My question is about Social Security: all I’ve heard for the past couple of years is that Social Security is broken, it’s a Ponzi scheme, it needs to be done away with/curtailed severely, etc. I’ve been told (and I’m not sure about this) that back in the 1960s, the government decided that the Social Security trust fund was growing too big and they needed to borrow that money from the trust fund and use it for the nation’s budget. If this is true, had they not borrowed the money, would Social Security have remained solvent up until the present day? If so, then it’s not Social Security that’s broken; when our government borrows money from other governments, that money must be paid back with interest. Why isn’t our own government paying back SS for the money that they borrowed from it?
Type
site:straightdope.com ponzi scheme social security
at the Google prompt to see 797 hits, not even including this thread you’re trying to start.
Pick whatever answer from those threads suits your prejudice, but in any event please ask Moderator to close this new thread quickly.
That’s not right, but there is a kernel of truth here. For today, as in the past, and for some years in the future, as people pay their payroll taxes, that first supplies the money for Social Security recipients. Whatever money is left over (the surpluses) is money that will be put into the Social Security Trust Fund.
The trust fund is not a pile of cash. The surpluses are used to buy special US Treasury bonds that pay interest. Those bonds are then held as the trust fund, because they are constitutionally guaranteed. Because the US Treasury sells those bonds to the trust fund, the Treasury receives cash in exchange for those bonds. That cash goes into the general fund where it can be used for government expenses, just like tax revenue.
In the future, when the number of people on Social Security gets larger, and the number of people paying in gets smaller, there will no longer be surpluses to invest in these bonds. Instead, the bonds will begin to be cashed in, so that the Treasury redeems the bond for cash to pay recipients. Where does this cash come from? The same pot of money used to pay government expenses, just like tax revenue.
This mechanism is well known, completely understood, and is not a fraud or surprise to anyone.
Yes, it’s not like the government said “we’ll just take SS money and use it how we want”. It’s more like borrowing from the kid’s college fund… except with real paperwork and a committment to pay back with interest on schedule.
SS fund has (so far) a huge amount of cash in preparation for the days when it will take in less than it pays out. That money has to be kept somewhere. The safest place (politics and joking aside) is and always has been US Treasury bills, so that is what the money is invested in. These bonds pay the same interest rate, same terms as anyone else who buys them, so its not like the feds are getting a sweetheart deal and getting money for free.
The government usually has spent more than it takes in (including the need to pay back older bonds) so there’s T-bills for sale for the fund to buy. SO techincally the SS fund has a HUGE pile of money, it’s just T-Bills not cash. The government is not likely to declare it will not make good on those T-Bills when they come due (or else it would have to pay the money SS needs anyway) so the bills are as good as gold (better - no interest from gold), the money is there.
It may seem to be taking from one pocket to pay the other, but the paperwork and guarantees are no different than if the fund were invested in Blue Chip company bonds or foreign T-Bills; the government would be overspending and borrowing even if it couldn’t borrow rom SS - obviously, they sell a lot more T-Bills than the SS buys.
The problem is, sometimes the economy does not do well (less money coming in) and the last few decades, thanks to birth control and abortion, people simply do not have children, so the workforce is getting smaller. The story goes that when the SS was first set up, there were 10 workers for everyone collecting. In 2 or 3 decades, with less people working and more living longer, there will be 3 workers per SS recipient. Plus, over the years it’s gone from being a retirement fund to something that pays those with disabilities and other reasons for politicians to bribe people with their own money.
Depending on whose calculations you believe, the fund will run dry sometime between 2030 and 2050. At that time, the government will have to make up the difference unless they raise Social Security deductions.
Canada has a similar math quandry in the late 1990s with CPP (Canada Pension Plan) - to many future recipients, not enough cash. The solution was to effectively double the cost of the plan - maximum contribution, from income about $40,000 a year or more, went from about $900 to $1800. Fortunately, Canada has a country-wide Unemployment Insurance plan too, and they reduced the options to collect (i.e. if you quit or are fired for cause, no payout) and reduced the premiums on that to cushion the impact.
Can you imagine any US politician going to the average Joe and saying “your SS contributions are going to double now.” Not likely, but that’s what they have to do. The longer they wait, the less money in the fund and the more likely it will end up being paid for out of current taxes too by 2040.
It is not even close to a Ponzi scheme. Some people are under the mistaken impression that they the money they are paying in is going to be theirs when they retire. This is just stupid people being stupid. SS is just like any other tax. What goes in mainly pays for current expenses. The government has never claimed otherwise.
As the the SS trust fund, the SS taxes were increased in the 1980s (not 1960s) to build up the fund for when the baby boomers retired. Within a couple of years, the policticians saw this pile of money and wanted to get their hands on it to pay for all the Reagan programs (and various big wastes of money since).
So they took the money and spent it. Only a fraction of the money is still there. The rest is gone, gone, gone. In something like 3 years the real money will be used up.
Note that a lot of people have pointed out how wrong this is. From all over the political spectrum. One of the early opponents of this sham was the late Sen. Daniel Patrick Moynihan, for example.
It is absolutely, positively amazing how many people refuse to believe that the money is gone. Even on the SDMB, despite the clearest possible explanations, a lot of people are in denial.
E.g., you have $50. You want to spend it. So you write yourself an IOU for $50 and spend it. You claim you still have the money. People point out that the money is gone. You claim that you have always paid back every loan you’ve gotten with interest. They point out that the last sentence is meaningless since it’s a loan to yourself. They ask again and again and again where is the money and how are you going to replace it. You put your fingers in your ears and start singing.
–
The money to pay back China is “gone” too, so can we just write that off? Or do we pay the Chinese and tell our old people to suck it up?
The money is as gone as any money you put in the bank or your pension fund or any other commercial, legal IOU. The SS fund holds money in the form of T-Bills. These are specific legal documents that say, “the government owes you X dollars and will pay on date Y”. Like the money you put in the bank or your 401K, it’s gone if the promise you can have it back is useless. The feds know specifically how much they owe, when it has to be paid back, and they budget for that every year.
If the federal government cannot pay, then yes, the money is gone. If your bank goes mams up, the money you put in the bank is gone (less FDIC limit). What are the risks of either? This is Great Debate territory.
IIRC, the money is not “all gone” in 3 years. Sometime in the next 3 years is when the fund starts spending more than it takes in. Exactly when depends on the economy and thus the total level of yearly contributions. Then the accumulation of T-Bills starts to be drawn down; so in 20 to 40 years, depending on the economy and payouts, the fund will be back to zero. Sometime before then, the sooner the better, the premiums should be adjusted or some other adjustment made to ensure the fund has money.
The government usually spends more than it takes in. (The Clinton years were an exception - surplus). You can argue that borrowing from one pocket to put into the other pocket and then spending it is a con; but the government would borrow regardless from whomever they could find to buy T-bills; and the fund would look the same whether they bought T-bills or bonds from blue-chip companies or fereign governments. So what difference would it make if the SS fund bought Wall street bonds, and those Wall street banks turned around and bought T-bills with that cash?
The real question is whether the federal government will make good on its bonds. Considering that quite a lot are NOT held by the SS fund, the problem with SS would be the least of our worries if the government defaulted. At this point, repaying ALL government debt is around 10% of total spending. It will be a long time or several more years of this same economic depression before the USA reaches the level of a Greece or Portugal.
It is very simple. For a long time the government took in more money in SS taxes than it paid out in SS payments. The excess was put in a special class of government bonds allowing it to be used elsewhere. However, we are now at the point where more is going out than coming in. No problem, we have all those bonds. Oops, the general fund is having trouble borrowing enough to meet the obligations previously supplemented by SS excess and has no money to pay back the bonds. All my life I have heard predictions this was going to happen.
I can’t say more and stay within the GQ guidelines.
Due to 30 years of tax cuts.
Do you have a cite showing that there is “no money to pay back the bonds”? (And I’m assuming that when you mean “trouble borrowing enough,” you mean political trouble, not financial trouble.)
In what way is the government having trouble borrowing money. On another thread, someone said that interest on 13 week T-bills is now 0.01%. Assuming that rate is the annual rate, it means that if you invest $10,000 in one of these, then after 13 weeks you get back $10,000.25. It doesn’t sound like they are having trouble borrowing. People know what is safe and damn S&P.
So there is a notional SS trust fund, all in government bonds. When SS has to pay out benefits, they “cash” some bonds. Of course this is all bookkeeping and what the government actually does is cancel the bonds and pay it out of general funds. It really differs little from what happens when you withdraw money from your bank account. The bank doesn’t go to a vault and take out the money you put there. They pay it out of money that someone just deposited.
At least, that’s the theory. I have read that the fund becomes insolvent in 2047. You can get slightly different dates depending on the demographic assumptions you make. As noted people are no longer averaging 2.5 kids or whatever. In Canada they are dealing with this, in part, by loosening up immigration, favoring younger productive immigrants. You can imagine how that would go over in the US. In any case, they now have 36 years to fix the problem and the sooner they act the easier the fix. The easiest fix is to simply increase the income on which SS tax is paid. But of course, they are dragging their feet. Many are doing it because they would like to see SS disappear, at least as a public scheme.
There is another problem. If there are 3 workers for every retiree, then 1/4 of every workers output has to go to a retiree. In other words, it is generally thought of as a problem with money, but I think it will also be a problem with supply of goods. Maybe I am wrong about that, but I have never seen it discussed.
I need a cite for the daily front page news?
Every time we have one of these threads a bunch of people jump in to say that the SS fund is invested in T-bills. It is not. They may be using the term as a generic term for Treasury Securities, but T-bills are securities with a maturity of one year or less (Treasury notes are 2 - 10 years and Treasury bonds are 10 - 30 years) and currently pay almost negligible interest.
People also say that these T-bills are the same as you or I could buy. This is also incorrect.
See Ravenman’s post for a correct explanation. SS funds are used to buy special bonds that only the SSA can buy.
A cite for your claim that there is “no money to pay back the bonds.”
If it’s on the front page of newspapers daily, then you shouldn’t have any trouble producing it.
You don’t understand logic, do you? There is money to pay for the wars, money to pay for people too stupid not to live on the coast in hurricane country, money to fight fires in Texas even though they cut state funding for fire fighting, money to pay the interest on bonds we sold to the crazy, human rights denying psychopaths in China, but SS is a special, magic program that gets to be at the end of the line because it had the audacity to run a surplus for the last few decades.
If I understand correctly, its not a ponzi scheme because the government can raise taxes or print money or increase debt whenever it wants to…right? Therefor it is not dependant on SS money coming in.
Was it ever “sold” as a self sustaining program?
If so, when did that clearly stop?
(emphasis mine). Yeah, that’s what makes it like a Ponzi scheme. Money in from new “investors” goes to pay people who want their money now. The “stupid” people are stupid for not seeing this.
Okay, they are not T-bills. Was there anything else about my post that you disagree with? My main claim is that, until some date in the future, SS taxes will have funded SS payments and something will have to be done before then to modify the program.
Although not a factual claim, I actually believe that the retirement age will have to be raised. Otherwise there will be too many unproductive people chasing too many goods. We are healthier and living longer.
That is not the definition of a Ponzi scheme.