IS the US Economy a Ponzi Scheme?

Pyramid Schemes.

Same turd different wrapper.

Wiki:

 

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That may be true, but most people of modest means do consider SS an important part of their "savings" for their retirement years and they are very aware of the fact they are paying the SS security tax ("investing" in their future, via SS).

How does the average SS contributor (an investor from their mistaken POV) differ for the investor in Madoff's scheme? Both contributed money in the hope of getting more back later. That money was not actually invested to grow for them, (even though they thought it was).

In both cases, the current contributions were used to pay those currently collecting. If SS is not a Ponzi scheme, then neither was Madoff's plan. There is no difference in how these two plans operate, except SS is legal and compulsory and participation in Madoff's scheme was voluntary.

In both case, it is certain that someday the then current contributors will get screwed as their contributions will not even pay the current expenses. In the case of SS as it currently stands, that day is in 2024, as I recall, but SS will be modified to change that "go broke" date; however, the "go broke" date cannot be eliminated unless the increasingly geriatric distribution of the population is eliminated. (There is a thread about euthanasia of the old where this is being discussed.)

SS will probably be the longest running Ponzi scheme in human history, but it still is a Ponzi scheme. When it collapses, the last in contributors will get screwed, just as in any other Ponzi scheme. As an "early investor", I will get back much more than I put in (my compulsory investment).

Actually, SS was a significant reason why I retired at the end of 1993 - Despite years in school, I had my "40 quarters" at the max rate contributed, and the max contribution for 1994 took a big percentage step up. As my older max rate contributions would be stepped up with inflation, the payout I received later would not be significantly greater but my total contributions to SS would be if I continued to work, so I retired early. (My frugal nature and other investments with the resulting saving made that financially easy.)

There was a more important factor in my decision to retire early - A Brazilian lady, a beautiful university professor, I briefly met during a Mexican vacation. - After some letters and several exchanged visits, I decided I wanted to go and live with her permanently in her Sao Paulo apartment. I am starting my 16th year of living with her there. A couple of years ago, we got officially married. - Not good to rush into marriage, but we are getting older; however, but both are very healthy still. I look forward to collecting SS for 25 years more, at least. (She owns her apartment; I pay only for our non-party food, which is cheap as little meat is eaten, so I can live on only my SS income in Brazil.)

 

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The analogy here isnt even similar...the industrial revolution merely increased productivity of real things. The virtual revolution doesnt produce anything.

What it does do is broaden markets and facilitate communication, so a better analogy would be comparing the production of money with the velocity of money.

A faster velocity of money in an economy does not create wealth.

Nor does cyber-chatting create real friendships.

Even if youre the most popular person on any given internet forum it wont make a wit of difference to your real life...except to steal real time.

 

If SS was not a Ponzi scheme under Clinton, who placed it on a sounder basis and delivered balanced budgets for GWB to destroy, it sure became one under GWB.

Following is from the current issue of The Economist at:
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12931660

"... To pry elderly voters away from the Democrats, GWB promised to add a prescription-drug benefit as part of any Medicare reform. He did so in 2003, winning the support of the AARP, the powerful pensioners’ lobby, which has long been seen as closer to the Democrats. But in the end he achieved few cost savings, while adding a staggering $8 trillion to Medicare’s unfunded liability (see chart below).
...
Although such an attempt was part of Mr Bush’s first election campaign, it was not solvency that animated him, but the prospect of workers diverting some of their Social Security contributions to private investment accounts. Such accounts were intended as the center piece of the Republican Party’s “ownership society”. Economists are divided on the merit of such accounts, but agree they do nothing to restore solvency ..."

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PS Now that Obama is POTUS and clearly indicating that the era of government for the benefit of your supporters and cronies is over, Zacks has made Halliburton the "Bear of the Day." - I guess this reflects the fact that they must now bid for contracts, can no longer turn in billion dollar invoices for services never provided, etc.

At least some* will miss GWB, but not me.
----------------
*In that group is the "Christian right." Their rewards for loyality to GWB (No federal dollars for stem cell research; GWB's efforts to get a constitution admendment defining mariage as between a man and a woman, etc.) are going no where now under Obama.

 

Billy T, while I agree with everything you said, there are probably more motivating factors for George II to push Medicare Part D coverage...that being to prevent seniors from crossing the borders to buy prescription drugs at a much lower price. ARRP suppported prescription drug coverge for seniors but was against the "no bid" portion of the bill that allows drug companies to charge the Federal government any price they so choose for drugs under the program. And the so called fiscally conservative Republicans (Republican controlled Senate killed the House bill to repeal "No Bid" clause in committee) reaffirmed that specific provision in 2006 when the Dems (house passed a bill to repeal the no bid provision) tried to make change it to allow bidding as is the custom with other Federal Agencies.

I heard Senator Fist (Republican) try to explain it the other day when a reporter posed the question to him. His response was total jibberish. He responded the Republcans did the right thing and the rest was totally unintelligible. And of course there were no follow-up questions to nail him down on the issue.

 

There are 2 ways out of the SS Ponzi, or at least pushing the broke date back:

1. Inflation.
2. Whipping out the elderly population with a disease, a flu maybe...

 

There are many other ways. First, everyone needs to pay the same percentage of their income in Social Security taxes...not the case today. Earned income above 103k is totally free of Social Security Taxes. So the more you earn, the less you pay as a percent of earned income. Social Security is a very regressive tax.

Second, instead of just throwing federal dollars at healthcare, action needs to be taken to reduce healthcare costs - not by killing seniors. But by making the system more productive and efficient. That means making the healthcare markets more open and revising the regulatory systems that create healthcare oligopolies...a little old fashioned market compettion would do the whole industry good. And I am not talking about just deregulating insurance. We need a bit of supply side economics in healthcare. For example, why do physicians in this country get 33 percent more non medical training than anywhere else on the planet? Could it be a barrier to entry into the profession to keep physician salaries artificilally high? We have to stop this kind of nonsense that enriches the few at the expense of the many.

 

Inflation will not do much as the SS payments are increased with CPI. For example, 2009 payments are 5.8% higher than they were in 2008.

PS I hope you will make a brief post following this one:
http://www.sciforums.com/showpost.php?p=2147188&postcount=1719
Why will obvious when you go there.

 

Well, as long as the real inflation is above the payments increase, it still works.

About the Avatars, you can make a poll, but mine wins. I am in love with it!

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The contributors into SS do not do so in the hope of increasing their wealth, or getting "more back later", unless they are somehow misled by people describing the system as a "Ponzi scheme" and the like.

If they are misled into thinking of it as an investment, it is not because the facts of the system are concealed, or its nature obscured. There is no necessary deception.

And its support is the productivity of the US economy, not a pyramid of ever-more-numerous misled investors. It can be made solvent at any time - including the very year it falls to break-even - with fairly minor structural tweaks.

The structure of SS did not change under GWB. It did not "become" a Ponzi scheme at any time, and balancing its books while keeping its basic structure the same would not somehow change it from a Ponzi scheme to a sound investment vehicle.

It will never be an investment vehicle, sound or unsound.

The CPI is a rigged number, currently underestimating the rate of inflation by at least a third.

 

Err, given that the CPI is currently negative (or 0 for the version that excludes food and energy), I suspect you may want to rephrase that statement. Multiplying the current CPI by 3 results in much LOWER inflation (or still 0, if you exclude food and energy).

 

Hmmm. Lessee. That's harder than it looks. "three times as less" - nah. "absolute inflation" - worse.

I notice you didn't provide any helpful suggestions. Easy to criticize, sure, but doing it yourself is another story.

 

Without knowing what you consider to be an accurate inflation figure, it's not really possible for me to suggest a particularly great phrasing. Although it might be easier to use an additive relation rather than multiplicative one, as this would not be sensitive to the sign of the CPI (i.e., "CPI is underestimating inflation by x%"). But what motivated my post was not so much the phrasing per se, but its implication that the CPI is currently positive. All I was trying to do here was interject up-to-date CPI data...

What do you consider problematic about CPI, BTW? The emphasis on "urban population?" The composition of the basket of goods and services?

 

The difference is that SS contributors (and their eventual offspring) don't have a choice about contributing, while Madoff investors do. This makes Madoff's scheme much more volatile than SS, although of course the same long-term problem of declining income relative to growing obligations is shared by both. But in SS's case, this is a demographic (and so, slow) problem that can be seen long in advance and planned for, rather than a an Achilles Heel with the ability to unravel the scheme literally overnight.

 

A dozen different changes made over the years. Off the top of my head, the replacement of actual housing costs with "rent equivalent" a few years ago (I've run into at least one analyst who blames that as a significant cause of the housing bubble), the "hedonic equivalent" discount used to adjust for increases in quality and improvements in lifestyle as perceived by whomever's making the adjustment (it never works in reverse), some kind of messing around with health care costs I can't recall right now - the theme has been to remove or discount the exact areas in which prices are rising fastest.

It's become an inflation index with much of the inflation carefully excised.

 

Actually, yes. If they live long enough they WILL get back more. And just because they don't think or acknowledge that they expect more that doesn't change the fact that they do...

 

There is a lot of truth in your post, but often for the old when they retire, they make their life more simple - no longer need or want the latest and better items. Thus, the discounts for improved quality, durability etc may not cut as deeply into their inflated expenditures. I.e. the CPI correction may be at least adequate for those who are mainly buying basics things, like food and simple shelter, not sending kid to college etc. It is mainly medical cost that they may have that are increasing faster than the CPI adjustment, but even in this area, the government is helping with other programs (and probably more so soon)

SUMMARY: Everyone's correct inflation adjustment is different as what they spend their income on is different. Many older folks, living in modest house they have fully paid for, with vegitable garden in back yard find the CPI correction adequate. It tends to be the younger ones struggling to meet the mortgage, save for the kids college, buy new suit for work, etc that the CPI correction is inadequate for, but they are not yet collecting any Social Security checks either.

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I'm of course interested in reading more on these topics, if you have any good references. But it seems that most of the inflation is still there, at least at first glance. The CPI seems to track gdp growth and monetary policy in roughly the way you'd expect, for example.

I can't say that I've done a careful accounting of inflation in my own expenses, but I'd estimate it to be in the ballpark of the CPI, which is about all I really expect out of it... although I'm young and so don't pay much in health care, and rent my home (supposing "rent equivalent" actually corresponds to that), so perhaps I'm a better fit for the CPI than others.

 

But it does mean that they don't think or acknowledge that they expect more - i.e., they aren't investing in a Ponzi scheme, even in their thoughts.

The official money supply figures are messed with as well. And if you take into account that the "GDP" is a similarly screwed up stat (check out the changes made in discarding the old "GNP",itself problematical), and the circumstance that almost the entire increase in wealth in the US went to the upper 20% income bracket, while the "adjustments" in the CPI primarily affect the lower 80% income bracket, and on down the Marxist checklist,

You get an effective rate of inflation for the low-to-median Social Security recipient that is considerably higher than the percentage figured into their checks.

And what percentage of older folks is that, do you suppose?