David B. Shemano wrote:
> A real Ponzi scheme [under his definition -- JD] has three fundamental
> elements (1) a talented con man to convince fooliish/greedy/etc. people to
> give him money in exchange for unrealistic returns, (2) the nominal business
> activity is a sham and the real business activity is simply convincing more
> people to give money, and (3) the scheme continues to exist until the
> promised distributions exceed the amount of money the con man is able to
> raise.
> As for social security, element (2) is met, because contributors misleadingly
> believe that the money they pay belongs to them and misleadingly believe that
> the funds are invested and appreciating, when in fact social security is
> simply an additional tax paid to the general treasury and there is no legal
> requirement the government pay a penny back to them. <
The idea that people "believe that the money they pay belongs to them
and misleadingly believe that the funds are invested and appreciating"
is an empirical statement that seems utterly wrong. Most adults I know
understand that US OASI (social security) is mostly a "pay as you go"
plan," a redistribution from younger employees (especially those below
the "cap") to retired ones. A strong minority think of it as some sort
of Ponzi scheme that won't pay them when they're old, but they're
wrong. But again this public opinion issue is an empirical question.
Calling Dr. Gallup...
David, are you saying that OASI is not an individual retirement
account? Agreed. But just because it's not an individual retirement
account does not make it like a Ponzi scheme. Rather OASI is a matter
of pooling resources, much like an _insurance_ plan. In this case,
it's insurance against poverty in old age. (Like all insurance, it's
not 100%.) Like insurance, it does not provide a positive rate of
return to the average "contributor." (The only people who get a
positive return from fire insurance are arsonists who get away with
it.)
In mainstream thinking at least, providing insurance is usually seen
as a "real business activity," justifying the generous profits
received by the owners of insurance companies. By the way, even though
on the surface it looks like insurance involves legally-defined
benefits (if your house burns down, you get funds), it's subject to
the sometimes-arbitrary decisions of insurance claim adjusters. This
is especially true in health insurance these days.
Contrary to the implications of David's statement, OASI does have
legally-defined defined benefits: there's a clear legally-backed
formula for the distribution of benefits. There are no adjusters to
deny standard OASI retirement benefits to retired people. That's a
crucial reason why OASI's administrative costs are so low (and the
system is so efficient) compared to private-sector retirement accounts
and the like.
Further, unlike all true pension plans (with defined benefits), OASI's
benefits are indexed against the ravages of inflation. Of course, like
the US government itself, OASI might go bankrupt and welch on its
obligations. That is, the OASI law could be changed, cutting benefits.
But OASI is backed by the power of the government and won't fail
until (1) the government itself fails or (2) the government falls for
cockamamie (Bushwa) "privatization" schemes or similar that undermine
OASI's viability.
It's true that the Greenspan commission recommended a hike in OASI
taxes ("contributions") and got it passed, so that there's a surplus
that goes into the general fund (by buying government bonds) rather
than being part of the "pay as you go." The imposition of yet another
regressive tax was done to convince the bozos that social security is
financially solid. I guess it's good to have a reserve fund, but it's
not really needed.
>Element (3) is arguably met, because the scheme can only work to the extent
>that the government can collect enough money from new contributors into the
>system and that will end soon enough based upon existing levels of taxes and
>benefits. The only way to argue that element (3) is not met is for the
>government to admit that social security is not an independent fund and
>payments are made from general tax revenues (but there is no legal
>requirement), but then the program loses all of its aura.<
I don't know where this comes from. The very conservative predictions
of the OASI trustees have the system running a surplus in the future
and will be solvent until the 2040s. As Doug pointed out years ago,
they base their predictions on extremely pessimistic assumption that
the US real GDP will grow at something similar to 1930s rates.
That disaster seems much more likely now than it did a year ago, but
if the economy does stagnate in that way, it screws up financial
investment in the private sector (the stock market, etc.) too. With
really slow growth of real GDP, it's hard to imagine high profits,
dividends, and/or capital gains on stock. (If the economy does
stagnate, by the way, it's the private sector's and deregulators'
fault, not OASI's.)
David asserts that: "the [OASI] scheme can only work to the extent
that the government can collect enough money from new contributors."
This statement seems based on the standard demographic delusion that
inflict discussions of OASI: to support the growing retired
population, we need more and more young people to pay into OASI (or
higher tax rates). Or maybe David is saying (without explanation) that
more and more contributors are needed even _without_ the demographic
shift? Either way, rising labor productivity (real GDP per person) can
finance OASI without a growing number of contributors (or raising the
tax rate). Rising labor productivity raises the tax base without the
need to raise the tax rate or the size of the labor force.
In a different missive, David writes that:
>Of course the [OASI] benefits will stop being paid. "Entitlements" make up an
>increasing larger share of government budgets. <
If we want to maintain mental clarity, it's a mistake to conflate OASI
benefits with "entitlements." The main reason that "entitlements" have
been rising has been Medicare and similar medical insurance systems.
These programs have been more and more expensive because of the crazy
dynamic of the largely-private-sector medical sector, the rising price
of patented pharmaceuticals, the rising cost of malpractice insurance,
the need for more and more expensive tests, the rising insurance
administration costs, etc.
In contrast, OASI will pay for itself for decades. If necessary, they
can adjust the tax a little (e.g., abolishing the "cap") to deal with
any future problems. The problem arises not because of Ponzi nonsense
but because OASI revenues are based on wage income, which has been
stagnant in this brave new WalMart world. (See Dean Baker's work, for
example.)
> Eventually that trend will stop. We might all be dead by that point, but the
> trend will eventually stop. Some governments will default. Others will
> inflate away the obligations. <
that's David's faith.
> Others will switch over to 401(k) type plans.<
Those plans have turned out to be a bust, haven't they?[*] If the
private sector and its deregulators (enablers) were able to manage
their financial and housing markets as well as OASI runs its plan,
however, we'd be doing fine.
IRAs, 401(k) plans, etc. wouldn't do as well as they have if they
weren't subsidized by the government. On the other hand, OASI is
running a surplus, i.e., with no government subsidy.
> ... I live in California, where the voters of a bankrupt state continually
> vote for large bond measures, apparently upon the assumption that they can
> get immediate benefits while the taxes are pushed far into the future, by
> which time they will be dead or have moved to Nevada or Arizona. I am not
> optimistic about our ability to manage social security and other
> entitlements.<
Revenues bond measures in California have to be spent on material
investments (such as infrastructure and schools) which boost the
supply side of the California economy, allowing the payment of
interest on those bonds. The problem is instead with the operating
budget, which suffers because of the tendency to increase programs
(such as prisons) when times are good, the irresponsibility of
Governor Arnold (cutting the "car tax"), the GOP's unwillingness to
raise taxes (and its ability to veto majority-backed programs), etc.,
etc. I wouldn't blame the GOP for this mess as much as I'd point the
finger to the Jarvis-Gann Prop. 13 movement (that morphed into the
current California GOP) and some of the earlier "progressive" reforms,
which set CA up for a fall.
[*] (See _The Great 401(k) Hoax: What You Need to Know to Protect
Your Family and Your Future_ by Bill Wolman, Anne Colamosca & William
Wolman. According to these authors, the 401(k) "hoax" was based on the
assumption that it's always a good time to put money into the stock
market. Like bubble economics, it assumes that "there's no place to go
but up" for financial investments. In addition, the "hoax" assumes
that it'll be a good time to sell when one retires and that
administration fees are minimal.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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