Stopping the social security ponzi scheme

by Russ Roberts on May 4, 2010

in Social Security

What if I told you that there is a program to give poor people food, called food stamps. You’re not poor. So you can’t have food stamps. But wait you say, I’ve spent all these years paying taxes. You’re telling me I can’t have food stamps? Well, I reply, if we tax everybody to pay for free food for everybody, that would be kind of silly wouldn’t it? I suppose, you reply. Food stamps are for poor people, I explain. I pay taxes to fund them even if I never have a poor month where I’m eligible and collect.

People think social security is different. I paid into the system all those year, people cry. But those taxes you paid went into a big pot with all the other taxes and funded all the things government does–wars and payments to farmers and food stamps and yes,  money for old people, poor or rich, who paid social security taxes in the past.

But this is a nutty, absolutely nutty idea. Why would you ever want to create a program that taxes everybody and gives money to everybody? One answer would be to redistribute income and social security does that in subtle and not so easy to understand ways.

But it’s mainly a Ponzi scheme, an agreement to tax each generation to pay for the last one, a scheme that works pretty well until the baby boomers come along. Then the ponziness of the scheme is apparent even to people who are hardly paying attention and something has to be done. So we’re stuck. We paid for our parents and grandparents but there isn’t going to be enough coming from our children and grandchildren to pay for us.

This isn’t a tragedy. Most Americans under the age of 50 don’t expect to get very much from social security. They aren’t counting on it. So “taking it away” isn’t a big deal. Except politically, and the fact that you can’t talk about this solution just shows you how dysfunctional our political system has become.

The way to keep social security from bankrupting the country is to make it a welfare program for the elderly. But what about all the money I “contributed”? Alas, that was a lie. The money wasn’t set aside for the future. It’s like asking why don’t I collect food stamps even though I’m rich. Hey, I contributed so I should get food stamps. That’s a bizarre belief to have. That’s not the way food stamps work. That is the way social security is supposed to work, but it’s a bad idea, it was an illusion that your contributions were really yours and there isn’t enough money to keep the illusion going.

Why would I want my children and grandchildren to support me if I can support myself? Why would I demand that YOUR children and grandchildren support me if I can support myself? It’s a horrible idea. So if I had my druthers, I’d get rid of the whole thing and let private charity help people who had bad luck or who failed to save for their old age. But the next best thing is to get the government out of the business of redistributing money to rich people under the guise of running an investment plan that’s really a ponzi scheme.

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