Scrivener.net

Tuesday, February 01, 2005

The "beauty" of Social Security, by Paul Samuelson. 

At the height of Social Security's political and economic success, Paul Samuelson, Nobelist and America's top liberal economist of the era, explained why it was such a success...
The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.

More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Social Security is squarely based on what has been called the eight wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.


-- Writing in Newsweek, 1967 [Quoted by Schieber & Shoven]
Ah, so "Ponzi" wasn't always a bad word to liberal advocates of Social Security!

In today's world Samuelson's description seems almost quaint. But it's not quaint, it's important and entirely relevant to the current debate.

The thing for both sides to remember is that the Social Security that Samuelson was writing about -- the Social Security that so many remember so fondly -- is already gone.

Samuelson could write...
Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times...!
But today Social Security's actuaries say that from now on all annual classes of retirees will get back less from Social Security than they put into it, discounting at the federal bond rate -- that is, they will lose money compared to if they had simply put their Social Security taxes in a federal bond.

Moreover, a great many -- including the average male born after 1970 (age 35 today or younger) will lose money outright to Social Security as it is, and be made poorer by it on a lifetime basis.

Yet when people express opinions along the lines of...

"Social Security is the most successful and most popular government program in American history, we should preserve it, not change it."

... they inevitably are thinking of the golden age Social Security of Samuelson's time.

Alas, we can't preserve what is already long gone.

There is no option to "save" Social Security as it was when it became the most successful and popular government program in American history.

The only options are to change it from what it was.

The only question is "how?"