The Great American Ponzi Scheme?

My Social Security statement came in the mail a little while ago. It always says pretty much the same thing: "Social Security is this really great program the helps when you retire, and, uh, see the thing is it's kinda not doing so hot, so you might wanna save some extra money just in case, I mean we're not sayin' we're just sayin'." It goes on to explain that people are living longer and the birthrate is declining, thus the ratio of workers to beneficiaries is falling, and by the time I'm 54 a quarter of the money I've put into the system will have been given to someone else.

As widely understood and accepted as the impending doom of this program is (my dad has been telling me since I was a teenager to plan on getting zip from it in benefits), every time I read my statement this sentence grabs me:

The Social Security taxes you now pay go into the Social Security Trust Funds and are used to pay benefits to current beneficiaries. The Social Security Board of Trustees now estimates that based on current law, in 2037, the Trust Funds will be depleted.

Funds from new entrants into the system are used to pay current beneficiaries. Thanks to a certain high-profile criminal and a certain Texas governor, we all know what this sounds like: a Ponzi scheme.

Is this a fair characterization? Social Security defenders argue that unlike a Ponzi scheme, no one is being misled, the system is transparent and run by the government, funds are invested, you can never run out of "investors" (taxpayers), and there's no fraud being perpetrated.

So which is it? Flagship government retirement program or evil Ponzi scheme? My answer: who cares? You can make the argument on both sides but at the end of the day, the majority of the American people show no interest in chucking the program, and fixing it to provide funds for retirees for decades to come is not all that difficult. A modest reduction in benefits and increase in revenues, the kind of thing Reagan accomplished in the 80's, would fix the system long term. Allowing young folks like me to place a portion of their benefits in private accounts, as past Conservatives such as Bush and McCain have proposed (with much slander from the left), would be a great idea too but it's not required.

Of course it will take some political courage (the kind Congress seldom shows), but the way forward is clear and achievable. Last year the economic crisis caused Social Security's payouts to exceed its revenue four years earlier than expected. We need to tone down the rhetoric and get the job done because ultimately, Social Security could almost be considered a distraction compared to our much bigger problems: Medicare and Medicaid.

When the baby boomers retire in twenty years or so, the number of seniors drawing Medicare benefits will be double what is now. The Congressional Budget Office estimates that by 2082, Medicare spending will roughly equal the amount spent by the entire federal government today (as a percentage of GDP). Medicare beneficiaries today get out of the system approximately three times what they pay into it (by comparison, Social Security beneficiaries today get out roughly 10% less than what they pay in). The primary reason for this is skyrocketing health care costs. Obama's Affordable Care Act did a little to curb these costs for Medicare in the future, but not nearly enough. If we have any hope of avoiding an enormous budget crisis in our lifetimes, we are going to have to go further to find a way to fix our health care system and fundamentally reform Medicare (by both raising taxes and cutting benefits)—and if 2010's health care fiasco is any indication, it won't be easy.

Sources not yet linked: U.S. Budget and Economy
Image: Social Security Online