26 October 2010

What's wrong with this picture

Yesterday, I received my Social Security statement in the mail. It looks something like this. I just assume that the country will be bankrupt by the time I reach retirement age, so I don't pay much attention to these things. I did notice a sort of Frequently Asked Questions insert that came with the statement, though. I was especially intrigued and infuriated by the question in the green box in the middle of the page. It asks the hypothetical question of whether or not Social Security will still be around when I retire. It then answers the question by saying that even though the whole enterprise will be insolvent, the current estimate is that Social Security will pay 76 cents on the dollar of promised benefits. (The website is apparently out of date.)

Let's put some real numbers behind this. Let's say Mr. Smith, a 30 year old man, makes $100,000 per year, or rather, let's say that his salary over the time for which we works, averages to $100,00 per year. Let's further assume that Social Security taxes stand at 7.65%, which is where they currently stand. They tend to increase over time, but let's try to keep this simple. Finally, let's assume Mr. Smith starts working out of college, at age 22, and works to his full Social Security retirement at 67. In this example, Mr. Smith will have worked for 45 years, earned $4.5 million and paid $688,500 (with his employer's matching contribution) into the Social Security "trust fund". Assuming that the entire $4.5 million is taxable for Social Security purposes, Mr. Smith is entitled to $2,659 per month. At this rate Mr. Smith could live for almost 22 years (to age 87) before he would exhaust the money he paid into the system.

Before we get ahead of ourselves, let's also look at the case of Mr. Jones, also aged 30 years. He makes closer to the median of $50,000 per year. At retirement, Mr. Jones will have earned $2.25 million and paid $344,250 in Social Security taxes. In retirement, using the same parameters as above, Social Security estimates that it will pay him $2,015 per month. Mr. Jones could live for 14 more years (to age 81) before his money would be exhausted.

What's wrong with this picture? In spite of the common arguments that people are living longer and fewer people are paying into the system than are drawing upon it, the government should be running a huge surplus given that the average life expectancy in the U.S. is currently 78 years. This is what truly makes this a Ponzi-scheme. People aren't even living long enough to exhaust their own benefits, and Social Security is still insolvent. This is almost certainly due to inflation, and Social Security benefits with it, rising faster than wages. I touch on the inflation and benefits portion of the problem later. First, let's look at the money that is paid into the system.

Social Security trust fund

You may have heard of the so-called Social Security Trust Fund. The idea most people have is that the money that is paid into Social Security by workers and employers is socked away somewhere in a bank quietly earning interest. Instead, the money paid into Social Security is invested in U.S. government treasury bonds. The actual money is then spent by the government to pay for other things (perhaps even existing retirees). In fact, there is no trust fund. What actually exists is $2.5 trillion of debt that the government owes to itself, plus interest. The money that the fictional Mr. Smith and Mr. Jones paid into Social Security has already been spent. Their retirement money rests solely on the government's ability (or possibly even willingness to) pay its debts.


Inflation is defined as "a rise in the general level of prices of goods and services in an economy over a period of time." Let me make a distinction, though. When corn prices rise because farmers had a bad season, that is not inflation. Instead when I say inflation, I'm referring to the existence of an excess amount of money in the economy contributing to the devaluing of all money. To demonstrate this phenomenon, though, here are a few charts:

This first chart is of the "consumer price index". The CPI refers to the price of a group of common goods bought by consumers. The dark line shows the relative price of those goods over time. The red line shows the year over year change in the price of those goods. Since the red line is almost always in positive territory, over time the darker line has to go up.

This chart is another way of conceptualizing what is shown in the CPI chart. Relative to the value of the goods that one would purchase with a dollar, the value of that dollar is falling. Stated differently, today's dollar is capable of purchasing 1/20th (or less) of a good that it was capable of purchasing one of in 1913.

This chart should drive home the point about excess money in the economy. You can see that things really went awry (in all three charts) around 1970, which coincidentally is when the U.S. finally severed all ties to a gold standard.

What does this have to do with Social Security? The federal government has two options with regard to Social Security: default or pay. I don't believe that there is the political willpower to default, which means that the government will attempt repayment (assuming the economy lasts long enough). The government can only raise money via taxes or inflation, and raising taxes is going to be politically difficult for the foreseeable future. That leaves inflation. The point of all of these charts then is to demonstrate that by creating inflation, the government will necessarily have to destroy the dollar. The worst part is that inflation begets inflation. In order to protect those on Social Security, the government raises their benefits through COLA. In order to raise their benefits, it has to print more money. By printing more money, it creates more inflation. Creating inflation is a very dangerous game, though. It can very quickly lead to hyperinflation, which some argue is not far away; and even if hyperinflation never occurs, the inflation tax is still levied on everyone.

What's wrong with this picture, indeed

I mentioned earlier that I was infuriated by the question in the insert with my Social Security statement. What infuriated me so much is that I was enrolled into the Social Security program without my consent and given no way in which to opt out of it. Assume that I got over that, though. Great, so I pay into a system that promises to pay me X amount at retirement (ignoring for a second whether or not I get the full benefit of the amount that I paid in). Suddenly, I get word that the rules have changed. I continue to pay in the same amount, but now I receive reduced benefits. If anyone but the government did this, it would be illegal. I believe the technical term is fraud.

Here's my favorite part, though. John Boehner has suggested that those with "substantial non-Social Security income" when retired should receive reduced or no benefits at all. From each according to his ability (via the progressive tax regime), to each according to his need (no benefits for those who don't need it). Who's the Socialist now, Mr. Boehner? Who would put their money into a system that guarantees a 100% loss before the first dollar is even invested? Nobody, that is, except by the coercion of law.

My solution

Here's is what I propose: If the government will release me from the Social Security system, now, I will forgive the money I've already paid into it and promise not to attempt to draw on it later. Sound fair?


  1. social security is insurance, not an investment. like with your auto insurance or homeowner's insurance, you may pay in more than you collect.... also, don't buy into the argument that social security will not be around when you get old. our corrupt politicians who want to privatize social security -- so they can steal it like they did the money you invested in the stock market -- want you to think social security will not be around when you get retirement age; that way it will be easier to convince you to privatize it... fact is the fix is easy; increase the limit so people pay social security on all their income, not just the first $107K.

  2. this anonymous guy has to be a liberal otherwise he would know they money has already been spent and privatizing it wouldn't be a bad thing. Like the government could ever invest better than yourself....really I mean REALLY. As Reagan said there is a government bureaucrat that thinks they can spend their money better than you.

  3. If you become Amish, you don't have to pay into the Social Security system. Otherwise, you're just as screwed as everyone else under the age of 40.

  4. This comment has been removed by a blog administrator.

  5. Has anyone heard of the Redemption Manual? or Secured Party Creditors? has a lot to do with freeing yourself from the social security system.

  6. Author is conveniently omitting the fact that if you become disabled now (before retirement) you get paid for the rest of your life! Or, if you die, you wife and/or children gets paid for the rest of their lives!

    Privatization does not always work, especially when it comes to essential matters such as social security and healthcare. In a nutshell, the reason is because the institutions that manages them only care about profit, nothing else. Period.

  7. You can't stop paying your SS taxes and get forgiven because you are funding the checks of the retired people now. When you're retired, the young workers will be paying for your check. Bernie Madoff's scheme proved this can work indefinately, as long as there is no sudden disruption in the market.

    You've also obviously have never been self-employed because you still look at the 'employer' as 'matching' your contribution. This proves your sense of entitlement, and class envy.

    The total social security tax you pay is 15.3% if you make less than 100k/yr. That other 7.65% that your employer 'matches' would otherwise go into your pocket because it is added to the overall cost of your labor.

    Conclusion: you deserve to be not allowed to opt out of social security because you were all for it when you thought it was free and funded. Now that you know that the money is a front loaded ponzi-scheme, and you're paying for someone else's benifits, you're opposed? Socialism is a brotherhood, brother.

  8. "That other 7.65% that your employer 'matches' would otherwise go into your pocket because it is added to the overall cost of your labor."

    Naw, it would go right in the bosses or shareholder pockets if not required by law.

  9. Anonymous 5:13: "if you die, you [sic] wife and/or children gets paid for the rest of their lives!"


  10. The problem isn't Social Security. Social Security isn't a Ponzi scheme that's ruining the economy. Bear in mind that Social Security was there in the 40's, 50's, and 60's when the economy was "good." Your plump for the gold standard is interesting if laughably mercantilist.

    As you are aware, a larger money supply alone doesn't guarantee inflation. Inflation is a measure of currency debasement, and currency value depends on things like industrial productivity. A dollar is only as valuable as what you can buy with it. If the government prints dollars but pays people to create value (infrastructure, for example) then the amount of worthwhile stuff per dollar--the availability of goods and services--increases.

    So the question to ask is: "Does keeping retired people out of poverty add to the value of the dollar?" I would not be surprised if it in fact does add to the value of the dollar, if we factor in the true costs of creating a subclass of starving old people.

    Inflation comes about when money is printed to satisfy inherently valueless obligations, like wars of choice (Vietnam, Iraq) and unwise industrial subsidies (sugar, oil, the Security State).

  11. Our country is government run, has been, always will be and unless you live in a remote island you are subject to governmental control its a fact of life and it has been that way for centuries, to stand on a pedistal and truely believe that you are to be seperated from governmental control is to simply proclaim your own short comings of mental capacity of understanding. For you to make such a big deal over a simple pat down in an event that it is occuring such a big deal is only an attempt of a lonely individual to gain recognition... the biggest benefit that the american government offers compared to any other is your ABILITY to choose to and or not to be subjected to the governmental control...you have to right not to do or to do something... you clearly had an understanding of this in that you were prepared for these events to occur. Secondly they also offer you the right to leave. You make mention that you would only allow your wife or physician to pat you down in such a way....this gets to the basic fault of your own...that being that you allow your doctor to pat you down because you feel he has the right to so that he/she can protect you from harm...this is the basic concept behind it and there is no more to it...this is also the exact same concept that is being used in airport pat downs... it is also the same theory that hospitals use in their own use of x-ray machines.... in both medical and travel safety you are subjected to these things because they are the BEST way to ensure the safety of the individual... the biggest defenition behind what is to consider as you intentionally try to over blow in using the word molestation..clearly for dramatic effect...because nobody in a straight frame of mind actually considers what the doctor or airport officials do as molestation...is the intention behind the physical contact...the pure and sole purpose of the pat down is to protect you and fellow americans...it is the governments responsibility to do this in the event that their is fear or concern over it ...as it is the doctors professional responsibility to do the same in the event of a health concern... there is truely no seperation, it is the same basic concept and people that try to exploit it for more are simply trying to gain attention and feel a sense of purpose and looking for it in an area that they feel will gain the most attention...for example the doctor could be given the same complaint yet you do not lash out on this topic because everyone would laugh at you...you have the RIGHT not to subject yourself to a doctors or governments attempts to ensure your safety and health... but what they will do to ensure this safety and health is always clearly communicated and you are therefore aware of what the potential events are that you could be subjected to if you visit a doctor or if you choose to fly on an airplane.. if you dont like it dont see your doctor and dont fly... but most of all dont waste peoples time that are trying to do the american population as a whole a service and keep us safe

    As for your comments to military personal until you can say you would fight for freedom and you would put your life on the line then please dont make a mockery of what the government does or does not do for your freedom because you have not done anything to establish it except sit at a computer and mock it.


Please be relevant, civil, and brief... in that order.