Great Piece by Arthur Brooks

The expanding welfare state exists, in no small part, to shove marshmallows into our collective mouth. The government expunges sacrifice, smooths the risk out of our economic lives, and protects us from the consequences of our actions. It is aggressively moving us away from the national entrepreneurial ethos, teaching dependency and changing our relationship to the state.

This is not conservative dogma. Look at Greece. It is easy to get lost in the weeds of sovereign-debt ratings and monetary inflexibility, but the fundamental source of that country’s problems is straightforward. Politicians were unwilling for more than a decade to ask citizens for any meaningful sacrifice in public spending, which outstripped revenues. Citizens came to feel entitled to public resources their country had not earned and could not afford. As the country faced collapse, the result has been hopelessness, helplessness and Molotov cocktails.

That was from Obama’s Budget Flunks the Marshmallow Test which was in the February 24th edition of the WSJ.

By “marshmallow test,” Brooks is referring to the test conducted on kids in order to study self-control and deferred gratification.

Anyway, I agree with most everything Brooks says in his piece except for the idea of means-testing social security. He doesn’t mention it specifically but he alludes to it with this statement:

The present administration believes we should be able to get our country fiscally back on track without the vast majority of Americans having to accept less from government. Year after year, no entitlement recipient is asked to give up benefits—even benefits well above a basic safety net.

Good luck correcting this now. Meanwhile, the social security keeps raising the amount of income that’s subject to social security and those who are employed keep throwing more and more money down that hole.

Anyway, I like what Brooks has to say in this piece. It even goes hand-in-hand with the quote I posted yesterday from chapter two of “Think and Grow Rich” about how people tend to look at those who have achieved success in life as somehow catching a break that the rest of us didn’t get.

The Income Subject ot Social Security Taxes Goes Up in 2012

In 2012, the amount of income subject to social security taxes (confiscation) is going up to $110,100 from $106,800 (the wage base for 2009 – 2011). This means the maximum social security tax will now be $6,826.20 ($13,652.40 when you include the employer’s portion). Take a look at these two graphs I put together to see just how quickly the maximum tax and the amount of income subject to the tax have increased since 1965. It’s not a pretty picture (and it’s only going to get worse).

All of this wouldn’t bother me so much if…

1. We didn’t have to pay income tax on the amount confiscated.


2. I could plan on getting our share back when we retire. It’s doubtful that’s going to happen. What is there will get taxed away because we have managed to save on our own.

NOTE: While researching this post, I tried to find a history of the maximum social security payment amounts but came up empty. Do any of you know where I can find this information?

Saving Social Security with Private Accounts…

Okay. This guy’s voice is incredibly annoying. This video is interesting but he doesn’t go into any detail. Where are the details? Give us specifics.

Their six reasons for private accounts:

1. Social Security is broke

2. Payroll taxes already are too high

3. Social Security is a bad deal for workers

4. Personal accounts are safer than Social Security

5. Personal accounts boost economic growth

• Lower tax rate on work, encouraging job creation

• Less government spending, leaving more resources in productive sector

• More private savings, fueling investment

6. Personal accounts are working in other nations

At the end of the video he mentions the catch regarding private accounts:

“Social Security is a pay-as-you-go system, which means that taxes from today’s workers are used to pay benefits to today’s retirees. So if we allow younger workers to ship their payroll taxes to personal accounts, what do we use to pay benefits? since nobody wants to pull the rug out from under older workers or current retirees, we will need to come up with money—a lot of money—to fulfill those promises. We’re talking about trillions of dollars. But, this isn’t an argument against personal accounts. The transition cost of personal accounts are actually lower than the transition cost of to bailout Social Security.”

I would like to see those numbers.

I love the idea of private accounts. This is how it should have been set up all along. It should have NEVER been a pay-as-you-go system. I almost think it was designed that way in the first place in order to make it virtually embedded into our system, making it harder to change or do away with.

Related: Is Social Security a Ponzi scheme? Edward Harrison doesn’t think so.

The WSJ on Rick Perry’s Social Security Comments

I know the editors at the WSJ are pro-business but I thought their piece regarding Rick Perry’s comments about Social Security being a ponzi scheme were interesting:

He’s [Rick Perry] even technically right that Social Security is a species of Ponzi scheme (if not a criminal enterprise) in the sense that young people today are putting more into the system than they can possibly get out in retirement.

Part of the problem is that current seniors get more than they put in thanks to the formula for increasing benefits over time. Eugene Steuerle and Stephanie Rennane of the Urban Institute estimate that a two-earner couple both earning an average wage who retire in 2010 will get $906,000 in benefits having paid $588,000 in payroll taxes. The same couple who retires in 2030 will get $1.23 million (in constant dollars) while having paid $796,000.

Even a pyramid system such as this could be solvent if it took advantage of compound interest. But the overriding problem is that not a dime of the payroll contributions the government collects over a lifetime is saved and invested for a worker’s retirement. Social Security’s pay-as-you-go financing model means that 12.4% of all wages are transferred to current beneficiaries, the surplus dollars are spent by Congress on other things, and Social Security gets an IOU from the Treasury.

In other words, the program is building up debt even as benefits become less sustainable as the baby boomers begin to retire and the ratio of workers to seniors shrinks. The feds will then have to pay out of other tax revenue to meet Social Security’s obligations. This is the long-range problem Mr. Perry should attempt to explain, and the danger is that his rhetoric will scare the elderly rather than reassure them that reform is necessary for the sake of their grandchildren. He’s now running to represent Republicans as their Presidential nominee, not hawking a book on conservative talk radio.

I agree. I agree that Social Security is a form of a ponzi scheme and I agree that Perry’s going to turn off voters if he doesn’t tone it down a bit, which is unfortunate. We need to get some kind of serious dialogue going on Social Security. It would be helpful if we could put a muzzle on AARP during these discussions because they do not help matters with their rhetoric (lies).

Is This Proof That Social Security is a Ponzi Scheme?

My post from Tuesday generated quite a few comments. One of those comments was one from Jim. I copied the opening paragraph to his comment below:

I’ve paid the maximum every year for 46 years and invested even more than that in the stock market. Funny thing – one day I woke up and all my money in the stock market was now in the pockets of the bankers on Wall Street – and all I have left is my Social Security pennies. OK – I’m back at work again (Hello – Welcome to…..) and what I can earn and the savings I put away (in Social Security) are making ends meet.

I was curious as to what the maximum contribution to social security was over the last 46 years so I looked it up. I found the information here. I took that information and put into a couple of pretty little graphics for you, which you can see here:

From his comment, we know that Jim made AT LEAST $2.17 million over his 46-year career. We also know that he paid in over $252,000 into Social Security over his career. Looking at the Social Security website, I see that the maximum benefit amount is currently $1,809 per month (click here and scroll down to Table 2.A27), which implies an 8.61% yeild ($21,718.80 ÷ $252,127.95 = .0861 or 8.61%).

Now, some will say that’s a great return. However, I think it proves that Social Security is in fact a ponzi scheme. I mean, how else can they pay such a high-yielding payment compared to every other investment?


Robert Wright: Social Screwity

Following is a guest post from Dr. Robert Wright, Nef Family Chair of Political Economy at Augustana College SD, and author of numerous books.

Thanks for yet another opportunity to reach out to your large and informed audience. The last time I posted on your blog, Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills* was just out. I’m happy to report that sales are better than expected in part due to my appearance on the Dylan Ratigan Show a few weeks ago. One of the leading highlights of the book is “Sacred Hoax,” the chapter on Social Security. My original chapter title was the title of this blog. I changed it after the editor convinced me to remove the repeated images of sodomy liberally and licentiously sprinkled throughout the original text. But don’t worry, I’m not going “back there” here. Social Security is just too important a matter. It’s a prime example of what I term hybrid failures, or combinations of market and government failures that fester for years or decades, eventually turning quite monstrous. It is also a prime example of how our public discourse revolves around political ideologies rather than causes and effects.

I’m often asked, in effect, if I want old people to starve. Of course not. But I also don’t want children, or anyone for that matter, to go without. So the real question is: How do we ensure that everyone gets enough of what they need? Part of the answer, of course, is to do things as efficiently as possible, to waste as little time, energy, brain matter, or human talents as we can. The other major part of the answer is to be fair to everyone. Society shouldn’t take from A to give to B until it has extinguished all other available options. Social Security is a bad policy because it’s inefficient and, as I recently reminded Paul Krugman, unfair.

Social Security is unfair because it is not actuarially-based much less actuarially-sound. It is not, as sometimes portrayed, a type of insurance. Workers pay the same percentage of their wages whether they have terminal cancer or are likely to live to 90. People likely to die relatively young, minority males for example, pay into a system that they get little or nothing from. Those who start families at young ages also lose out because by the time their mortality rates start getting high, when they are in their fifties, their children are already too old to collect any survivorship benefits. Because lower wage workers pay so much of their income into the system (the payroll deduction plus, in almost all instances, the employer’s alleged contribution) they rarely have estates of any size to pass on to their children (be they minors or adults). And that is a recipe for perpetuating poverty. So, at best, Social Security merely privileges the aged poor over other equally poor groups.

Social Security isn’t efficient either. In other words, individuals could receive more or better benefits if they could spend their S.S. taxes on private security products instead. No, I’m not talking about private accounts. I’m talking about a rationale plan of investing and insuring over the life cycle.

First and foremost, everyone needs disability insurance. (I’m setting the sticky issue of health insurance aside as it is a different chapter, “House Scrubs,” and a different set of issues.) Social Security offers the cheapest sort possible, known as “any occ,” which means if you can do any sort of work, you won’t get any benefits. (Except you might because the entire claims apparatus is highly politicized. You might also be denied benefits even if you can’t legitimately work at any occupation.) That might be fine for unskilled workers but most of us these days really need “own occ” coverage, which means we can get benefits if we can no longer do our “own” occupation, not push a broom or clean a toilet. Private disability insurance, especially “own occ” policies written by quality insurers, is pretty expensive and not as good as it could be. But its development has been stymied by the existence of Social Security and by state level insurance regulators. Policies and prices would rapidly improve in a less restrictive environment. Unfortunately, only a small percentage of the American population knows the difference between “any occ” and “own occ” policies, let alone the many other varieties of disability insurance available. (I blame the Aflac duck. No, not really.)

Next, many but not all people need life insurance. If you have a spouse or children or anyone else dependent on your income, you should buy as much as you can afford. And that, thankfully, is often a lot. Million dollar term policies are not uncommon these days. They are more affordable than disability insurance because Social Security has not crowded out the life insurance market as much as it has the market for disability insurance. Also, life insurance matured well before the Great Depression and hence was well established in its major outlines before it became more absurdly regulated. It isn’t perfect, but it is far better than what Social Security offers especially given that turning age 18 is now more likely to mean big college tuition bills than economic independence.

Saving for retirement is also more difficult than it has to be due to government regulations and the effects of Social Security. The dirty secret of advocates of Social Security is that before the Great Depression the percentage of the aged population that was indigent had remained low and constant for decades. The government could simply have provided old age relief during the downturn and after the upturn allowed people to return to their pre-Depression savings strategies and all would have been well. But it didn’t, so now we have generations of people who think that saving means speculating in the stock market. It doesn’t. It means after covering disability and death contingencies with insurance people should acquire a diversified portfolio consisting of real estate (e.g. a home that you actually own and are not renting from a bank via a mortgage kept as close to 100% LTV as possible), life annuities (insurance contracts that make monthly payments during an annuitant[s]’ life [lives]), and financial securities (that shift towards cash as retirement age approaches). But Social Security has infantilized us to the point that most people don’t know how to implement such strategies, much less how to make adjustments to changing economic circumstances.

In short, we are caught in a sort of catch-22. Private security is prima facie better than Social Security except in a world where Social Security (and some seriously FUBAR regulations) already exists. That is why it is so difficult to move beyond Social Security. I’ve sketched a plan in Fubarnomics that would pay promised benefits for older Americans out of general revenues and cast younger Americans (people precisely my age and younger) adrift with a stern warning to prepare for the future, starting now. If the economy ever roars again I think it would work economically, but I doubt it will work politically. Not yet anyway.–

Robert E. Wright
Nef Family Chair of Political Economy
Division of Social Sciences
Augustana College
Robert’s Website


Should We Means Test Social Security?

How Much Could You Have If Social Security Was Your Money?

Should We “Means Test” Social Security?

Listen to the first few seconds of this video of President Obama explain the social security situation.

This morning I watched a clip on Fox News (not the above clip) with a panel discussing social security and the above clip of Obama. One of the panelists, a Democratic strategist, talked about means testing social security payments so that the “wealthy” do not receive benefits.

Here is the problem with this idea:

It penalizes those who planned for retirement. There are lots of people out there who are making sacrifices in order to put money aside for retirement. People who are foregoing nice cars, fancy houses, and vacations in order to save for their future. Meanwhile, their neighbors are living the highlife and not saving nearly enough for retirement. Then, retirement day gets here and the one who put money back for retirement is going to have to give up some of their social security and the one who did nothing is going to get their full retirement. Crazy.

I think a fairer way to means test (I’m not saying I agree with means testing) is to means test on career earnings. The Social Security Administration has those earnings records. Yes, those who planned for retirement will still be penalized somewhat but not nearly to the extreme that they would be if the means test was performed on retirement assets.

The same Democratic strategist also talked about the social security trust fund. Is there even a trust fund with actual assets? It doesn’t appear so. According to the linked piece, there is an account filled with IOUs.

If only the government would have structured it as a retirement planning system. There were more than enough current workers to fund benefits for those who were currently retired. The balance could have gone into retirement accounts for the current workers. It should have never become the mess it has become. Yes, I’m angry about this because I know that my generation and my kids’ generation is going to get screwed on this deal.

This is what happens when we allow government to do for us what we should be doing for ourselves.