Saturday, October 5, 2013

The Six Most Economically and Mathematically Illiterate Comments on Social Security

"There's Nothing in the Social Security Fund but IOU's"

Guess what? Unless you have a petroleum tank or grain silo in your back yard, all your wealth is IOU's. Your bank account is bytes in a computer and scribbles on paper. Your stocks and bonds are pieces of paper. Just ask anyone who owned Enron. You have gold or platinum? Good for you. Do you actually have physical ownership? If not, all you have is a promise to deliver your gold. Even if you have gold, it has value only because you can probably count on someone to take it in exchange for what you want. But nobody is going to take gold for the last seat on a lifeboat or the last can of beans in town.

"There are Only Two Workers for Every Recipient"

As of August, 2013, there were 62.7 million Social Security recipients. They received an average monthly benefit of about $1200 per month ($14,000 per year), according to the Monthly Statistical Snapshot of the Social Security Administration. According to the Department of Labor, the employed work force totaled 144 million people, and according to the Census Bureau, the median personal income was about $50,000 a year.

So we have 2.3 workers for every Social Security recipient, but they're earning 3.5 times as much. So each Social Security recipient is equivalent to about one third of a worker, and there are 2.2 times as many workers as recipients. The actual income ratio is 2.2 x 3.5 = 7.6 to one. That is, wages total 7.6 times the amount being paid out in Social Security benefits.

"My Grampaw has Gotten 400% of what he paid in!"

So fulminated one angry millennial on line.

Ever hear of double-digit inflation? We had it for several years in the 1970's. The consumer price index now is about six times what it was in 1970. Meaning a dollar paid in to Social Security in 1970 would have to be repaid by $6 now. So yes, Grampaw probably did get 400% back in face value dollars. In actual purchasing power, he probably broke even.

"I'll Never See a Penny of Social Security"

That's entirely up to you.

Just be aware that "entitlement reform" is code for "I'm going to take everything you paid in to Social Security and use it to reduce my taxes.

So go right ahead and vote for politicians who want to rob Social Security. Your call.

"It's A Ponzi Scheme"

A Ponzi scheme promises investors unreasonable growth, which is achieved in the short run by luring new investors in to cover shortfalls.

If you borrow money from people, promising to pay it back when you get a job, and you do, that's not a Ponzi scheme, even though you're promising to pay in the future with money you don't yet have.

If you promise people to double their money in six months, and just take it and run, that's not a Ponzi Scheme. Stealing, yes, but not a Ponzi Scheme.

If you promise people to double their money in six months, and make a risky investment that could possibly have done it but fails, that's bad judgement. It may get you a whopping civil suit or even prison time, but it's not really a Ponzi scheme.

In a real Ponzi Scheme, you'd promise people to double their money in six months. (More than likely, you'd pose as a shareholder yourself to rake in the payoff). You pay them back a bit each month, using their own money to do it. They are impressed and encourage others. Now you have real money to play with. So you pay off the original suck investors, who are very happy. They tell their friends, and may re-invest their own money, and all goes smoothly, until the growth stops. You continue to make payouts until the money runs out, and then you run.

The important element in a Ponzi scheme is not hoping to pay off debt with future income, which is every debt ever incurred. And it's not even promising future growth. That's called "investment." It's the promise of unending growth, and even that's not a Ponzi scheme as long as you can deliver, and alert investors that the ride is about to end. No, a Ponzi scheme promises unending growth and then uses trickery to prevent investors from seeing the crash until too late. If Bernie Madoff had just said, "Sorry, folks, but the fund isn't doing well, and returns will be down" he'd have stayed out of trouble.

Social Security is not a Ponzi Scheme. At the beginning, it could pay out more than recipients paid in, because the pool of contributors was increasing. That ended 60 years ago. Right now there's a bottleneck because Boomers are retiring, but that can be fixed by controlling the growth of benefits and by raising the cap on contributions. If we make those reforms we can ride out the Boomer wave. There's no reason Social Security can't function indefinitely.

But is it fair to hit the rich with the costs of Social Security? Well, one reason they're rich is that their corporations stopped providing defined benefit plans, and they don't pay workers enough to save enough on their own. So, yeah, it's fair.

One final point. President Roosevelt wanted the Social Security fund to be prepaid, but conservatives opposed allowing the Government to accumulate such a large surplus.

"We have $100 Skazillion in Unfunded Obligations"

You are earning the median income of $50,000 a year and you have a mortgage of $250,000. Panic! You have $250,000 in unfunded obligations! That's five times your annual income!

Except, of course, you can reasonably count on earning a salary to meet future payments. And you will probably be able to sell the house, and maybe your salary and the value of the house will go up. 

According to "Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt" (Wall Street Journal, November 28, 2012), the total value of unfunded liabilities in the U.S. is about $87 trillion, 5.5 times GDP. But if we don't flinch at our mortgage holder above owing five times his annual income, what's to panic about here?

So say we have 150 million workers. That $87 trillion in obligations comes to $580,000 each. But nobody is going to get a $580,000 lump sum. That will be paid out in Social Security and Medicare benefits. Those unfunded liabilities include pensions and social security payments to be paid out over maybe 25 years. Over 25 years, that $580,000 comes to $23,200 a year.

The present U.S. GDP is about $16 trillion, so the total GDP over 25 years will be 400 trillion dollars. Government obligations of $87 trillion total 21 per cent of total GDP over 25 years. But wait! yells the TV pitchman, there's more! Cox and Archer claim the obligation is growing at $8 trillion a year. Let's tack that on, a total of $120 trillion, to give a grand total of $207 trillion. That's half the total GDP over 25 years, not 5.5 times.

Well, hey, why don't we just extrapolate out till the earth gets too hot for life, 1.5 billion years from now? Our total unfunded liabilities over that span are 8 trillion times 1.5 billion = 12 sextillion dollars. That's 750 million times our GDP! We're doo-o-o-oomed. On the other hand, the people at the end are screwed anyhow (I was going to say "hosed," but they'd probably welcome that) so we can just stick them with the tab.