Can anyone give me an example using actual numbers why this is so? Is it a Ponzi scheme? How come it’s unsustainable if it’s self-financed? Why was the government allowed to borrow from the SS fund to begin with – doesn’t that defeat the purpose?
It is not unsustainable, so long as there are modest changes to the system. Those changes might involve things like increasing the payroll tax, eliminating the cap on income above which wealthier people don’t have to pay the payroll tax, limiting the growth of benefits, making tweaks to eligibility rules, or any of the above. Plus, anyone who tells you Social Security is a Ponzi scheme should be thoroughly disregarded. It is just factually untrue, and it is really nothing more than an empty, political talking point that craters under the slightest examination.
The government doesn’t really “borrow” from the Social Security Trust Fund… but it does get a short-term benefit. Social Security has basically had a surplus for as long as it has been around: people are paying in more money than people are being paid out. The law requires that these surpluses be kept in the safest investment around: special government treasury bonds that aren’t sold to the public.
The Social Security Trust Fund is made up of these bonds; it is not a pile of cash somewhere. But, when Social Security taxes are used to buy the bonds that the government issues, the non-Social Security side of the ledger gets the money from the Social Security taxes. Those funds go to the General Fund, like just about any other revenue, and get spent.
If and when it comes time that Social Security starts running deficits, the trust fund will start cashing in those bonds, and the government will have to take money out of the General Fund to pay for benefits.
That’s the 15 second version of how Social Security works. It’s not that complicated.
I’m sorry, I don’t quite understand.
So the public pays money into the fund, and it gets used to pay benefits today. Is this right?
Any surplus that exists gets exchanged for government bonds, which are like safe IOU’s, right? The money itself gets spent.
So how do we ensure the IOUs are properly paid back?
Keep the General Fund solvent. This may involve having an appropriate tax structure and making sensible budget choices, so it’s generally considered more feasible to tweak SS through payroll taxes and other means, so as to not have to cash in those bonds.
Wait, is the payroll tax different from SS tax? Is the amount I am paying in SS called “SS” tax or payroll tax, etc?
I suppose I am confused as to why I hear different things from different people. SS is a huge chunk of our spending, but I always get confused as to why some people say it technically doesn’t add anything to our deficit because it’s self-financed. But how can this be so if it’s tied to the general fund when it’s running surpluses?
If I am only investing the surplus in bonds, then how can I possibly run a deficit? What would make it so the benefit payouts would need to be greater than what was paid in (resulting in a deficit), when benefits are calculated by how much you’ve earned over your lifetime and how much you’ve paid in? Is it simply cost of benefits or something else?
Social Security is funded by a “FICA” withholding (after the Federal Insurance Contributions Act) applied to wages paid, which is why it’s called a “payroll” tax rather than an “income” tax. In prior years both employee and employer paid 6.2%, but for 2011 the employee side is reduced to 4.2%.
Social Security will run a yearly deficit when the income received through payroll taxes isn’t enough to pay active benefits. This can happen because SS benefits are indexed to inflation, and get a Cost-Of-Living Adjustment (COLA) each year. During the initial years of this, the bonds in the SS Trust Fund will be sold to offset the difference. I think this has actually already started happening due to the payroll tax cut xenophone mentioned. Once the SS Trust Fund has expired, then benefits will have to be cut or taxes increased to keep paying (or borrowing from the General Fund).
Long-term, I believe SS can pay 75% of benefits indefinitely with no changes to current law. This number has probably changed due to the economic downturn.
Anyways, the short answer is that SS is probably the most stable part of the federal budget. Medicare and everything funded by the general fund (defense, discretionary, government agencies) are where the big long-term problems are (Medicare and Medicaid in particular).
Keep in mind that Social Security was set up at a time when people didn’t live as long and when there were many more people paying into it, relative to people receiving benefits, than today. It really makes no sense to keep the age at which you can get benefits the same as it was 60 years ago. Social Security can be sustainable, but it needs to change a bit as the population changes.
It was set up so that it didn’t look like a “welfare for old people” program, but since that is basically what it is, we might as well fund it that way-- ie, eliminate the cap on the payroll tax and means test the recipients. I personally don’t like that idea, but we might as well face reality and just change the system to what it is that people actually want.
The same way we ensure that a $1 bill is worth $1. It’s backed by our faith in the US government, or at least in its currency.
In fact, this is one of the reasons the debt ceiling issue was a big deal.
Well, life expectancy hasn’t actually increased all that much at the lower end of the income distribution. The bigger increases in life expectancy are correlated with higher incomes. It’s not really a clear thing that we should be cutting benefits to those people who aren’t living that much longer yet need the SS the most.
As for means testing, there’s not much need in this case. Eliminating the cap alone pretty much takes care of SS for at least a century. And probably indefinitely. Also, it’s just adding more bureaucratic overhead for a system that doesn’t need it.
Isn’t “full faith and credit” dangerous though? I mean it basically assumes “we will always be good for it and pay our obligations.” It’s like if someone loses their job and claims that they’ll still be able to make their payments in the future as long as we keep giving him resources to do so.
What if we can’t make those obligations under our full faith and credit? Have we already hit that point?
Is there any real reason to make cuts to SS? Or is it just for political points?
The age has gone up, and is continuing to rise. Its not the same as it was 60 years ago.
Also, the primary reason the program is becoming more expensive is not because people are living longer. Most of the increase in lifespan between now and the 50’s has been due to decreses in infant and child mortality. Dead children don’t affect the SS outlook, since they neither contribute or receive benefits from the program (other then survivor benefits, which are a pretty small part of SS).
The primary reason SS is becoming more expensive is because declining birthrates mean we have fewer workers per retiree. The ratio is changing not because we’re producing more old people due to longer life expectancies, but because we’re producing less young people due to declining birthrates.
But isn’t that the problem with a Ponzi scheme? Fewer new investors to fund the old? That’s where that logic comes from, anyway.
If it weren’t a Ponzi scheme, then why should it matter that the newcomers are dropping off via birthrate?
Too few workers paying into the system versus people relying on the system. It’s really that simple.
There’s not really “fewer and fewer” investors, though, unless you think we’re just going to stop having babies altogeather and stop letting in immigrants and just all die off. Presumably the birthrate will (or already has) level off, and we’ll be left with a stable worker to retiree ratio. That ration will be less then it was, so either workers will have to pay more or retirees will have to receive less (or, as will almost certainly be the case, a combination of both).
Plus, while we have fewer workering age people per retiree, they’re a lot more productive then they used to be, and a lot more of them actually work (due to woman entering the workforce) so the situation isn’t so grim as it appears at first glance. If workers pay the same percentage as they do now, we can still support SS at 75% of its old level indefinately, despite the ratio having gone from 1:20 to 1:4 over the last eight decades.
It’s a generational wealth-transfer scheme. Due to demographics shifts (in particular the Baby Boom), we will, for a time, have more people receiving benefits than paying in. This was not the case for much of the program’s existence.
Once the Baby Boom generation passes the program will be on better demographic footing (there might be a smaller period of shortfall due to the Echo Boom).
My point here is that if I am paying money all my life to get benefits later, would I be better off just paying the benefits on my own without paying into SS, for example?
If we’re looking at SS as insurance, the whole point of insurance is that we pool risk by contributing premium in the event that one/some experience loss, and thusly are covered.
But in the event of SS, everyone’s cashing out from the pool – those that live long enough to do so, anyway, and even out of the ones that die, they can pass benefits on.
So what is really the point of SS? If it’s just a system where the incomers are paying for the elderly, how is this not a Ponzi scheme? Talking about worker/retiree ratios isn’t much different from talking about new investor/old investor ratio.
(I don’t believe that it is to the tune of maybe 75%, but I’m playing Devil’s Advocate here so I am fully convinced)
The worker to retiree ratio has gone from 40:1 to about 3:1, and will be 2:1 in the near future.
Perhaps you would. Perhaps you wouldn’t. Perhaps your personal investments tanked. Perhaps you didn’t save enough. Perhaps you got swindled, or kept your cash under a mattress and the value was destroyed by inflation.
We provide everybody that lives to retirement insurance against losing their retirement savings, if you want to look at it that way.
Right, everyone cashes out their benefit if they live to receive it. That’s the point. It’s a set minimum guaranteed amount of retirement pension if you work your whole life, regardless of what your personal investments might do. It’s also a bit of a hedge against living way longer than typical - a situation where your personal retirement investments could run out.
The point of Social Security is to provide old-age retirement insurance. At least, that’s the point you seem to be talking about. It also provides disability insurance and other things as well.
A Ponzi scheme requires increasingly more new investors in order to pay for the existing ones. SS only requires that the long-term contributions match the long-term benefits. As I pointed out, this is basically the case already, and with minor adjustments to the COLA would be the case indefinitely.