The Socialist Security Pyramid
I began my description of Social Security as an example of a socialist program. It fits nicely into the Marxist mantra, “From each according to his ability, to each according to his need.” — or some other nonsense. It is just a socialized pyramid scheme — it puts Bernie Madoff to shame.
Don’t believe the malarkey about a “trust fund.” The Social Security accountants keep meticulous records of what you earn and what you have paid in FICA taxes, but the government does not fulfill any fiduciary responsibility to the beneficiaries. The government doesn’t look for the best investments for your particular needs.
The government collects money (by force) from current wage earners and distributes it to the current recipients. When the government collects more than it pays out, the rest goes into the general fund (the Social Security administrators buy government bonds.)
Here’s how their pyramid works.
The graphic above gives a greatly scale down depiction of the Social Security pyramid. This system has one person receiving benefits of $10,000 per year. It has 12 workers paying into the system. Each of those workers earns $10,000 a year and pays 10% of that wage as a Social Security tax. The total taxes collected from all workers amount to $12,000. The system has a ratio of payers to receivers of 12 to 1.
This system, which collects $12,000 in taxes and pays out $10,000 in benefits, ends up with a surplus of $2,000. (The surplus goes into the general fund through the purchase of $2,000 in bonds.)
As with all pyramid schemes, those paying into the system greatly outnumber those receiving payments. As long as this remains true, the scheme can continue.
But economic systems never remain stagnant. Consider the following demographic shifts.
If one of the 12 workers from the previous period retires, the system ends up with an entirely different situation. The system now has two workers, each receiving $10,000 a year—for a total payout of $20,000, and only 11 workers paying a total of $11,000 in taxes based on the same parameters of $10,000 per year in wages and 10% in Social Security taxes.
When 1 out of the 12 payers retires, the ratio drops to 11 to 2, and the system plunges into a catastrophic deficit. The system now has a total of $13,000 to pay benefits. It has collected $11,000 in the current year and has $2,000 left over from the prior period. That amount will not cover the $20,000 benefit obligation of the system. The system has a deficit of $7,000 and will collapse without any outside funding.
To keep this teeny system afloat, the payer to receiver ratio must stay at 12:1 or greater. Of course, a few things can happen that might change that relationship, for example:
- Retirees can die faster.
- More people can enter the workforce.
- Incomes for payers can rise faster than the increase of benefits paid out.
In the case of the real Social Security, the numbers receiving have been growing, and the numbers paying in has been declining. The system is heading for collapse. (You can do your own research to find out the actual ratio.)
Legislators have made several proposals that would extend the life of our current Social Security system — raising the retirement age, adjusting the tax schedule. But, whatever the government comes up with to stretch out the life of Social Security (by tinkering with a fraudulent system), the system will continue to transfer income from one group of people to another group of people.
Social Security provides a good example of a socialist program (redistribution) that exists in a system most people think of this capitalist. Like many socialist programs, it transfers money from savings to spending. That shift causes a long-term drag on economic growth. It cannot sustain over the long term, yet politicians recommend more redistributive programs like it.
Socialist politicians don’t want to replace capitalism. They want to expand the socialism that already exists.