Updated March 14, 2011, at about 10:57 PM to add a brief explanation of Ponzi schemes, and to correct several small errors.
A couple of days ago I read an angry letter that a reader of a local newspaper in one of the more rural western states had written to his paper. For the sake of his privacy, we’ll call him Bret. Bret started off using the essentially the same words I have personally heard from many people when I was working at Social Security, usually delivered in an accusatory tone, “I have paid thousands upon thousands of dollars into Social Security” for some long period of time. In his case, he said he had done this for 51 years.
He also indicated that he was getting Social Security checks. He went on to say that he would probably not get back all the money he had paid in. He said, “This is my money and I want it back.”
Unless Bret is on death’s doorstep, he will get it back, and then some. In order for me to analyze his circumstances I have to make some guesses about him. He said he have been working for 51 years. I will guess that he started working at 15 or so and just kept going. 51 years got him up to age 66, which is probably his full retirement age. (It is for everyone born from 1943 through 1954.) I will also guess that he filed for Social Security retirement benefits at his full retirement age. A lot of people do. Lastly, he sounds like he has been receiving his retirement benefits for a little while, but not a long while. Based on this, I will assume that he attained his full retirement age in 2009, which means he was born in 1943.
The last assumption I will make is that Bret earned the maximum covered amount each and every year for the entire 51 years he worked, which would get him the maximum benefit amount for people who attained full retirement age in 2009, which is $2,323.00 per month. I am doing this to make a point. The formula Social Security uses to determine benefits tends to be more advantageous to workers who make lower amounts than it is for workers who make higher amounts. So a worker who paid the maximum FICA tax throughout his working lifetime will require a longer period of time to get his money back than a worker who never paid more than, say, half the maximum FICA tax in any year. So, in effect, Bret is a worst case scenario.
The table shows the year, the OASI (Old Age & Survivor’s Insurance) portion of the FICA tax, the DI (Disability Insurance) portion of the FICA tax, and the combined OASDI Tax, which has been at 6.2% of covered earnings since 1990 (except 2011, when it is 4.2%.) Please see the SSA publication Social Security & Medicare Tax Rates for the rate history. The amounts shown in the table are the maximums for each year. As I said, I am guessing that Bret worked from the year he attained age 15 (1958) through the year he attained age 66 (2009.)
Now let us take a look at Bret’s make-believe contributions to OASI and DI. We aren’t including Health Insurance (HI) contributions for this exercise, because for a number of years they have had no maximum, and one does not get paid any money from this trust fund. The first good hospitalization after entitlement to Medicare Part A (which HI finances) should be enough to get the benefit of every dime the worker contributed into this.
|Year||OASI Tax||DI Tax||OASDI Tax||Year||OASI Tax||DI Tax||OASDI Tax|
Since Bret’s Social Security benefit amount is $2,323.00, he will recover his entire contribution in 54 months. That’s four and a half years. If Bret had made less than the maximum (which he probably did) he would recover his entire contribution even more quickly.
In his rant, Bret made a couple of other statements that are so wrong that they require an answer. He said that the government “should have put the money where it might have earned a little bit of interest.” He went on to say what the government did “instead” with Social Security’s assets, (which are called its “trust funds,”) was “asinine mismanagement. They screwed it up royally.” I would like to direct Bret’s attention, and that of unfortunate people who think like he does, to the Social Security Press Release Social Security Board of Trustees: Long-Range Financing Outlook Remains Unchanged which was issued on August 5, 2010. In that release, the Trustees stated, “The combined Trust Fund assets earned interest at an effective annual rate of 4.9 percent in 2009.” I wonder if Bret gets 4.9% for his money from any bank.
Bret went on to complain that the money that current workers pay into Social Security should not be used pay the benefits of current retirees. He said that this money should instead go into each worker’s own Social Security account. Imagine that. There are about 150 million workers paying into Social Security now. Imagine 150 million separate accounts. These would be held by banks, of course, because the government always “screw(s) it up royally.” The banks would charge fees and pay much less interest. They have to make a profit, you know.
There is one major problem with this line of thinking which the boneheads who advocate privatization always forget to consider. When a worker pays his FICA tax, he is not just putting his money into his own little savings account. He is helping to finance what is known as a “social insurance system.” Most nations on the planet have some version of this. When the worker pays his FICA taxes, he is paying into a system which will provide for his own retirement, true, but it will also provide benefits for him if he becomes disabled. It will provide benefits to certain of his dependents in both cases. And it will pay benefits to certain of his survivors if he should die young. All of these benefit payments will go on for as long as the beneficiaries retain their eligibility under the rules governing the various classes of benefits; in some cases, for many years; in some cases, for the rest pf their lives. This is regardless of how much or how little the worker contributed into Social Security. Would any bank do this?
Another big problem that privatization would cause. If those 150 million workers had their contributions set aside into little savings accounts, this would stop the income Social Security uses to pay its current beneficiaries, which costs a little under $700 billion per year. The trust funds would last three or four years, then they’d be gone. The privatizers neglect to say how this $700 billion would be covered after that. Perhaps that’s the time to bring out the “death panels” they were blathering about so vigorously in 2009.
I also take exception the Bret’s use of the terms “asinine mismanagement” and “(t)hey screwed it up royally. Social security has an immense job to administer. It has to keep track of the earnings of about 150 million workers. It pays about 60 million OASDI beneficiaries every month. A lot of these beneficiaries move, change their direct deposit information, leave the country or return to it, marry and divorce, have a child, require a representative payee due to incapability to manage their benefits any longer, go to prison, and die. It’s Social Security’s job to track this and make sure that people are paid correctly.
Social Security also administers the Supplemental Security Income (SSI) program, which serves about 6 million aged, blind, and disabled recipients whose income and resources are severely limited. Social Security also provides administrative support to Medicare, a program which is primarily the responsibility of the Department of Health and Human Services. Social Security’s role is taking applications for enrollment in Medicare, processing various postentitlement actions for Medicare beneficiaries, and explaining how Medicare works and providing help to Medicare beneficiaries who need it.
For all this, and a lot of other things I didn’t mention, Social Security’s administrative cost has been about 1.6% of benefits paid. The Republicans in Congress intend to reduce this sharply. There isn’t an insurance company in the world that can approach this level of efficiency. If you could find one whose administrative cost was even as low as 20%, that would a very lucky find.
Bret’s last remark is the most insulting to Social Security, its dedicated workers, its complex programs, and its efficiency. He said, “This Ponzi scheme makes Bernie Madoff look like a rookie piker.”
It seemed to me that not everyone understands what a Ponzi scheme is. It is an investment scam that appears to be actually paying high returns. What it is paying is either money from the victims’ own capital, or from money from later victims. Ponzi schemes are named after Carlo Ponzi who ran a huge Ponzi scheme in the US in the 1920s. He was not the first person to run such a scam, but he got the honor of having it named for him.
The easiest way to explain how a Ponzi scheme works is with an example. Suppose the scheme promises a return of 10% a month. The scammer simply takes investors’ money and returns a tenth of it at the end of every month.
The fact that investors appear to be getting the returns they were promised will encourage more people to put their money in the scheme, and even encourage the original wave of victims to reinvest. This growth is what makes Ponzi schemes successful.
After ten months the fraudster will have returned all the money invested by the very first investors (assuming they did not reinvest), but will have most of the money invested by later investors. At this point the fraudster simply takes the money and disappears. Some Ponzi schemers who are very good at it can run it for years. Witness Bernie Madoff. He was caught in 2009, but he began his scheme as early as the 1990s, and even perhaps as far back as the 1970s. Estimates of how much money he scammed run from about $18 billion to $65 billion. No one knows for sure. It’s gone now.
A Ponzi scheme is a criminal enterprise. Social Security is a highly successful program started 75 years ago, which has been providing food, shelter, and some measure of decent living to hundreds of millions of people over the years. It is the method by which this society provides these things to people who have earned a right to them. I agree with Bret when he says that Social Security isn’t a handout, that it isn’t welfare. He earned it. The fact that he has to say this at all tells me that he has been listening to people who despise Social Security. They’re called conservatives. They are conning Bret and others like him. For his part, he is repeating their cons in his article. Shame on him for that.
Social Security is certainly not welfare or a handout. Not at all. It is an earned entitlement that is there to provide a decent life to people who can no longer work due to age, disability, or death, and their dependents or survivors. Social Security does a remarkably good job at this, despite thirty years of increasingly vigorous conservative attacks against it. There may be bad days for Social Security in the future, but this most cherished program in the entire realm of programs administed by our government for us will survive and take care of future beneficiaries like it takes care of current ones.