidence that Congress, which has been controlled by the Dems for pretty much the past 60 years, will screw it up as usual.