The Social Security Ponzi Scheme Paradox
Erik Chavez
Issue date: 10/14/04 Section: Perspectives
The social security program hurts society at large because it is jam-packed with inefficiencies and waste. To begin with, social security payments do not earn interest and grow over time. They are immediately paid out to current beneficiaries. However, when today's taxpayers retire, they should collect benefits that have been adjusted upward because of interest earned over the years. By privatizing this plan, interest earned will be higher than it is under the current program. A second issue with this program is the way taxes are generated and the distortion that is created by the method of collection. A payroll tax deduction has much more harmful effects than a consumption tax.
Along with the negative aspects mentioned above, minorities and the poor fare even worse under this archaic and paternalistic program. On average, this cohort has a lower life expectancy than do others in society. This fact of life translates into fewer benefits collected. A more serious problem is rooted in the fact that this cohort has a disproportionate amount of their life savings, if not all, under the rigid social security program. This feature has such a damaging effect on the lives of this cohort because it severely limits wealth transfers across generations. A second issue related to the disproportionate savings tied to social security is that access to the funds is limited to retirement. For example, if a person loses their job, they are unable to access their social security savings to pay for education, re-location fees to move to a region with jobs that match their skill set, or to pay for daycare while they look for work. This limits their flexibility much more than is the case for people who have personal savings accounts.
These three issues play an important role in sustaining the perverse results of this program, which resist class movement for minorities and the poor. This is the paradox part of the problem because minorities and the poor continue to vote for candidates who refuse to address this program, which hurts them so much more than society at large.
If you would like to learn more about this issue, please contact ajain2@gsb.uchicago.edu or echavez@gsb.uchicago.edu to be added to the Milton Friedman Group distribution list. Professor Kevin Murphy will be discussing social security in the near future. This is your chance to hear his lively discussion without having to turn in a homework assignment that took 15 hours to complete.
Along with the negative aspects mentioned above, minorities and the poor fare even worse under this archaic and paternalistic program. On average, this cohort has a lower life expectancy than do others in society. This fact of life translates into fewer benefits collected. A more serious problem is rooted in the fact that this cohort has a disproportionate amount of their life savings, if not all, under the rigid social security program. This feature has such a damaging effect on the lives of this cohort because it severely limits wealth transfers across generations. A second issue related to the disproportionate savings tied to social security is that access to the funds is limited to retirement. For example, if a person loses their job, they are unable to access their social security savings to pay for education, re-location fees to move to a region with jobs that match their skill set, or to pay for daycare while they look for work. This limits their flexibility much more than is the case for people who have personal savings accounts.
These three issues play an important role in sustaining the perverse results of this program, which resist class movement for minorities and the poor. This is the paradox part of the problem because minorities and the poor continue to vote for candidates who refuse to address this program, which hurts them so much more than society at large.
If you would like to learn more about this issue, please contact ajain2@gsb.uchicago.edu or echavez@gsb.uchicago.edu to be added to the Milton Friedman Group distribution list. Professor Kevin Murphy will be discussing social security in the near future. This is your chance to hear his lively discussion without having to turn in a homework assignment that took 15 hours to complete.