You Can't Cheat an Honest Man - James Walsh [154]
Richard Nixon would later call this move one of the biggest mistakes of his presidency. Considering how his presidency played out, that’s a big mistake.
When the stagflation years of the late 1970s followed, with their theoretically impossible combination of recession and inflation, the indexed Social Security benefits disconnected from workers’ wages. The retirees getting government checks started catching up—and in many cases, passing—current workers in terms of disposable income and quality of life.
Eventually, Social Security benefits were adjusted again so that they were indexed against real wages. This was supposed to prevent a repeat of the stagflation decoupling. More changes came in 1983—in a series of adjustments that program administrators called the “75-year fix.” This fix raised payroll taxes, taxed program benefits and phased in a higher retirement age.
But even after these changes the system promised each successive group of retirees higher real benefits. Worse still, several generations of workers learned to expect steadily increasing Social Security benefits. Economic historians suspect that this expectation reduced savings—since people began to think that the federal government would provide for their retirement.
This trend touched yet another familiar Ponzi scheme theme. Unsophisticated investors will sometimes load their investments into one scheme that promises huge returns. That many eggs in a crooked basket are likely to be broken.
Investment banker and economist Pete Peterson dismisses Social Security as “a vast Ponzi scheme in which the first people in are big winners and the vast array of those who join late in the game lose.” Like a standard Ponzi scheme, Social Security only works if there are fresh people to bring into the system each year. Unlike a standard Ponzi scheme, the federal government forces people to participate.
“There is no crisis situation with Social Security,” Shirley Chater, administrator of the Social Security program, told a congressional committee in 1996. She was trying to talk congress into giving her agency more money. But her effort backfired. Like any Ponzi perp, she’d cooked the books to make a better impression. Under questioning, she confessed to having counted only workers’ Social Security taxes in her analysis of the system’s return on investment, not employers’ matching contributions, which economists agree are paid indirectly by workers through lower wages or benefits.
One senator was so angry at the dissembling that he attacked Chater for using “Disneyland financial analysis.”
Stanford economist John Shoven puts it more plainly: “The current system simply isn’t financially viable. [It’s] akin to an inter-generation chain letter.”
Possible Solutions
“The growing disenchantment with Social Security is all but inevitable when you have a pay-as-you-go system in a low-growth world,” says White House advisory council member Carolyn Weaver:
It’s been coming for a while. [Soon] the same old, conventional fixes like raising taxes or reducing spending [on benefits] aren’t going to cut it. Those tend to shift costs to the younger generation and make their rates of return worse.
One poll, conducted by Newsweek magazine, found that 61 percent of adults are not confident Social Security will be solvent enough to provide benefits to them when they retire. This skepticism about Social Security, plus the fact that younger workers will not get the same favorable return rate on their investment as today’s retirees, is driving people of all political persuasions to believe the system should be fundamentally restructured.
In the 1990s, Social Security’s defenders have argued that the program can continue for 60 to 80 years with a few minor modifications. If retiree benefits are gradually decreased