Monday, September 20, 2010

Ron Johnson Understands Social Security All Too Well

The urgency of portraying Ron Johnson as clueless leads smart people to make silly claims. Last week, local blogger Jay Bullock said that Johnson's reference to social security as a "ponzi scheme" means that he doesn't understand it.

If that's so, then Johnson has a lot of company. Referring to social security as a
"ponzi scheme" is quite common.

To do so is, of course, an analogy and analogies point to one thing that is like another in some significant ways even if they may differ in others. Social security is not a ponzi scheme in the sense that, unlike Charles Ponzi, the government promises nothing to those who pay into social security. You aren't supposed to get a return on your money and you have no right to a dime in benefits. The government will, in any event, probably be good for whatever it decides to pay out - perhaps even for what it currently says it will pay out - because, unlike Charles Ponzi, it has the right to take money from others.

But there is a way in which social security is very much like a Ponzi scheme. Social security has not, strictly, speaking been, as its defenders lole to say, a "pay as you go" system for a very long time. Back when Baby Boomers were young, it was absolutely predictable that paying benefits upon our retirement was going to be extremely difficult because of the absolutely predictable diminishment in the ratio of workers to retirees. In other words, there are a lot of us and less of those born after us. Demography is, in a very real sense, destiny. It is a future that has already occurred.

So, in 1986, it was decided to raise social security taxes beyond that required to pay current benefits and create a trust fund. The problem, of course, is that the money was not invested in a way that represented a claim on anything other than the government's promise to pay. It was invested in special government bonds and, essentially, used to fund current government spending. It's as if you saved for your own retirement by placing money in a piggy bank and then replacing it with IOUs to yourself so that you could spend the money.

Thus taxpayers have been paying in more than a "pay as you go" system would require in order to create a trust fund consists of nothing more than IOUs. That sounds an awful lot like a Ponzi scheme.

People like Jay who defend the system like to say that the government won't or can't default on those bonds. It certainly can. Congress could repudiate the bonds, although it likely won't. The problem - the one that Jay elides by saying that the trust fund "can pay" out benefits for a number of years - is what it would take to pay those benefits.

The trust fund can't just write a check. It must redeem those bonds, i.e., call in the government's IOU to itself. The government can't just write a check to honor the bonds because it doesn't have the money. It must either raise taxes or borrow more money. To the extent that this cannot be done, benefits must be reduced. Thus taxpayers who have paid "extra" as "we went" really have nothing to draw on. They must either forego benefits or impose even higher taxes on younger people. That sounds an awful lot like a Ponzi scheme.

Jay wants to argue that this happened because we have been "undertaxed." Johnson would presumably argue that it happened because we have "overspent." Those are value judgments about how the problem that Johnson describes could have been avoided. But the problem that he described is very real and "Ponzi Scheme" is not a bad way to describe it.


Michael said...

Thanks for taking the time to do this. I didn't have the heart for it and I wouldn't have done it as well.

Free Lunch said...

Ponzi scheme, of course, is a totally misleading way to describe the Social Security program. As you show us here, the problem is with our mismatch of revenue and spending in the general account and the willingness of Reagan, GHW Bush and GW Bush to borrow ever more to fund their increased spending and their tax cuts and leave the government unable to deal with severe recessions.

The Social Security program, by itself, is fine for the foreseeable future. So, why don't we talk about the huge mismatch between general fund spending and taxes. Why don't we ask the GOP why they were such huge fans of borrow and spend five years ago, but now feign concern about the deficit? Is there any reason for us to take what they say seriously?

George Mitchell said...

Free lunch explains this as a problem of the "...the huge mismatch between general fund spending and taxes." And, of course, blames it all on the last three Republican presidents.

The Social Security System has a growing number of beneficiaries and a declining number of contributors. More people are expecting their promised distributions at the same time as there are relatively fewer contributors. Unsustainable.

The validity of Johnson's assertions likely will be evident in debates with Feingold.

The solutions are evident, including a higher retirement age and/or higher taxes or means-testing and/or a more accurate method of calculating inflation. And, of course, a voluntary option for people to opt out and instead get the kind of system federal workers and congressmen have.

Free Lunch said...

The Social Security law does have a built-in brake on expenditure growth if revenue is not adequate. The adjustment of payments is slowed from keeping up with income to keeping up with inflation.

Social Security was properly funded by Republicans and Democrats with the huge Reagan Social Security tax hike. Sadly, Republicans have used this revenue as an excuse to cut income taxes, particularly for the wealthy. Johnson may have the right to his own opinions, but he does not have a right to his own facts.

Anonymous said...

Even more precisely, Social Security is an income tax and nothing more. It is just an income tax and what seniors get is a welfare check. And nothing more.

George Mitchell said...

"The Social Security law does have a built-in brake on expenditure growth if revenue is not adequate."

Just like a Ponzi scheme.

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Anonymous said...

I've paid into SS for a heck of a lot of years and I expect to get MY money back when I retire. Call it a Ponzi scheme or entitlement or whatever--that is scaring the people who are too ignorant or lazy to find out the truth about SS. God help this country if people like Johnson get elected.

Anonymous said...

It's interesting that Ron Johnson is understanding security. I heard that his former profession was as a Broker Dealer Lawyers.

Thanks for the great post!!

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