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Reply #10: You're ignoring several aspects of Social Security. [View All]

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Jim Lane Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Nov-17-11 01:34 PM
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10. You're ignoring several aspects of Social Security.
Edited on Thu Nov-17-11 01:36 PM by Jim Lane
Social Security is also known as OASDI, for Old Age, Survivors, and Disability Insurance. You've considered only the old age pension benefit.

By paying into Social Security you earn entitlement to survivors' benefits. If you die, your spouse and child(ren) will be entitled to that coverage. You also get disability insurance. If you suffer an accident or a major illness and become disabled before you reach retirement age, you'll receive disability benefits.

Your post effectively values these components at zero just because you're alive and healthy -- now. It's like saying that a homeowner's insurance policy in 2010 was a waste and a ripoff because the homeowner paid in the premiums and the house didn't burn down. That's a faulty economic analysis.

Beyond these points, Social Security has a progressive redistributive effect. The formula used for calculating benefits isn't just dollar-for-dollar based on contributions. If your covered earnings this year were $40,000 and your twin brother's were $80,000, then, when you both retire, this year's boost to your benefits will be less than his but will be more than half of his.

Finally, as others have pointed out, it's not a Ponzi scheme. Here's a good explanation that was part of a longer document on the Social Security Administration website, one that was (not surprisingly) removed from the website after Bush launched his attack on Social Security:

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go insurance programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system, and so it is not a pyramid or Ponzi scheme. If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs, and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes or any other fraudulent form of financing; it is simply the nature of pay-as-you-go systems.

The 1983 tax increase was intended to address the problem caused by the demographic anomaly of the baby boom, and it largely did address it. We Boomers have enabled the system to build up a huge surplus, which can be drawn down as we start to retire. On some economic projections -- projections that have been criticized as unduly pessimistic -- the surplus will fall somewhat short of what's needed, but the difference can be covered by some tweaking of the system.
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