Op-Ed

Ronald Reagan Wasn’t a Ponzi Schemer

And Social Security isn’t a scam. Why Reagan supported and improved Social Security.

By - Sep 1st, 2016 02:06 pm
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Ronald Reagan. Official Portrait of President Reagan 1981 (Public Domain).

Ronald Reagan. Official Portrait of President Reagan 1981 (Public Domain).

At a recent WisPolitics luncheon, Senator Ron Johnson told the audience that Social Security should be privatized because “it is a legal Ponzi scheme.” Moreover, the bonds in the Social Security Trust Fund are worthless because one branch of government owes money to another branch; “it cancels out to zero.” In doing so, he joins fellow Republicans Marco Rubio and Chris Christie in demonstrating a misunderstanding of both Social Security and Ponzi schemes. When such false claims are made by leaders of this stature, it is no wonder that young people fear that the program will not be there for them despite a lifetime of paying into the system. That fear was stoked by David Barnes in a recent op ed for the Milwaukee Journal Sentinel, “Millennials deserve a better deal than Social Security.” Barnes is the Policy Director of Generation Opportunity, an organization supported by the Koch brothers, who have long favored privatization.

A Ponzi scheme attracts investors by the promise of very high returns. It works in a sequence: early investors receive their returns from the money invested by later investors. As the high returns get paid, the news travels fast, and round after round of investors gleefully invest. As long as each successive round of investors is sufficiently larger than the one preceding it, the promised returns can continue to be paid, with the scheme organizers reaping huge profits as well. Eventually, however, the laws of arithmetic catch up with this ruse. It becomes impossible for each succeeding investor group to be ever larger; the scheme collapses into lawsuits by disappointed investors and, as in the cases of Bernie Madoff and Charles Ponzi, with prison terms.

By contrast, Social Security is remarkably solvent; the system is going strong after 80 years, never having missed a payment. It is an insurance program that most workers are forced to participate in by paying a payroll tax as their contribution to insure against poverty in their old age. It is designed as a “pay-as-you-go” system: current workers pay for current retirees in the expectation that, when they retire, future workers will pay for their Social Security benefits.

Such pay-as-you-go systems are stable if each succeeding generation has a bit higher total productivity than the preceding one. This requirement is hard to achieve when one generation is much smaller in number than the preceding one; the baby boomers number 77 million and the subsequent generation is only 47 million. Anticipating this, in 1985 President Ronald Reagan augmented the original pay-as-you-go design by raising the payroll tax rate, forcing the boomers to add savings while they were working. Now, as the boomers retire, their forced savings are being added to worker payroll taxes to pay scheduled retirement benefits.

The boomers’ forced savings were invested in special issue US Treasury bonds that can only be traded between the US Treasury and the Social Security Administration. These bonds constitute the Trust Fund. During the years that Social Security holds these bonds, Treasury has the cash to invest in growth-enhancing assets like roads, bridges, broadband, and port facilities. During the years when payroll tax revenue is insufficient to pay retirement benefits, either due to the large number of retirees or setbacks such as the Great Recession of 2008-09, the bonds can be traded in for cash. The bonds are definitely not worthless; they represent money loaned to the general public by boomers during their work years to be repaid later during the boomers’ retirement years. If the bonds were worthless, as Senator Johnson believes, then the Reagan plan would have been massive theft. Fortunately, Ronald Reagan was no Charles Ponzi!

In the original 1985 plan, the payroll tax rate was calibrated so that the bonds would run out around 2060 after all but the most persistent boomers will be dead. However, the combination of slower-than-projected economic growth plus the blessing of longer life will exhaust the bond fund around 2034. At that point, the payroll tax revenue will be about 79 percent of what is required for scheduled benefits. Consequently, just like a private insurance plan adjusts to changing demographics and returns on endowment, adjustments will be required to Social Security.  Small changes, such as an increase in the eligibility age or raising the top end of the taxable income range, can be phased in to make up for the shortfall. This hardly constitutes a crisis. But privatization is impossible: there is no money to privatize unless some generation wants to pay twice, once to pay retiree benefits and once to set up a private fund. That’s why Franklyn Delano Roosevelt was confident in saying, “no damn politician can ever scrap my Social Security program.”

William L. Holahan is emeritus professor and former chair of the Department of Economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke is retired dean of the College of Business at UWM. They are co-authors of “Economics for Voters.”

Categories: Op-Ed, Politics

36 thoughts on “Op-Ed: Ronald Reagan Wasn’t a Ponzi Schemer”

  1. Tom D says:

    The reason for the impending Social Security Trust Fund shortfall is the post-1983 tax cuts. Social Security is funded by two taxes, the well-known 12.4% payroll tax (split 50-50 between worker and employer) and the less-understood federal income tax on the first 50% of Social Security benefits.

    Ronald Reagan started taxing Social Security benefits back around 1983 with the promise that the added tax revenue would go to Social Security. While that income tax revenue ($29.6 billion in 2014) has always been turned over to Social Security as promised, that money is barely half what if would have been if the 1983 tax rates were continued.

    The Republican party that decries the Social Security shortfall is the same party that caused the problem in the first place.

  2. NealB says:

    Article fails to mention that high income earners have benefited the most from the Social Security system over the years because they fail to pay the same amount as everyone else. Just an example: Top earners, those in the top income tax bracket making more than $415,000 per year, around 900,000 people here in the US, all paid at least $18,383 LESS last year, as a portion of their income, than you and I did. 900,000 * $18,383 = $16,544,700,000! That’s at least $16 billion not paid by the wealthiest Americans that could have been added to the Social Security trust fund last year alone. Over the past 30 years, since Reagan raised the retirement age and forced average income Americans to pay more, rich folks have avoided paying their fair share to the tune of around half a trillion dollars.

    If (not a Ponzi-schemer) Reagan had eliminated the cap on Social Security contributions instead of raising the retirement age and increasing the amount middle income Americans were forced to pay, Social Security would not only be solvent forever, it would easily be able to pay benefits above the poverty rates it pays today.

    No, Reagan wasn’t a Ponzi-schemer, but he made sure it was the middle and lower classes that paid the bulk of the bill while the rich continued to benefit from tens of thousands of dollars in contribution savings each and every year.

    Look at it this way. You and I pay Social Security tax all year long every year. The lucky 900,000 in the top tax bracket pay just until Valentine’s Day in the middle of February and get to take the rest of the year off. The solution to Social Security’s solvency, and fairness, back when Reagan was president is the same simple solution that his successors Bush, Clinton, Bush or Obama could have backed if they really cared about the retirement security of average working Americans: Eliminate the cap and make everyone pay the same portion of their income into Social Security.

  3. Jason says:

    The top 1% pay 22.7% of taxes.
    The top 10% pay 50% of taxes.
    The top 20% pay 65.3% of taxes.
    The top 40% pay 84.3% of taxes.

    The bottom 20% pay 1.1% of taxes.
    The bottom 40% pay 6.1% of taxes.

  4. Tom D says:

    NealB (post 2):

    Social Security is actually far more generous to lower-paid workers than to the well-paid.

    Social Security benefits are calculated on your average monthly earnings over your highest-paid 35 calendar years. (For this purpose, money you earned before age 60 is “indexed”—essentially adjusted for inflation; for example, $10,000 earned in 1973 would be indexed to $61,300.)

    If you were a low-paid worker (if you averaged $856/month or less after indexing) you will get 90% of your average pay in Social Security benefits every month of your life (assuming you wait until age 66 to begin collecting). For example, if you averaged $800/month, you will get $720 a month starting at age 66.

    But any monthly earnings above $856/month only return 32%, and earnings above $5,157 only return 15%. (Any earnings above the FICA cap—that is any untaxed earnings—is totally ignored and returns nothing).

    If you averaged $3,000/month, your age 66 payout would be about $1,456 (90% of the first $856 and 32% on the remaining $2,144).

    And if you averaged $6,000/month, you would get about $2,273 (90% of the first $856, 32% on the next $4,301, and 15% on the rest).

    To recap, at age 66, if (after indexing) you:
    • average $800/month, you get $720/month (90% of your indexed wages)
    • average $3,000/month, you get $1,456 (48.5%)
    • average $6,000/month, you get $2,273 (37.9%)

    All the above examples are for somebody born in 1954 who turns 62 this year and ignore cost-of-living adjustments which start at age 62.

  5. Tom D says:

    Jason (post 3), your numbers apply to federal income tax. Social Security tax is a very different animal where the bottom 50% pay very close to 50% of the tax (and pay a higher percentage of their income than the rich).

  6. Jason says:

    Tom, you seem to be well versed on the Social Security subject. I am not, but it always seems that you can not satisfy certain factions of the public which in general the progressives . They demand the rich to pay and pay until they simply leave. When is enough, enough. A fund manager in New Jersey named David Tepper left New Jersey in 2016 for Florida.. New Jersey now needs to fill the whole left in its state budget. Tepper’s lost to Florida which is $10-$80 million dollars each year.

  7. Jake formerly of the LP says:

    Jason- You like to talk, but you sure don’t know much, do you? No wonder why you resent people who didnt peak in high school like you

    The answer to Social Security is to make millionaures pay the same percentage in taxes that you and I do in SS. Do that, and you can expand it to people who are 55 (as it should be)

  8. Vincent Hanna says:

    Wow Jason finds a single example and decides it proves his argument. Two seconds of research would tell you how wrong you are. “New Jersey, New York, California and other states are replacing rich people faster than they are losing them. New Jersey had 237,000 millionaires in 2015, compared with 207,200 in 2006, according to Phoenix Marketing International, a research firm.” http://www.nytimes.com/2016/05/01/business/one-top-taxpayer-moved-and-new-jersey-shuddered.html?_r=0

  9. happyjack27 says:

    Known as the anecdotal fallacy or exception fallacy. “An exception fallacy is sort of the reverse of the ecological fallacy. It occurs when you reach a group conclusion on the basis of exceptional cases. This is the kind of fallacious reasoning that is at the core of a lot of sexism and racism. The stereotype is of the guy who sees a woman make a driving error and concludes that “women are terrible drivers.”

    I see it quite often. Our brains are designed to maintain our current belief system. So when we encounter cognitive dissonance, people will find the tiniest smidgen in their favor and latch on to it, with a strong emotional attachment.

    This, of course, rarely turns up any truly useful, and is of course never a sound approach. Most often it materializes in the form of an exception fallacy, black-and-white fallacy, gray-fallacy, straw-man fallacy, or ad hominem fallacy (including calling the source biased).

    A good way to try to get out of it is to dettach yourself emotionally, reset your judgement, and try to consider alternative information and alternative explanations in a proportional manner. You have to be guided by skepticism and curiosity rather than (the often much stronger impulse of) social appearance and self-congratulation. (related to the illusory superiority instinct that we all have).

  10. NealB says:

    Social Security tax rates have fluctuated over the years. When it began in 1937 the rate was 2% (combined employee + employer contribution) on annual income up to $3,000. By 1972 the rate was 9.2% on earnings up to $9,000 per year. When Reagan became president in 1981, the rate was 10.7% on $29,700. The rate since 2009, as article cites is 12.4% on first $106,800 of income. In all that time, those earning more than the cap realized immediate cash tax savings on income above the cap.

    Fact is that those that earned more than those caps got an immediate cash benefit in the form of lower withholding for social security taxes for every month they earned money above the cap level. The value of those tax savings for the rich may be incalculable in terms of opportunities lost by those that were required to pay a larger share of their total income each month, each year along the way relative to the opportunities gained by those more fortunate with higher incomes that were permitted to keep more of their income each month, each year along the way.

    Reagan knew this. His entire aim was to force the middle class to pay for lower taxes on the rich. He won the argument, and the rest of us have been paying the bill ever since. Reagan may not have been guilty of perpetrating a Ponzi scheme by definition, but the result has been the same in that those that were able to pay their Social Security tax off sooner each year gained a lot while those that were forced to pay longer suffered.

  11. John Casper says:

    Jason,

    You’re not a conservative. You don’t understand your numbers. What matters is the percentage of an earners’ income that the government takes.

    Luke 21:

    “1Jesus looked up and saw the rich putting their gifts into the offering box, 2 and he saw a poor widow put in two small copper coins. 3 And he said, “Truly, I tell you, this poor widow has put in more than all of them. 4 For they all contributed out of their abundance, but she out of her poverty put in all she had to live on.”

    Tax revenues confirm the income disparity that contradicts your conclusion. See this chart. https://m.reddit.com/r/dataisbeautiful/comments/4yikuh/us_share_of_income_earned_by_the_top_10_with_the/?utm_source=mweb_redirect&compact=true

    It’s grown worse since 1987.

    Sure the elites pay more in taxes, but it’s a fraction of their income.

    That wealth inequality destroys aggregate demand. The elites can’t spend enough to offset the poverty of most Americans.

    “Without spending–there are no sales;

    Without sales–there are no profits;

    Without profits–there is no demand for workers;

    Without demand for workers–there is no job creation;

    and without job creation–there is no recovery!”

    I got this from Economist @ptcherneva

  12. Jason says:

    You know this issue is played out when some one has to go the Jesus route. With this site being so PC I am surprised some one has not berated the author for using the term “Ponzi”. I guess Italians have left the progressive banner.

  13. Jason says:

    John Casper really. Why not go with the Santa Clause argument. Santa had no money but he had elves and reindeer. Santa was able to put a gift under all the kids beds, and he had only love. The Grinches worked their keisters off and were forced to pay most of the entitlements for all that resided in Whoville.

  14. Jason says:

    Neal B, so your argument is that the so called idiot, Republican Reagan duped all the clever Democrats that stand up for the little people. Last I looked. Reagan never had a Republican congress to push bills through. He worked with the Democrats. Liberals whine but Clinton could have changed tax policy on SSI in 1993-1994 when there was no Republican opposition. Obama could have done the same in 2009-2010 no Republican opposition but chose not too.

  15. happyjack27 says:

    Wow, that just went right over Jason’s head.

    No need to reiterate, John. You were perfectly clear.

  16. happyjack27 says:

    That is not even close to ANYTHING NeilB said!

  17. John Casper says:

    happyjack27,

    Thanks.

    Jason doesn’t w̶a̶n̶t̶ ̶t̶o̶ ̶understand that what we’ve got is socialism for the elites.

  18. Jason says:

    Casper, when you see a trash can on fire do you think that is God communicating to you. Casper I am Who Am.

  19. happyjack27 says:

    OMG I almost want you to engage that. Haha. Humor him – say you do, I want to see what he says next.

    I understand if you don’t. The amusement will probably dry up quickly.

  20. happyjack27 says:

    Jason, God spoke to me today he said I should tell you to leave trash cans alone. They have every right to burn and reveal God’s image. And by God of course I mean Ronald Reagan. Because that’s obviously how this relates to what we’re talking about.

  21. Jason says:

    Jack, in your little world do you really expect employers to pay the 6.3 percent of wage earners tax on the top 3 percent.

  22. happyjack27 says:

    Since when were we talking about tax rates?

    I’m talking about seeing God through everyday discarded objects. That are on fire.

  23. Jason says:

    Let me fire up some bath salts, inject myself and join you on your quest.

  24. happyjack27 says:

    Pro tip: when someone does an appeal to ridicule fallacy, an effective (and sometimes fun) response is to humor it.

    They’ll quickly realize the futility of their approach.

    This works for ad hominem abusive, as well. E.g. “The data for anthropogenic global warming is overwhelming.” “You’re stupid.” “That may be true. And I’m certainly no expert on climate change. It takes a lot of intellectual training and research to be able to write something that will pass rigorous peer review, and I certainly don’t consider myself capable of that. However, accepting this, I must therefore accept that the rational thing for me to do is to defer to the experts.”

    Easy. Accept and that diffuses it. They’re never prepared for that.

  25. happyjack27 says:

    Join me, Jason. This is fantastic. A real mind-expanding experience.

  26. happyjack27 says:

    I should mention its ironic that I’m an atheist and I’m the one defending the Bible quote here. Very nice pick there, John. I shall try to remember that one when arguing with religious right conservatives.

  27. Jason says:

    Could it merely be that a majority of scientists agree on global warming or global cooling simply because their paid handsome grants from the government. We just must all agree with the pin heads.

  28. happyjack27 says:

    It’s a global liberal conspiracy, Jason. The process of Science is deeply flawed. It serves only to exaggerate our cognitive biases and hold back both social and technological progress.

  29. Jason says:

    Very well, I will eat my steak, drive my diesel fueled vehicle, and push around my gasoline lawn mower and not give a methane produce fart about your need to save the earth from the likes of the rest of us.

  30. happyjack27 says:

    What really gets me is the complete lack of standards about verifiability, testability, falsifiability, or repeatability.

    It’s like they can just pull anything out of their but and no one can challenge it.

  31. happyjack27 says:

    So, anyone want to talk about Ronald Reagan, social security, and economics?

    I believe John and NealB made some very good points. Anyone have some (logically related) thoughts on them?

  32. Micah says:

    The author says Social Security not a ponzi scheme, since ponzi schemes leave the last group stuck holding the bag and then claims Social Security does not do this. False! Social Security constantly does this! It just sheds them regularly in smaller groups off to the side instead of all at once in a big group front and center. I am referring to all the people who paid in but will not receive any payout. If everyone lived to a ripe old age far far into retirement or received a remaining benefits payout equivalent to their pay-in upon death the system couldn’t be sustained. On the other hand a ponzi scheme would be continually functional if they could count on a big enough percent of investors and descendants never get anything back in the same way Social Security does.

    Personally, my biggest issue with a ponzi scheme is that there are always people pulling money out who never paid in? Gosh, does Social Security have any of those? And if there is, why didn’t the author mention them? And would Social Security be closer to solvent if the Old Age retirement side stood alone as its own separate system? I am not saying the other group does not deserve help, but why try to combine separate issues to hide what you are doing? If something needs to be done and is truly the purview of the Federal Government in our freedom based society then it should be able to stand alone as an issue.

    Social Security is an insurance (as stated in its Acts Title) and both it and the Affordable Care Act are trying to enact social justice through insurance in direct opposition to actuarial facts.

  33. Tom D says:

    Micah (post 32) asks:

    Personally, my biggest issue with a ponzi scheme is that there are always people pulling money out who never paid in? Gosh, does Social Security have any of those? And if there is, why didn’t the author mention them?

    The only people getting money out of Social Security are those people who paid in and their immediate families (spouses, dependent children, and—occasionally—dependent parents). Nobody else!

    Perhaps Micah is confusing Social Security with Supplemental Security Income, a welfare program which is administered by the Social Security Administration (but with separate funds).

  34. Micah says:

    @Tom D

    The Social Security web page says the Disability Insurance Trust Fund is funded from Federal Insurance Contributions Act, i.e. that pesky FICA line, taxes paid by employees and employers. The same FICA line that is also used to fund the retirement benefits. The Social Security Administration, created by the Social Security Old Age and Disability Insurance Act, is both the Old Age and Disability all at once no matter how they internally subdivide the pot. Not Separate. Create a separate administration and move the portion of the the funding into a separate funding stream and then you can use the word separate.

  35. Tom D says:

    Micah (post 34):

    Social Security Disability Income (SSDI) is not the same thing as Supplemental Security Income (SSI), even though their abbreviations are similar.

    SSDI (also called “DI”) is one of two parts of Social Security; the other is “Old Age and Survivors Insurance” (“OAS”).

    OAS pays pensions to old people and their families and also pays families of deceased younger workers (similar to life insurance).

    DI pays younger workers (and their immediate families) if they become disabled before they are old enough to collect regular OAS benefits.

    OAS and DI are separate programs with separate and separate trust funds, although they share a board of trustees. Nobody collects from either except people who have paid in and their immediate families.

    Although your pay stub shows a single “Social Security Tax”, you are actually paying two separate taxes to two separate funds. Until this year, your (and your employer’s) 6.2% was split:
    • 5.3% for OAS
    • 0.9% for DI
    • 6.2% total tax

    Last November, Congress passed a law temporarily changing this split:
    • 5.015% OAS
    • 1.185% DI
    • 6.200% total tax

    The new split is temporary, only applying to 2016, 2017, and 2018. The old 5.3%–0.9% split is scheduled to come back in 2019. Although the temporary split takes billions out of OAS, it was paid for by closing two OAS provisions which had allowed some couples to collect as much as $50,000 extra before age 70.

  36. Tom D says:

    The 5th paragraph in my previous post dropped the word “taxes” and should read:

    OAS and DI are separate programs with separate taxes and separate trust funds, although they share a board of trustees. Nobody collects from either except people who have paid in and their immediate families.

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