A surprisingly receptive audience reaction to Social Security reform.
Yesterday I gave a talk to the Osher Lifelong Learning Institute (OLLI) at California State University, Monterey Bay (CSUMB). I typically give 2 such talks in the spring and 2 in the fall. This year is no exception. One of the people involved with OLLI suggested last spring that in the fall I give 2 talks on economic issues in the presidential campaign. (The second talk will be on October 8.) With some trepidation, I agreed. Why trepidation? Because I know how even very reasonable people (and the OLLI audience is typically very reasonable) can get spun up about particular candidates.
So what I did early in my presentation was show a slide that said:
Downplay candidates.
Play up issues.
When I showed that slide, I said, “One good reason for doing so is that I find the issues far more interesting than the candidates.” That got a number of heads nodding and a couple of laughs.
I talked at length about federal spending, federal taxes, and the federal budget deficit, showing them some scary figures from the Congressional Budget Office. Then I pointed out that according to the CBO, during the years 2030-34 Social Security spending net of Social Security revenue would add an average of 1.2% of GDP to the annual budget deficit and Medicare spending net of revenue would add 2.4% of GDP net of revenue. So these 2 programs alone would add 3.6% of GDP. That’s over half of the expected deficit as a percent of GDP. If it weren’t for those, we would be in much better shape.
Then I took a deep dive into Social Security to make a few points. The first was what one of FDR’s advisors gave as one of his, the advisor’s, motives in setting up Social Security:
W. R. Williamson, an actuarial consultant to the first Social Security Board, stated that Social Security extends Federal income taxes “in a democratic fashion” to the lower-income brackets.
I filled in the background, pointing out that the income tax back then was a “class tax” and that it was only World War II that turned it into a “mass tax.” Surveying the room of about 30 to 35 people, I said that I suspected that none of their counterparts in their part of the income distribution in the mid-1930s would have paid any income tax.
Then I laid out that the fact that Social Security is a Ponzi scheme and was explicitly planned to be a Ponzi scheme.
I showed this quote from comedian Dave Barry:
I say we scrap the current [Social Security] system and replace it with a system wherein you add your name to the bottom of a list, and then you send some money to the person at the top of the list, and then you . . . Oh, wait, that IS our current system.
—Dave Barry, “Election could come down to who kisses most orifice,” Miami Herald, September 24, 2000.
Then I quoted Paul Samuelson blessing it as a Ponzi scheme. I quoted from the chapter on Social Security in my 2001 book, The Joy of Freedom: An Economist’s Odyssey:
MIT economist Paul Samuelson added some of the intellectual backing for these policies. “The beauty about social insurance is that it is actuarially [italics Samuelson’s] unsound.” Samuelson’s point was that if real incomes were growing quickly, each generation could get more out of Social Security than it paid in. While its critics attacked Social Security as a Ponzi scheme, Samuelson beat them to the punch in 1967 by blessing it as one. “A growing nation,” wrote Samuelson, “is the greatest Ponzi game ever contrived.”[1]
[1] Samuelson quotes are from Newsweek, February 13, 1967, and are quoted in Derthick, p. 254.
Then I quoted Franklin D. Roosevelt laying out how making it a Ponzi scheme would almost certainly guarantee that Social Security would never be abolished:
[T]hose taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions….With those taxes in there, no damn politician can ever scrap my Social Security program.[1]
[1] From Arthur M. Schlesinger, Jr., The Age of Roosevelt, vol. 2, The Coming of the New Deal (Houghton Mifflin, 1959), pp. 309–310, referenced in Martha Derthick, Policymaking for Social Security, Washington, D.C.: Brookings Institution, 1979, p. 230.
Then I showed a picture of my Hoover colleague Mike Boskin and noted that his commission, set up by the U.S. Senate, did a report in December 1996 that argued that the Consumer Price Index overstated annual inflation by 1.1 percentage points. Then I did some math. “If Congress and the President had started in 1998 to set the Cost of Living Adjustment (COLA) at CPI – 1.1 percentage points, in 2033, Social Security benefits would be 32% lower. (Here’s the math: 0.989^35 = 0.68.) The Social Security crisis would have been gone just like that. I then noted that the Bureau of Labor Statistics had made some adjustments in response to Boskin’s commission. Boskin, in an article in my Concise Encyclopedia of Economics, estimated that as a result the CPI overstated inflation by 0.8 to 0.9 percentage points.
So I redid the math: 0.992^35 = 0.75. So Social Security benefits would be 25% lower. Again, the crisis would be gone.
I could tell you other highlights of my talk–there were many. But what I particularly liked was that this audience, at least 85% of whom were receiving Social Security, seemed quite open to this.
It makes sense. Who goes to a class on education, for which there is no certificate? Answer: people who want to be educated.
READER COMMENTS
Steve
Oct 2 2024 at 3:54pm
Social Security is not a Ponzi scheme. Charles Ponzi was an honest con man. He’s had to work to recruit his victims.
More seriously, you have no right to Social Security. The Supreme Court ruled in Flemming vs. Nestor (1960) that benefits exist solely at the discretion of politicians.
David Henderson
Oct 2 2024 at 4:32pm
You write:
Funny you mention that. Here’s what I wrote in The Joy of Freedom:
You write:
Exactly. I pointed that out and cited the case. Here again, from The Joy of Freedom:
Thomas L Hutcheson
Oct 2 2024 at 5:38pm
Social Security and Medicare have two fundamental problems:
a) The taxes and benefit formulae of the programs do not ensure that the system does not produce deficits or surpluses over time, much less over short periods. As such they do not contribute to good fiscal management that, in my view, consists of deficits = Σ(expenditures with NPV>0)
b) The are financed with taxes on income rather than on consumption.
Fixing these would be fairly easy by financing both programs (and Medicaid and unemployment insurance, while we are at it) with a VAT adjusted ever few years to keep revenues and expenditures in balance.
I think that conceiving of these programs as benefits that each person is “entitled” to becasue of their contributions leads to profound misunderstandings. They are just transfers of consumption from people who at one time and circumstance of life need it less to those who need it more.
https://thomaslhutcheson.substack.com/p/socia-insurance-20
Jose Pablo
Oct 2 2024 at 8:30pm
They are just transfers of consumption from people who at one time and circumstance of life need it less to those who need it more
A burglary perpetrated in Beverly Hills by residents of Skid Row will also adjust to this definition. It would be “just a transfer of consumption …”
Thomas L Hutcheson
Oct 3 2024 at 1:22pm
Are you trying to justify burglary? I don’t think it works. 🙂
Jose Pablo
Oct 4 2024 at 1:01pm
Actually, it was you who justified burglary. Or so it seemed to me
Jose Pablo
Oct 2 2024 at 7:58pm
So Social Security benefits would be 25% lower. Again, the crisis would be gone.
Not necessarily. Taxes could have been 25% lower and the “crisis” (as you call, if I understand it right, the fact that part of Social Security is financed with debt) would have been the same.
But, wait, lower taxes (the ultimate cause of deficits for any given level of expenditures) are a blessing. More money in the taxpayer’s pockets. Sure they know what to do with it! (and if taxpayers have a dramatic lack of imagination, they can always buy government debt).
If lower taxes are a blessing, it necessarily follows that deficits (used to finance any possible COLA) are also a blessing. I find it misleading to call a blessing “a crisis”.
Thomas L Hutcheson
Oct 3 2024 at 1:25pm
There are different combinations of taxes and expenditures that make deficits = Σ(expenditures with NPV>0)
Jose Pablo
Oct 2 2024 at 8:25pm
By the way, the American sovereign debt is also a gigantic Ponzi scheme. The only way the Treasury has of paying off “old” investors is by using for that the fresh money of the new “suckers” it can fool into the system. That’s precisely the definition of a Ponzi scheme.
And every potential new “sucker” knows this … and yet
Maybe there is something about Ponzi schemes that we don’t get (or, at the very least, that the buyers of sovereign debt don’t get).
Kind of “philosophical” but, if a Ponzi scheme is not in any way concealed (so it is obvious for “new” investors drawn into the system that it is a Ponzi scheme), is it still a Ponzi scheme?
Mactoul
Oct 3 2024 at 12:57am
But if the economy continues to grow, the thing holds together, doesn’t it and it has held together for 75+ years.
And there is no reason why the economy won’t continue to grow, is there, given the reassurance of technological growth, blessings of capitalism and superior entrepreneurial energies of the immigrants.
Jose Pablo
Oct 3 2024 at 7:06am
But if the economy continues to grow, the thing holds together
No, it doesn’t, for any amount of economic growth you can realistically imagine, the actual debtholders can only be paid with the proceeds of selling new debt. That’s a textbook Ponzi scheme.
How long a Ponzi scheme holds says nothing about its true “Ponziesque” nature
Thomas L Hutcheson
Oct 3 2024 at 1:29pm
I’m not a big fan of “Ponzi scheme” analogy among other reasons that the Treasury DOES have other ways of paying debt holders it (or rather Congress) can raise revenues or reduce expenditures.
Jose Pablo
Oct 4 2024 at 1:12pm
No, it can’t. That’s a fantasy when you look at real numbers (Federal Government):
Tax revenues: 4.50 tr
Expenditures: 6.14 tr
Federal Debt maturing in 2024: 7 tr.
The only real way of paying this 7 tr of maturing debt is by fooling new suckers into the system.
The alternative you subject would require:
* Increasing federal taxes by 200% to more than 13tr
* Reducing gov expenditures to zero while simultaneously increasing taxes by around 40% …
Your suggestion is pure fantasy. A”paper” alternative no self-respecting debt buyer would pay any attention to.
Roger McKinney
Oct 2 2024 at 9:56pm
And, SS was a blast effort to buy votes. Socialists want to get most voters dependent on the federal government so they will always vote for a bigger check.
Thomas L Hutcheson
Oct 3 2024 at 1:33pm
On the larger issues of defects I modestly suggest reading:
https://thomaslhutcheson.substack.com/p/austerity-sic-is-in-the-air
https://thomaslhutcheson.substack.com/p/income-wealth-and-debt
https://thomaslhutcheson.substack.com/p/debtpocalypse
Jim Glass
Oct 3 2024 at 11:39pm
Social Security is a Ponzi scheme today, but NO, it was not planned to be a Ponzi scheme. It was “explicitly planned” to be exactly the opposite, in fact. Instead of quoting a comedian, let’s quote a real history book, The Real Deal, the History and Future of Social Security, by Sylvester Schieber and John B. Shoven. Schieber was a longtime member and Chairman of the SSA Advisory Board. Shoven has been chairman of Stanford’s economics department and its Dean of Humanities and Sciences, and is at Hoover, like you. You two could chat about this.
S&S say that when FDR famously proclaimed Social Security to the “actuarially sound and out of the Treasury forever” he was very, very serious and telling the total truth. FDR was very conservative and cautious about SS. In 1934 he told his policy mavens…
His actual SS Act of 1935 created a program that was fully funded into the 1980s — fifty years into the the future (!). Workers were to receive benefits based on the federal bond rate earned on the payroll taxes they paid in. That’s entirely sound. And as no benefits were to be paid during the first five years of tax collection (starting in 1937) and full benefits wouldn’t be paid until the 1950s, the Trust Fund was projected to grow to over $500 billion (2024) dollars by 1955, when the program would mature.
Initially, to finance supplementary benefits to early retirees who didn’t receive full regular benefits, the plan designers took enough funds from payroll tax revenue to knock SS out of balance in the 1960s. They didn’t tell FDR — and when he found out he reportedly had a “tantrum”.
The words and deeds of someone intentionally creating a Ponzi scheme? I mean, he was upset that 30 years in the future an imbalance would start requiring a call on general revenue 45 years in the future. And he acted to stop it! Does anybody alive care about the budget and debt like this today?
OK, so what happened? In 1939 with payroll taxes coming in and no benefits being paid, Congress got upset. The liberals wanted to spend the taxes right away on bigger benefits and other things. The *conservatives* got upset that after payroll tax revenue enabled the Trust Fund to buy the entire outstanding national debt, well, what would it invest in?
Thus in 1939 Congress amended SS to increase the typical single worker’s benefit by 19% — with the new spousal benefit, by 79%. The payroll tax was then 2% and supposed to begin increasing in 1940 towards 6% in 1949. But the Amendment postponed any increase until 1944, when Congress passed another law postponing any tax increase again. FDR vetoed this change, but Congress over-rode it. Then, with the payroll tax slashed by 2/3rds, and benefits ramping up, it was “Ponzi world here we come”.
Isn’t real history more enjoyable and educational than myths and urban legends? Enjoy the irony: in the late ’90s and early 2000s fiscal conservatives and Republicans staged a futile attempt to fund SS by having it invest in real assets — after conservative Republicans had led the successful charge to destroy the funding of SS to being with.
And educational: FDR’s left wing cabal of New Dealers intentionally swamped the govt with Ponzi scheme social spending? Nah, not at all — FDR’s planning was rigorously fiscally sound. But free cash flow turns all politicians — they always bipartisanly consume it on tax cuts and more spending. Three years years after the free cash flow started, FDR’s Social Security plan was gone.
Just as happened 1999 to 2001 but on a much larger scale. The entire government starts running a surplus. Projections are the entire national debt can be retired in the foreseeable future!!! Then …. it’s gone, we’re all immediately back to ever-growing deficits and debt — via big tax cuts and spending increases. The exact same process. This time with Republicans in charge, and Democrats tagging merrily along. Divvying up free cash flow is totally bipartisan politics. The two parties can always agree on that.
The Real Deal is out of print but at Amazon and in decent libraries. It’s the best book I’ve ever seen on the history and politics of Social Security. Of course a comment can hardly cover the details in its hundreds of pages, so anyone who wants the full myth-busting story should check it out. And Shoven is still at Hoover to answer questions.
David Henderson
Oct 4 2024 at 3:59pm
Thanks, Jim. I’ll take a look at the book.
Given that, do you have any idea why FDR would make the comment he made? It sounded to me as if he was trying to justify a Ponzi scheme. You give good evidence that he wasn’t. So why did he say what he said?
David R Henderson
Oct 4 2024 at 11:43pm
I got the book out of the Navy School library. I’ll take a look.
David Henderson
Oct 5 2024 at 6:06pm
Jim,
I read the relevant sections of the book. Notice that from the getgo, the funds were invested in government bonds. We know what government does with money when it sells bonds: it spends the money. That means that when the time comes to pay out, the government either uses current payroll taxes or sells the bonds. Either way, it needs to come up with the money and the money is not the money that the beneficiaries paid decades earlier in taxes.
So yes, it really was a Ponzi scheme from the getgo. There are degrees of Ponzi. FDR tried to make it “conservative Ponziish.” But it was Ponzi.
Nothing you said in your comment and extensive quotes above contradicts the idea that it’s a Ponzi scheme.
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