Topic: Social Security

Cooling out the Marks in Uncle Sam’s Ponzi Schemes

The flap over whether Social Security is a Ponzi scheme reminds me of two passages about Social Security’s sister program, Medicare, from Cato adjunct scholar David Hyman.

The first is from his book Medicare Meets Mephistopheles, which remains the best (and only) satire ever written about Medicare:

Consider what happened when I presented some considerably less pointed remarks at the conference at Washington and Lee University School of Law. One of Medicare’s most enthusiastic supporters responded by making an impassioned speech that it was improper to describe Medicare as a “Ponzi scheme,” and the program should not be judged by the standards that would apply to a private pension because it was actually a “sacred bond” between the generations. (Leave aside the fact that I never used the word “Ponzi” in my remarks. I did note that the Medicare program bore certain similarities to an inter-generational pyramid scheme, which is something quite different. Of course, it is possible that the use of this term by the commentator was a Freudian slip.) His words brought enthusiastic applause from those members of the audience who had heard enough bad news of the sort found in this book and were more than ready to ignore Medicare’s problems on the basis of empty political sloganeering.

The second is from Hyman’s response to a critic of Medicare Meets Mephistopheles:

Finally, my reply is titled “Cooling Out the Marks, Medicare Style.” This is a reference to a well-known article by a famous sociologist, on con games and the social process of adaptation to failure:

“Sometimes, however, a mark is not quite prepared to accept his loss as a gain in experience and to say and do nothing about his venture. He may feel moved to complain to the police or to chase after the operators. In the terminology of the trade, the mark may squawk, beef, or come through. From the operators’ point of view, this kind of behavior is bad for business. It gives the members of the mob a bad reputation with such police as have not yet been fixed and with marks who have not yet been taken. In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play. It is called cooling the mark out. After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his team-mates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation. An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss.”  Erving Goffman, “On Cooling the Mark Out: Some Aspects of Adaptation to Failure,” 15 Psychiatry 451, 451-52 (1952).

The occupational hazard for Medicare’s defenders is the tendency to become coolers on the program’s behalf. Professor Horwitz largely avoids this temptation, although she is not (yet) willing to concede how hot things actually are in the place in which we find ourselves. The same cannot be said for Medicare’s more ardent defenders, who routinely justify and excuse Medicare’s pathologies on the grounds that it is a “sacred inter-generational trust,” and not just another mediocre government program. Yet, even these ardent defenders may eventually find themselves wondering, in the dark of night, how it came to pass that they became coolers, giving instruction to the poor and working classes on the philosophy of taking a loss at the hands of a program that was supposed to help them, but ended up treating them as marks. With friends like that, who needs enemies?

Rick Perry’s Moment

Last night POLITICO Arena asked:

Who won the Reagan debate?

My response:

Give Rick Perry credit: he had the courage to call Social Security a Ponzi scheme, which it is. As with all such schemes, early entrants got something for nothing (or very little). Late entrants will get nothing for something. Social Security started with 16 contributors for every recipient. It’s now down to fewer that 3, and headed for 2. It’s unsustainable, as Perry said. A private company that ran such a scheme would be prosecuted in less than a New York minute. We should be grateful that a major candidate has finally spoken truth to fiction.

Why Congressional Budget Office Estimates and Policy Options Are Taken Much Too Seriously

Coercive redistribution and diversity in the interests of its constituent groups are essential features of the modern welfare state.  Disagreement over perceived consequences of social policy creates the demand for publicly justified “objective” evaluations. If there were no coercion, redistribution and intervention would be voluntary activities and there would be no need for public justification for voluntary trades.

James J. Heckman (winner of the 2000 Nobel Prize in Economics), “Accounting for Heterogeneity, Diversity and General Equilibrium in Evaluating Social Programs,” National Bureau of Economic Research Working Paper No. 7230, July 1999.

Is Medicare Sustainable?

A letter in the Washington Post from Dale Everett of Ashburn, Va., makes a point about the sustainability of our entitlements programs:

At 80, I am a “poster boy” for what is wrong with Medicare and Social Security. I worked full time from 1950 until 1993, when I retired. I paid the maximum amount annually required by law. My payment from Social Security in 1993 was $1,170 per month, and it now exceeds $1,500. I paid $47,377 into the fund and have so far received more than $288,000 from it.

As for Medicare I paid $14,350 into the fund from 1966 to 1993. I have been very healthy but had cancer several years ago and a craniotomy five years ago. The costs of those exceeded $1 million. Even minor surgery would far exceed what I paid to the fund.

Please tell me how such a system can be sustained. Both programs need to be overhauled now. No one should believe that he has paid for and earned the right to such payments.

How Your Government Deceives You, ‘Social Insurance’ Edition

From my former Cato colleague, Will Wilkinson:

The trick to weaving an effective and politically-robust safety net for those who most need one is designing it to appear to benefit everyone, especially those who don’t need it. The whole thing turns on maintaining the illusion that payroll taxes are “premiums” or “insurance contributions” and that subsequent transfers from the government are “benefits” one has paid for through a lifetime of payroll deductions. The insurance schema protects the main redistributive work of the programme by obscuring it. As a matter of legal fact, payroll taxes are just taxes; they create no legal entitlement to benefits. The government can and does spend your Social Security and Medicare taxes on killer drones. But the architects of America’s big social-insurance schemes, such as Frances Perkins and Wilbur Cohen, thought it very important that it doesn’t look that way. That’s why you you see specific deductions for Social Security and Medicare on your paycheck. And that’s why the government maintains these shell “trust funds” where you are meant to believe your “insurance contributions” are kept.

Alas, like Social Security and Medicare themselves, the deceptions that protect these entitlement programs cannot go on forever.

Generally, liberals are profoundly conservative about the classic Perkins-Cohen architecture of America’s big entitlement programmes, which they credit for their remarkable popularity and stability. Yet that architecture offers very few degrees of freedom for significant reform. Crunch time is coming, though, and sooner or later something’s got to give.

If Wilkinson’s overlords at The Economist demand that he misspell program, they should be consistent and allow him to abandon the American convention of mislabeling leftists as liberals.

Parallels to 1995 in Spending Fight

The American welfare state has been in crisis for decades. Many of the problems faced in 1995 fight have become less tractable problems today. John Samples comments in yesterday’s Cato Daily Podcast.

One notable difference between 1995 and today, Samples says, is that the GOP of 1995 kept Social Security off the chopping block for spending cuts.

Subscribe to the podcast here (RSS) and here (iTunes).

The 2011 Social Security Trustees Report — Harbinger of Bad News

The just-released 2011 annual report of the Social Security Trustees shows a significant worsening of the program’s finances.

Last year we were told that we would see payroll tax surpluses over benefit expenditures for a few more years — until 2015. That won’t happen according to the 2011 report; the program will now add to federal deficits in every future year — and increasingly so, which will ramp-up financial pressure to downsize other federal programs, increase taxes, or create yet more debt.

Note that both Republicans and Democrats negotiating over how to reduce federal deficits and the national debt have resolved to leave Social Security untouched for now.  That leaves the program’s finances to fester and worsen — increasing the costs of future adjustments and burdens on future generations.

Many people, especially those who favor early reforms, say that the Social Security trust funds “don’t matter.”  Note, however, that they lock up future federal revenues for Social Security benefit payments — on par with future dedicated payroll taxes.

The lock-up effect of the Social Security trust funds  is demonstrated by the fact that the program’s cash flow deficits today are not forcing any benefit cuts or payroll tax increases.  This can continue until the year 2036 according to the 2011 report.

But if we allow the situation to continue for that long, fixing the program will require a permanent benefit cut of at least 25 percent or a payroll tax increase of at least 40 percent of payrolls in 2036 and beyond.

Most left-leaning politicians and analysts are unwilling to entertain any benefit cuts today.  They favor tax increases today.  But those will fall on today’s and future workers, destroying their incentives to work and ability to save for the future.

Retirees, on the other hand, can continue to enjoy Social Security benefits that are much more generous compared to what they paid in when working.  So to hold all, including well-off, retirees harmless from a “shared sacrifice” approach to fixing Social Security’s finances seems unfair.

The trust fund also “matters” because it provides fodder to the argument of left-leaning politicians that the program’s finances are sound, backed by $2.6 trillion in Trust Fund treasury securities.  That $2.6 trillion sounds like a lot of money to the average Joe on the street. But consider that past and current generations, who together contributed an extra $2.6 trillion to Social Security, are now owed much more under the program’s current laws — a whopping $18.8 trillion according to the 2011 report.

The program’s long-term actuarial deficit (over 75 years) is now 2.2 percentage points of payrolls.  That’s 30 basis points larger than was the case in last year’s report, by far the largest increase in recent memory . That’s surely because of poorer prospects today compared to last year of experiencing a rapid recovery of productivity, output, and payroll tax revenues.

Finally, Mark Warshawsky, my friend and colleague on the Social Security Advisory Board, notes that this year’s Trustees’ report has been released on a Friday during the afternoon — the right day to release bad news because policymakers and the public are usually busy planning or traveling for weekend activities.

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