Krugman's Obviously False Debt Spin

In the past, I've written numerous posts in response to Paul Krugman's nonsensical writing, in an attempt to expose him as a charlatan.   Because Krugman is a devout Keynesian, he believes that government spending is always an unqualified positive, and an easy solution to all economic problems.

If you thank that is an exaggeration, watch Krugman in this interview from August, 2011, where he parrots Keynes in supporting government stimulus spending, with his explicit statement that the spending be on something that wastes resources and helps no one — that is, a military buildup for a fictitious alien invasion --

---

http://www.youtube.com/watch?v=nhMAV9VLvHA
http://krugman.blogs.nytimes.com/2013/05/09/the-moral-equivalent-of-space-aliens/

If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.  And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better [off].

---

Paul Krugman's blog is dominated by content like the statement quoted above, which makes it little more than an endless stream of fallacies.   Here is another typical example, from a Krugman post in February, 2015, where Krugman attempts to dismiss concerns about the mounting U.S. public debt --

---

http://krugman.blogs.nytimes.com/2015/02/06/debt-is-money-we-owe-to-ourselves/

Debt Is Money We Owe To Ourselves

Paul Krugman   FEBRUARY 6, 2015 7:32 AM

Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: no, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves — an obviously true statement that, I have discovered, has the power to induce blinding rage in many people.

Think about the history shown in the chart above. Britain did not emerge impoverished from the Napoleonic Wars; the government ended up with a lot of debt, but the counterpart of this debt was that the British propertied classes owned a lot of consols.

More than that, as Fatas points out, rising debt could be a good sign. Think of my little two-classes model of debt, where some people are less patient than others — perhaps (to step outside the model a bit) because they have better investment opportunities. Moving from a very limited financial system that doesn’t allow much debt to a somewhat more open-minded system should, in that case, be good for growth and welfare.

The problem with private debt is that we have good reason to believe that in very wide-open financial systems people get irrationally exuberant, lending and borrowing to an extent that they eventually realize was excessive — and that there are huge negative externalities when everyone tries to deleverage at once. This is a very big problem, but it’s not about generalized excess consumption.

And the problems with public debt are also mainly about possible instability rather than “borrowing from our children”. The rhetoric of fiscal debates has been, for the most part, nonsense.

---

Krugman's blog post quoted above hardly deserves comment — since it is so poorly written, the fallacies it contains should be obvious to almost anyone.

First, the title is obviously false — it is true that the largest portion of the U.S. public debt is held by government agencies (mainly Social Security), but a large portion of the U.S. debt is held by foreign nations.   Here is part of a table from the U.S. Treasury's June 2015 Bulletin, showing the estimated ownership of U.S. Treasury Securities, from 2010 through March 2015.  Notice that this table shows that 'foreign and international' owners (column 11) were holding about 34% of the total U.S. public debt in December of 2104 --

---

https://www.fiscal.treasury.gov/files/reports-statements/treasury-bulletin/b2015-2.pdf   (p. 43)
https://web.archive.org/web/.../https://www.fiscal.treasury.gov/files/reports-statements/treasury-bulletin/b2015-2.pdf

---

And notice that China and Japan alone were holding over 13% of the U.S. public debt in March of 2015 --

---

http://ticdata.treasury.gov/Publish/mfh.txt

---

But regardless of the breakdown of the ownership of the U.S. public debt, Krugman's statement that 'debt is money we owe to ourselves — an obviously true statement',  is, rather, an obviously false statement.   There is nothing about government debt in general that entails 'taxpayers owing it to themselves'.   At a minimum, this would mean that all government debt securities are purchased by the government with tax revenue.   This was never true, and it certainly is not true now.

But even more importantly, notice that even in the case of the Social Security Administration's past purchase of government treasuries with surplus payroll deductions — as an example of 'owing it to ourselves' — we do not 'owe it to ourselves', since current beneficiaries of government programs like Social Security and Medicare will not pay, nor will they even suffer any consequences of, the growing debt that is being generated in part to pay for their benefits — obviously, future taxpayers will, since current taxpayers will not live long enough.

So even under the assumption that the phrase 'owing it to ourselves'  is simply meant to indicate government debt that was purchased with tax revenue, and so is held by government agencies (i.e. debt owned by U.S. taxpayers), that debt will still affect future taxpayers more than current taxpayers (especially given future interest rate increases).   In short, Krugman's phrase — 'debt is money we owe to ourselves' — is a euphemism to disguise the unequal impacts of the debt between current and future taxpayers.

So how is it possible to justify Krugman's claim: 'no, debt does not mean that we’re stealing from future generations',  when we know that the growing debt is certainly not helping future generations?

But what is truly perversely fascinating in this nonsensical 'we owe money to ourselves'  talk, is that anyone would take this seriously — never mind a Nobel laureate economist.

I wrote about the absurdity of pretending you owe yourself money last year in this post —
     http://maxautonomy.blogspot.com/2014/06/pretending-you-owe-yourself-hazard.html

In Krugman's blog post quoted above, he mentions that one person's debt is another person's asset — yes, but this is only true if there really are two different people.  Your debt is not also your asset.   So making the claim that your debt is your largest asset, is exactly the same as saying 'I'm broke'.   All debt is a claim against future earnings, and government debt is a claim on the future earnings of taxpayers, regardless of the owner of that government debt.   This is what makes the commonly heard comment that the Social Security 'trust fund' pays benefits so absurd — all the government 'trusts' that hold U.S. Treasuries are simply promises to collect future taxes (i.e. they are claims on future tax receipts), and so future taxpayers must pay, if those securities are ever to be redeemed in order to pay some government expense, like Social Security or Medicare benefit payments.

It is hard to believe that it is not obvious to people that they cannot also treat their debt as an asset, and that it should require an explanation as to why, but it must, since it is repeated ad nauseam — even by a Nobel laureate.

Making the claim that we 'owe it to ourselves'  does nothing to mitigate a debt problem.  The U.S. government 'trust funds' are an unfunded liability of U.S. taxpayers — that is, they are promises to collect payments from future taxpayers.   And notice that this simple fact — which is determined by the U.S. Treasury securities held by the trusts (that's just how they work) — stands in direct contradiction to Krugman's claim that 'debt does not mean that we’re stealing from future generations'.   The larger the U.S. debt grows — including the so-called 'trusts' — the larger the burden that will be borne by future taxpayers.

Here are more details on how the government trusts are a liability to U.S. taxpayers.  If you are a U.S. taxpayer, you pay for the U.S. trust funds, they do not pay for you —
     http://maxautonomy.blogspot.com/2015/05/the-trust-fund-tolls-for-thee.html

And notice the glaring contradiction in Krugman's comment that private lenders alone have a tendency to become 'irrationally exuberant'.   I suppose this is his shorthand code to readers who wish to pretend that government requirements had nothing to do with the financial crisis of the Great Recession.   This notion that governments are consistently rational and responsible, in contrast to the private sector, is so utterly ridiculous there is no reason to comment on it.   Anyone who responds affirmatively to such a comment is simply expressing a blindness driven by a biased agenda.   The crises, strife, and misery, caused directly by the world's governments are too widely well known to be worthy of mention.

To those who would now launch into a diatribe about the obvious harm that has been caused by private companies (no argument here), I would only say that your moral compass and your ability to measure harm are a bit off.   Good luck.

Of course, this is consistent with Krugman's mantra that all government spending has some magical ability to create well being, whereas private sector spending or saving does not.  That Krugman would be comfortable in repeating such a ridiculous claim, as well as 'Debt Is Money We Owe To Ourselves', is a testament to how insulated he is from any real criticism.

So much for the Nobel prize.

The 'Social Security Is Insurance' Fallacy

In a previous post, I commented on a blog post by an economics professor at the University of Oregon named Mark Thoma, where Thoma made the fallacious claim that Social Security functions like an insurance policy against economic risk.
     http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html
     https://archive.is/8Y8Yl

In his blog post Thoma references another blog post that gives details of a hypothetical risk pool, in an attempt to prove that Social Security functions like an insurance policy.

One reader of Thoma's blog pointed out the obvious error of comparing Social Security to an insurance policy, and Thoma simply instructed the commenter to read this link he referred to in his article —
     http://angrybearblog.com/2004/12/social-security-part-i-insurance-and.html
     https://archive.is/FWRVE

The reader's comment is worth reading, since it gives a better description of Social Security than the one Thoma provides — and one that isn't countered by Thoma's blog post, or the post he instructs the commenter to read --

---

Curt Doolittle said...

Pretty big error in logic you have going on there.

We can insure against fire, because not every house will burn.
We can, all of us, contribute a little, for the very few who need it.
If we require fire insurance, we do not create a moral hazard, we create a virtuous cycle of fire-reduction.

If we insure against old age, we must insure everyone, because nearly everyone will become old.
We must all contribute a great deal, because almost all people will need it.
If we require old age insurance, we create a moral hazard, whereby people do not save, and money is spent rather than saved and invested.

Social security is a transfer program.
If it were a forced savings program it would be a form of insurance.
It cannot be a risk mitigation program because risk mitigation requires a probability of less than 'certainty'. Therefore it is NOT a risk mitigation program.
It is an inter-generational, risk inducing, fragility-inducing, moral hazard.
if you want to make a social security program, enforce savings on everyone, and redistribute some portion of the very top to the very bottom.

Monday, March 07, 2011 at 07:22 PM

Mark Thoma said in reply to Curt Doolittle...

Read the AB link.

---

So let's look at the blog post that Thoma keeps referring to, to see if it is as convincing as he seems to think.

The credibility of the author of this post is given away in the first paragraph quoted below, in the statement that Social Security is solvent 'conditional on minor adjustments'.  Social Security already earns a negative return when compared with other alternatives, so this language describing Social Security's solvency hides the obvious point that the only way Social Security can remain solvent is by making everyone who contributes poorer — given that they are already losing part of their retirement savings by contributing to Social Security at all --

---

http://angrybearblog.com/2004/12/social-security-part-i-insurance-and.html
https://archive.is/FWRVE

...
As mentioned already, the basic solvency of Social Security (or solvency conditional on minor adjustments) is established, so I’d like to instead address the basic merit of the program. My argument centers on the fact that Social Security is really insurance. In fact, the phrase “Social Security” is typically used as shorthand for “Social Security Retirement Insurance.”

What’s so special about insurance? As it turns out, the vast majority of the population dislikes risk, and will pay money (e.g., insurance premiums) to avoid the consequences of risk. I’ve surveyed my students and asked whether they would prefer a job that has equal odds of paying $75k or $125k (expected income = $100k) to a job that paid $90k with certainty. Almost all prefer the $90k, meaning they would pay up to $10k (by having an expected income of $90k instead of $100k) in order to not have to face income swings of +/-$25k; many would pay more.(*)
...

---

Pay special attention to the use of the phrase 'equal odds' in the description above of the risk being insured against in this hypothetical risk pool — given that the author is attempting to make the case that Social Security is insurance, there is already a large potential problem in his argument.

---

http://angrybearblog.com/2004/12/social-security-part-i-insurance-and.html
https://archive.is/FWRVE

...
In such a situation, if people can pay less than $10,000 to avoid such risk then real economic value is created. And in fact, this happens in the real world all the time. Consider a group of 100 people, each of whom faces this hypothetical gain or loss of $25,000. Let’s see how they can benefit by pooling risk.

First, what is the social cost of the risk faced by this group of people? By hypothesis, it’s worth $10,000 to each of them to avoid the +/-$25,000 risk. So the mere presence of this risk creates a cost of 100 * $10,000 = $1,000,000. If we can figure out a way to reduce this risk, there’s the potential to create an additional $1m (100 people at $10,000 each) in value for this group.

How does a risk pool work? With just 100 people, there is near mathematical certainty (about .997, based on the sum of 100 Bernoulli draws, which follows a binomial distribution) that a minimum of 35 people will “win,” gaining $25k. The vast majority of the time at least 40 will win and, on average, 50 will win and 50 will lose. Should only 35 people gain $25,000 while 65 lose $25,000, then the group will have lost (35 – 65)*$20k = $600,000. Thus the simplest form of insurance entails each member paying a premium of $6,000, creating a pool of 100 * $6,000 = $600,000 to cover the group’s potential losses.
...

---

Notice that there is a huge problem in the calculations in the last paragraph quoted above, which are intended to show an unusually high payout from the risk pool (a worst case example), where 65 participants made $75,000 (vs. 35 making $125,000), and so well over 1/2 of the risk pool participants had to file a claim against the pool for that lost $25K.  The 35 people who had the optimum outcome and 'won' the $25K won't file a claim against the risk pool — they'll simply pay their premium again, assuming they wish to continue their coverage to avoid the worst case outcome of only earning $75,000 (following the assumptions given in the quotes from the blog post).

So, to compute the payout from the risk pool when 65 people file claims, you simply multiply the number of claims by the dollar amount of those claims — in this case, 65 * $25,000, or $1,625,000.

In short, this risk pool of 100 policy holders will pay out on average 50 * $25,000, or $1,250,000 every policy period, given the assumption that each participant had equal odds of making $75,000 in a given period, and so incurred the hypothetical $25,000 loss.

This would require each member of the risk pool paying a minimum policy premium of $12,500, since it would be unreasonable to assume that fewer than 1/2 of the policy holders would file claims, given that it is equally likely that each policy holder earns either $75,000 or $125,000 (again, per the hypothetical example).

It makes sense that the policy premium for the average case would be 1/2 the coverage amount, given the assumption of the hypothetical example that each policy holder has equal odds of filing a claim for any given period — so in order for the risk pool to even have a chance of remaining solvent, it must at a minimum collect 1/2 of the coverage amount from every policy holder, since in most policy periods at least 1/2 of the policy holders will be forced to file a claim for the coverage amount.

The example calculation in the blog post of 65 losers and 35 winners, showing a group loss of $600,000 makes no sense (for consistency the blog post should show the group loss as (35-65)*$25k = -$750,000, but it still wouldn't be meaningful), since the 35 who 'won' only share in the loss with the policy premiums they paid — the risk pool must pay for the covered losses from the premiums already collected, and so the policy holders who did not incur a covered loss are not filing a claim and have no effect on the payouts required by the risk pool.

For the example given in the blog post, where 65 claims were filed, the risk pool would have to pay $25,000 to 65 policy holders.  If the risk pool did not collect at least $1,625,000 in total premiums for all the policies ($16,250 per policy holder), or did not have enough capital in reserve to cover any shortfall, the pool would not be able to pay those claims, and it would become insolvent.

Why would anyone claim that an insurance policy premium of $6,000 dollars from 100 policy holders (for a total of $600,000), would cover a loss to 65 policy holders of $1,625,000 (65 claims for $25,000)?

A risk pool has to be managed to handle a worst case loss, so even a policy premium of $12,500 is too low for this hypothetical pool, given that this is the expected payout per policy holder — a risk pool has to collect more in premiums than the most likely payout to avoid going bankrupt, so the policy holders must pay more than $12,500 for this hypothetical pool to even have a chance of working.

So clearly, the first paragraph quoted below is false — $6,000 won't come close to funding a risk pool where every policy holder has a 50% chance of filing a claim for a coverage amount of $25,000 --

---

http://angrybearblog.com/2004/12/social-security-part-i-insurance-and.html
https://archive.is/FWRVE

...
That is, if each member pays $6,000 for insurance, they can create a pool large enough to cover the group’s losses even in the worst of states. (Should the worst of states not occur, the balance can be repaid to the group as dividends, pushed into the next year’s pooled funds, or retained by the insurer as profits.) Stated differently, without insurance each member of the group faces a risk of income as low as $75,000. By pooling risk, no member of the group faces a risk of income below $94,000.

Moreover, as more people join the risk pool, the law of large numbers tells us that the risk is reduced further and further. In fact, with 10,000 people in the risk pool, the premium required to cover the group’s maximum total losses (in all but about 3/1000 cases) is only $500, instead of $6,000. That is, with a reasonably large group of people sharing risk, each can pay $500 and the risk is entirely eliminated. How much economic value is created by this? As I explained earlier in this post, real people in the real world are willing to pay amounts in the $10,000 to $15,000 range to avoid income swings on the order of +/-$25,000. But in the presence of insurance, these 10,000 people only have to pay $500. So in this hypothetical example, insurance — risk-pooling over a large group of people — creates $9,500 in economic value per person. (**)

What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time — every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That’s the nature of insurance: if you don’t need it, then you’ll always wish you hadn’t purchased it. Only in the context of retirement insurance is this considered a crisis.
...

---

Also notice that the second paragraph quoted above is false.

That is, the Law of Large Numbers tells us nothing that allows us to reduce the policy premiums as the number of policy holders increases, since the Law of Large Numbers simply states that if an experiment for a particular random variable is repeated a large number of times, the average of the results should approach the expected value.  For example, if you flip a fair coin millions of times, you will find that you get very close to an equal number of heads and tails — even though there can be long runs of consecutive flips that repeat one side of the coin.

If you estimated the probability of a real-world random event at 50% (as in this hypothetical risk pool), you could prove that your estimate was correct by performing (or observing) a large number of trials.  If as the number of trials grew, the average of all the results didn't trend toward your expected value, you would know your estimate was incorrect.  But even if an estimated probability matches the outcomes in the real-world, that doesn't mean a long sequence of outcomes can't happen that don't match the expected value.

Using the hypothetical risk pool as an example, the Law of Large Numbers tells us that after a very large number of policy periods has passed, the number of claims filed should get closer and closer to: (1/2 the number of policy holders * the number of policy periods) — that is, a claim will be filed on average 1/2 the time, if policy holders really do have a 50% chance of losing $25,000 (of earning only $75,000), as given in the quoted description of the hypothetical risk pool.  But this doesn't mean it's impossible for a large number of consecutive policy periods to pass where well over 1/2 the policy holders incur the $25,000 loss and must file claims.

So for the hypothetical risk pool, a policy premium of $12,500 is still too low, regardless of the number of policy holders, since with a real-world claim probability of 50%, after a large enough number of policy periods, it's highly likely that at some point there will be a run of consecutive policy periods where well over 1/2 of the policy holders file claims, and without a large reserve the risk pool will become insolvent, since in that case much more than 50 * $25K would be required to cover the claims.  The Law of Large Numbers tells us that over the long haul, the total amount paid by this risk pool will trend toward the expected value of a 50% payout rate, given the assumption of equal odds for a loss or a gain to policy holders.  That is, the total will trend toward: ((1/2 the number of policy holders * $25,000) * the number of policy periods).  The Law of Large Numbers does not tell us that a large number of consecutive worst case losses are impossible because the number of policy holders is increasing.

Assuming that a long run of a particular outcome for a random variable decreases the probability of that outcome in the future is called the 'gamblers fallacy'.

That is, consecutively flipping heads 10 times has no effect on the probability that heads will come up on the 11th flip, since each flip is an independent event.

In any case, it is clear that there is nothing in this hypothetical risk pool example to support the claim that Social Security is insurance.

Never mind that the numbers this author uses in his example do not make any sense, and are not supported by anything he wrote — why would he use a 50% probability for an example he was attempting to relate to a forced U.S. government retirement plan that pays to everyone who reaches the age of 70, when the life expectancy in the U.S. was estimated to be over 77 years, as of 2004, when that post was written?  Obviously, using 50% as the probability for a hypothetical event that you're attempting to relate to a real life probability that is close to 100% makes no sense.

This author's risk pool example does not work, because the numbers he uses do not cover the risk he described, but if you plug a 90% probability for filing a claim into his example it really blows up, and makes it obvious why this comparison is nonsense — you cannot use a risk pool to insure against a near certainty, because everyone who participated in such a pool must pay in the full cost of that outcome.

In a previous post on Social Security, I mentioned the nonsensical example of 'Grocery Insurance', to illustrate the point that you would not try to create an insurance plan to cover a cost that everyone incurs all the time — it would make no sense, since it would do nothing but increase a cost that you had to incur by necessity, by adding the additional cost of managing the risk pool.

So no one would buy 'Grocery Insurance' (even if it existed), because such insurance would cost more than the covered groceries (such an insurance plan would not remain solvent, if this were not the case), and so purchasing such insurance would reduce the quantity of groceries that one could purchase.

Social Security has exactly the same effect.  Since the government does not invest surplus Social Security contributions into productive investments that earn a positive return to taxpayers (taxpayers must pay any interest on the government securities held in the 'trust fund', so those securities are a liability to taxpayers, not an asset), the costs to run the Social Security administration to perform the transfer payments only reduce the amount that retirees would have, had they been able to simply save that money in a private account.  That some contributors receive more from Social Security than they contributed in payroll taxes does not alter the situation — without a steadily increasing population, Social Security cannot pay more to any participants than they have contributed, without taking the difference from other taxpayers.  Social Security is a negative sum game — in that sense it is like insurance, but bad insurance that rarely covers the full cost of a loss — but that is a damning criticism, not cause for celebration.

And notice how the author attempts to dismiss criticisms of Social Security — as if people are calling it a crisis only because some had to pay into it, but ended up not needing it, rather than the real point, that the so-called trust fund only contains claims on future taxpayers — that is, U.S. government securities, which are a liability to future taxpayers, that do nothing to fund future retirement costs.

Given how bad Mark Thoma's blog post is, it is not surprising that a post he refers would be just as bad (if not worse).

Another Economist Misrepresenting Social Security

In a previous post, I commented on the rare honesty from the public regarding Social Security.  In that post, I pointed to an article by Robert Samuelson, because Samuelson correctly described Social Security as welfare, and because he received many angry replies in response —
     http://www.washingtonpost.com/wp-dyn/content/article/2011/03/06/AR2011030602926.html

Here's a shockingly bad blog post by Mark Thoma, an economics professor at the University of Oregon, in which Thoma attempts to rebut Samuelson's claim that Social Security has all the essential features of a welfare program —
     http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html

In his attempt to refute Samuelson, Thoma uses an old fallacy in his blog post — that Social Security is an insurance program, similar to fire insurance.

I refuted the 'Social Security is insurance' fallacy in a previous post, since that fallacy is often repeated by people who wish to pretend that Social Security is a successful social program, and who can't answer legitimate criticisms of Social Security.

I called Thoma's blog post 'shockingly bad', because Thoma is an economics professor at a major university, and his post includes some obviously false statements, in addition to misuses of the term 'transfer payment' — which is a standard term, defined in introductory economics text books --

---

http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html

Social Security is *Not* Welfare

Robert Samuelson is making the same wrong argument about Social Security being welfare that he's been making for years:

Why Social Security is welfare, by Robert J. Samuelson: ...Here is how I define a welfare program: First, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits. And second, Congress can constantly alter benefits, reflecting changing needs, economic conditions and politics. Social Security qualifies on both counts.

Since he is rolling out the same old column (and apparently getting paid for it), I'll just roll out the same old response. This is from March, 2005, just a few weeks after I started this blog:

Fire Insurance is not Welfare and Neither is Social Security: Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson:

Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare...

Not it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not "mainly welfare."

---

Notice how Thoma mocks Samuelson for supposedly 'rolling out the same old column', even though the only thing Thoma can do in response is make a false comparison between Social Security and an insurance policy.

If it's true that Samuelson keeps 'rolling out the same old column', that's a good thing, because it will help to remind honest people of the problems with Social Security — especially when a professional economist like Thoma can't provide an effective rebuttal, while still being convinced that he should write a blog post in response.

It isn't clear why anyone would believe that Social Security functions like an insurance policy, since there are obvious and important differences between them — so much so, that no useful comparison can be made between the two.

When you purchase an insurance policy you are paying a fee (the policy premium) to be in a risk pool, in order to receive a payment for some uncommon harmful event.  Thoma uses the example of fire insurance in his blog post, and a fire insurance policy only pays out in the unlikely event that a covered item (like your home) is damaged by fire.

Risk pools can only function by charging a fraction of the replacement cost of whatever is being insured, and by only paying out to a small fraction of the policy holders.

If every insurance policy holder of a particular insurance company were to suffer a significant loss that required a large payment from the insurance company, the insurance company would fail for dramatically underestimating the risk of the policies it issued, and the policy holders would receive only a fraction of the promised policy benefit — if they received anything at all.

None of these risk pool characteristics apply to Social Security.

Every working adult who lives past the maximum Social Security retirement age (70 in 2015) will receive Social Security payments, since the Social Security Administration automatically begins sending checks to contributors who reach age 70 — unless they apply to receive the payments even sooner, prior to reaching the maximum retirement age.

Not only do all Social Security contributors expect to receive benefits — they expect to receive more than they paid into the plan — just like a savings account.

That's the reason you can find studies like this, that compare Social Security to a private investment account — people expect their Social Security contributions to earn a positive return, not a negative return like an insurance policy —
     http://research.stlouisfed.org/publications/review/05/03/part1/GarrettRhine.pdf

In short, it's common knowledge that people who have been forced to contribute to Social Security expect it to perform as a pension plan or saving program, despite Thoma's insistence that people should view Social Security as an insurance policy.

Since every working person expects to draw on Social Security (and will, provided they live long enough), it can't function like an insurance policy, taking in small premium payments to make rare payments to a small group of policy holders in the event of a catastrophe.

And since people are happy to never collect on an insurance policy, since then they are spared the tragedy that would cause a payment under the terms of their policy, their view of Social Security stands in direct contradiction with their view of insurance.

Note that this comparison of Social Security with an insurance policy isn't just somewhat confused — it's completely absurd at its root, since becoming too old to work is not an economic risk from a rare occurrence, as Thoma wrote — it happens to everyone, which is why Social Security will pay to every contributor who lives long enough.

Comparing Social Security with a risk pool is obvious nonsense, since drawing on any retirement plan in old age isn't a rare catastrophe — it's a necessary condition for every person who lives long enough.  If only a small minority of people ever wished to retire, or lived to an age where they could not work, comparing Social Security with an insurance policy would make sense, since then the condition it was intended to address would be a rare occurrence — like one's home burning down.

In the next several paragraphs, Thoma demonstrates more confusion over the term 'transfer payment', as well as attempting to strengthen his comparison between insurance and Social Security, by writing that different people will collect different amounts from Social Security, just as they do with insurance policies.  Different people will also collect different amounts from state lotteries — does that mean a lottery is also the same as an insurance policy and Social Security? --

---

http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html

Just because an economic activity transfers income from one person or group to another does not make it welfare. Fire insurance transfers income. Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not.

Social Security is no different, it is an insurance program against economic risk as I explain in this Op-Ed piece. Some people will live long lives and collect more than they contribute in premiums, some will die young and collect less. Some children will lose their parents and collect more than their parents paid into the system, others will not. But this does not make it welfare.

Is gambling welfare? Gambling transfers income from one person to another. Does that make it welfare? Loaning money transfers income when the loan is paid back with interest. Are people who receive interest income on welfare?

---

Notice how badly Thoma confuses the definition of the term 'transfer payment'.

A 'transfer payment' is a redistribution of income, not a payment for goods and services, as Thoma states in his description of gambling and loan payments.  Here's a common definition —

A noncompensatory government payment to individuals, as for welfare or social security benefits.

One economics text I have defines transfer payments as —

payments made to individuals for which no goods or services are concurrently rendered.

The same economics text lists the three key money transfers in the U.S. system as welfare, Social Security, and unemployment insurance benefits.

Transfer payments are not counted in the national income, because they do not constitute an exchange of goods and services — money is simply being taken from one person and given to another, for no economic benefit — which is the main reason Samuelson called Social Security welfare.  Thoma's examples of gambling and money lending do not meet the definition of a transfer payment, because both examples constitute a payment for service — that is, a voluntary payment given for economic benefit.

In the quote below, Thoma acknowledges that welfare is a transfer payment (using the traditional definition) — but he attempts to isolate welfare in a special class of transfer payments he calls 'pure money transfers', which he acknowledges provide no economic gain, since they are a zero sum game — but Thoma hangs on to his false analogy that Social Security is insurance (even though, short of an early death, retirement is a certainty), in an attempt to pretend that Social Security does not fit his description of a 'pure money transfer' perfectly --

---

http://economistsview.typepad.com/economistsview/2011/03/social-security-is-not-welfare.html

There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives). ...
Angry Bear agrees with me on this and the two of us have been independently saying the same thing (in fact, I first encountered AB in a Google search on Social Security, insurance, and risk). As AB said (the full text is well worth reading):

What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.
On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist.
This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.

When I think of welfare, I think of pure money transfers from one group to another without any economic basis for the transfer. In such cases, one person’s gain arises from another’s loss. But economic activity that results in the exchange of goods and services is different. It is not a zero sum game. One person’s gain does not come at the expense of someone else.

The main feature of Social Security is not welfare as Samuelson asserts. The main feature is insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading and causes unnecessary class distinctions and resentments from the losers ex-post. More importantly, it ignores and obscures the important role Social Security plays in society as insurance against the economic risks we all face.

If you think you are so rich and powerful that you don’t need such insurance, consider this. The stock market collapse of 1929 at the onset of the Great Depression wiped out substantial quantities of wealth. The typical stock was worth only one sixth its pre-crash value once the bottom was reached. Whatever insurance existed in the stock market evaporated as the crash unfolded.

It wasn’t the poor jumping out of windows on Wall street. If you think it can’t happen to you, think again.

---

Notice that the supposed 'pure money transfer' quality that Thoma ascribes to welfare, does nothing to differentiate welfare from Social Security, even given his description of Social Security as a form of insurance against economic risk — it's just as easy to view welfare as an activity that results in the exchange of goods and services.  Welfare is more properly viewed as a form of insurance against economic risk than Social Security, given that the vast majority of people will pay taxes to support the economic assistance that welfare provides, but will never need that assistance themselves.

That is, welfare really can operate like a risk pool — an insurance policy against economic risk — because the condition for which it applies — the inability to support oneself at a subsistence level — is a relatively uncommon condition in society overall, whereas the need of individuals to retire from working to support themselves is not.  Welfare in any form would not be possible if poverty were the norm, since it would be impossible for a small minority of people to support a group many times their size at a subsistence level.

And notice that Thoma does not even address another critical point that Samuelson made regarding Social Security that makes it a welfare plan — there is no promise of any benefit.

Samuelson points out that Congress has repeatedly altered benefits, and that people only complain when they reduce benefits, as if a 'contract' (like an insurance policy) has been broken.  Samuelson then points out the 1960 Supreme Court decision Flemming v. Nestor, where the court explicitly rejected the argument that Social Security contributors have a contractual right to Social Security benefit payments.

How well would an insurance policy work, if an insurance company could change the terms of an existing policy at their whim?  No reasonable person would purchase such a policy, since it would not offer any real protection for the economic risk they were attempting to protect themselves against.  With this in mind, no government program can be viewed as insurance, since no government program makes a specific promise of a benefit that is enforced by law.

As I read Thoma's blog post, I kept having to remind myself that he is a professional economist at a major university.  I feel sorry for any students that must take his classes.

Rare Honesty On Social Security

I've written a number of posts on Social Security, because there are obvious fallacies about it that get repeated over and over again in the press.  Even professional economists will make ridiculous claims about the so-called 'trust fund', as if it's a great asset, ignoring the obvious fact that all government securities are a liability to taxpayers — including those purchased with surplus Social Security payroll deductions.

In one previous post I described all government social welfare programs (including Social Security) with the intentionally oxymoronic phrase 'forced charities', because such welfare programs must operate via coercion, given that governments can only provide to one individual what they have taken from another — whereas charity is voluntary.

If you recall the Bernie Madoff scandal, you know that Madoff made large sums of money defrauding wealthy investors with a Ponzi like investment scheme.  As with all Ponzi schemes, Madoff would pay some investors with the money he received from other investors — as long as new investors were opening accounts, Madoff could keep the fraud going.  Of course, with a private scheme of this kind, collapse is inevitable once the number of investors stops growing fast enough to make the necessary payouts.

In an attempt to restore victims of Madoff's fraud after it collapsed, courts have allowed the bankruptcy case trustee, Irving Picard, to 'clawback' some of the fictitious profits from Madoff's customers who withdrew more from their accounts than they invested.  Since Madoff investors with a positive return were paid with money Madoff received from other investors, rather than the returns from profitable investments, such investors had no right to keep those payments.

Note that a Social Security recipient is in an even worse position than a Madoff investor regarding a rightful claim to payment, in that they're also not paid from an account in their name that has earned a return over the years — they're paid by current workers — but their original investment can't even rightfully be returned, having long since been spent by government.  Social Security doesn't have vague similarities to a Ponzi scheme — it's identical in every respect.

In the case of Social Security, the government is Bernie Madoff, paying current retirees from the payroll deduction it receives from workers, and spending any money that is left over on whatever it wants, via the purchase of government bonds (the so-called trust fund) which puts the surplus in the government's general fund to be spent.

Here's a table from the 'CBO - An Update To The Budget And Economic Outlook: 2014 to 2024', which shows that mandatory spending — which is dominated by Social Security, Medicare, and Medicaid — accounts for about 60% of federal budget outlays.  Notice the budget deficit is projected to grow by over 40% (-$680B to -$960B) from 2013 to 2024.  There's no reasonable way to address that problem without making changes to those programs, including Social Security --

---

http://www.cbo.gov/sites/default/files/45653-OutlookUpdate_2014_Aug.pdf

---

There are some lonely critics of Social Security out there, but what they write is largely met with anger from the public.

Here's Walter Williams, John M. Olin Distinguished Professor of Economics at George Mason University, talking about the 'uglier mail' he gets when he writes about problems with government programs for the elderly.  He points out here what a terrible deal Social Security is for future recipients --

https://www.youtube.com/watch?v=30pjl3y_HLE

Here's Robert Samuelson pointing out that Social Security meets the definition of a welfare program, because it taxes one group to pay another.  He wrote this column in reply to angry responses he received for describing Social Security as 'middle-class welfare' --

---

http://www.washingtonpost.com/wp-dyn/content/article/2011/03/06/AR2011030602926_pf.html

Why Social Security is welfare
By Robert J. Samuelson | Monday, March 7, 2011;

In a recent column on the senior citizen lobby, I noted that Social Security is often "middle-class welfare" that bleeds the country. This offended many readers. In an e-mail, one snarled: "Social Security is not adding one penny to our national debt, you idiot." Others were more dignified: "Let's refrain from insulting individuals who have worked all their lives and contributed to the system for 50-plus years by insinuating that [their] earned benefits are welfare." Some argued that Social Security, with a $2.6 trillion trust fund, doesn't affect our budgetary predicament.

Wrong. As a rule, I don't use one column to comment on another. But I'm making an exception here because the issue is so important. Recall that Social Security, Medicare and Medicaid, the main programs for the elderly, exceed 40 percent of federal spending. Exempting them from cuts - as polls indicate many Americans prefer - would ordain massive deficits, huge tax increases or draconian reductions in other programs. That's a disastrous formula for the future.

We don't call Social Security "welfare" because it's a pejorative term, and politicians don't want to offend. So their rhetoric classifies Social Security as something else when it isn't. Here is how I define a welfare program: First, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits. And second, Congress can constantly alter benefits, reflecting changing needs, economic conditions and politics. Social Security qualifies on both counts.

Let's start with its $2.6 trillion trust fund. Doesn't this prove that people's payroll taxes were saved to pay for future benefits, disconnecting them from our larger budget problems? Well, no. Since the 1940s, Social Security has been a pay-as-you-go program. Most benefits are paid by payroll taxes on today's workers; in 2010, those taxes covered 91 percent of benefits. The trust fund's $2.6 trillion would provide only 3.5 years of benefits, which totaled about $700 billion in 2010.

The trust fund serves mainly to funnel taxes to recipients, and today's big surplus is an accident, as Charles Blahous shows in his book "Social Security: The Unfinished Work." In 1983, when the trust fund was nearly exhausted, a presidential commission proposed fixes but underestimated their effects. The large surplus "just developed. It wasn't planned," the commission's executive director said later. Even so, the surplus will disappear as the number of retirees rises.

Similarly, Congress has repeatedly altered benefits. From 1950 to 1972, it increased them nine times, including a doubling in the early 1950s. In 1972, it indexed benefits to inflation. People didn't complain when benefits rose, but possible cuts now trigger howls that a "contract" is being broken. Not so. In a 1960 decision ( Flemming v. Nestor ), the Supreme Court expressly rejected the argument that people have a contractual right to Social Security. It cited the 1935 Social Security Act: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to Congress." Congress can change the program whenever it wants.

All this makes Social Security "welfare." Benefits shift; they're not strictly proportionate to wages but are skewed to favor low-wage earners - a value judgment reflecting who most deserves help; and they aren't paid from workers' own "contributions." But we ignored these realities and encouraged people to think they "earned" benefits and that Social Security is distinct from the larger budget. Politicians, pundits, think-tank experts and journalists engaged in this charade to spare Social Security's 54 million recipients the discomfort of understanding they're on welfare.

A relatively small elderly population sustained these fictions. Now, this is no longer possible. Contrary to the Obama administration's posture, Social Security does affect our larger budget problem. Annual benefits already exceed payroll taxes. The gap will grow. The trust fund holds Treasury bonds; when these are redeemed, the needed cash can be raised only by borrowing, taxing or cutting other programs. The connection between Social Security and the rest of the budget is brutally direct. The arcane accounting of the trust fund obscures what's happening. Just as important, how we treat Social Security will affect how we treat Medicare and, to a lesser extent, Medicaid.

It is because these programs involve middle-class welfare that cuts could occur without inflicting widespread hardship. All the elderly aren't poor. In 2008, a quarter of families headed by someone 65 or older had incomes exceeding $75,000. No doubt people would be outraged. Having been misled, they'd feel cheated. They paid their taxes, why can't they get all their promised benefits? But the alternative is much worse: imposing all the burdens on younger taxpayers and cuts in other government programs. Shared sacrifice is meaningless if it excludes older Americans.

---

Here's Walter Williams also making some of the same points — that Social Security is welfare, and that there is no promise of a benefit — but he also points out that Congress has changed the description of Social Security over the years, which has helped to create the false belief among Americans that individual taxpayers have a Social Security 'account', when that is certainly not the case --

---

http://econfaculty.gmu.edu/wew/articles/13/CongressionallyDupedAmericans.htm
http://www.creators.com/conservative/walter-williams/congressionally-duped-americans.html
http://townhall.com/columnists/walterewilliams/2013/11/06/congressionally-duped-americans-n1736128/page/full

Congressionally Duped Americans

Walter E. Williams | Nov 06, 2013

Last week's column, "Is There a Way Out?", generated quite a few responses, some a bit angry. Some people were offended by my reference to Social Security and Medicare as entitlements or handouts. They said that they worked for 45 years and paid into Social Security and Medicare and how dare I refer to the money they now receive as an entitlement. These people have been duped by Congress and shouldn't be held totally accountable for such a belief. Let's examine the plethora of congressional Social Security lies. I'll leave the Medicare lies for another column.

The Social Security pamphlet of 1936 read, "Beginning November 24, 1936, the United States Government will set up a Social Security account for you. ... The checks will come to you as a right" (http://tinyurl.com/maskyul). Therefore, Americans have been led to believe that Social Security is like a retirement account and money placed in it is their property. The fact of the matter belies that belief.

A year after the Social Security Act's passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis. The court held that Social Security is not an insurance program, saying, "The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way." In a 1960 case, Flemming v. Nestor, the Supreme Court held, "To engraft upon the Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands."

Decades after Americans had been duped into thinking that the money taken from them was theirs, the Social Security Administration belatedly — and very quietly — tried to clean up its history of deception. Its website explains, "Entitlement to Social Security benefits is not (a) contractual right." It adds: "There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense.

... Congress clearly had no such limitation in mind when crafting the law" (http://tinyurl.com/49p8fl2). The Social Security Administration failed to mention that it was the SSA itself, along with Congress, that created the lie that "the checks will come to you as a right."

Here's my question to those who protest that their Social Security checks are not an entitlement or handouts: Seeing as Congress has not "set up a Social Security account for you" containing your Social Security and Medicare "contributions," where does the money you receive come from? I promise you it's neither Santa Claus nor the tooth fairy. The only way Congress can send checks to Social Security and Medicare recipients is to take the earnings of a person currently in the workforce. The way Congress conceals its Ponzi scheme is to dupe Social Security and Medicare recipients into thinking that it's their money that is put away and invested. Therefore, Social Security recipients want their monthly check and are oblivious about who has to pay and the pending economic calamity that awaits future generations because of the federal government's $100 trillion-plus unfunded liability, of which Social Security and Medicare are the major parts.

Pointing to the congressional lies and future economic chaos is not the same as calling for a cessation of checks going out to recipients. Instead, it's a call for the recognition that we've made a mistake that needs to be corrected while there's time to avoid a calamity. It's also a call for us to recognize that we all share in the blame and hence the burden to make it right. Politicians have little interest in doing something about an economic calamity that will happen in 2030 or 2040; they only care about the next election. Older Americans, who own most of the political clout, must lead the fight to get Congress to do something about entitlement programs. Of course, the alternative is continued belief in the Social Security and Medicare myth and the heck with future generations.

---

The Will To Believe

The web site pyramidschemealert.org is aimed at educating and warning people about pyramid schemes.  Ironically, that web site has a page that attempts to educate people as to why Social Security is not a Ponzi scheme.  Posted in September 2011, the page is entitled 'Is Social Security a Ponzi Scheme?' —
    http://pyramidschemealert.org/is-social-security-a-ponzi-scheme

Here are the main points from that page --

---

 ...
Fact, Not Opinion: Social Security Is Not a Ponzi Scheme
Here’s why:
• Social Security does not require an ever-growing base of new contributors. It is sustainable.
• The rate at which we each contribute to Social Security is calibrated to be sustainable, and if there’s a big change – in birth or death rates or unemployment – it can be recalibrated.
• Social Security does not employ concealment or deception. It is fully disclosed.
• Social Security is exactly what it claims to be, a mandated, government operated insurance program. It is not a private, individual investment program. It is a national, social insurance system. As in all legitimate insurance, the transfer of money is intentional and financially sound.

Social Security’s sustainability is a matter of mathematically verifiable fact, not opinion. Ponzi schemes, which are not sustainable and which rely on deception, are identifiable. They have traits that separate them from legitimate sales businesses, insurance and investment programs. This is a matter of fact, not opinion.      ...

---

Regarding the first bullet point above, note that the OASDI trustees report from 2011 discusses the unsustainable imbalance between Social Security's income and costs, due to the increase in retirees vs. workers —
      http://www.ssa.gov/oact/tr/2011/II_E_conclu.html
      https://archive.is/L4mcb

So even in 2011 when that pyramidschemealert.org page was written, Social Security was in trouble because the costs were already exceeding the program's income, since the number of workers had not increased to overcome the increased number of retirees drawing benefits due to the aging baby-boom generation.  In other words, the first bullet point is clearly false — Social Security requires a much larger number of workers paying into the system, than retirees receiving benefits, or it won't perform well (never mind failing).

Also, notice this article from a fellow at the Brookings Institution that repeats this point about the imbalance, but goes on to claim there's no immediate problem.  Why?  Because the interest income on the trust fund is NOT being counted, and that the nation's private pension system is also normally in this 'cash negative' situation — of course, the author of this article doesn't mention the obvious point that Social Security's interest income is paid from taxes, since the so called Social Security 'trust fund' holds government treasuries, so any Social Security income is yet another expense that must be paid by future taxpayers — that is, the so called income from Social Security's 'investment' must be paid by the plan participants — this is certainly not the case with private pension plans holding real investments that generate income that is not paid by the plan participants —
   http://www.brookings.edu/research/opinions/2011/11/16-social-security-burtless

Going back to the pyramidschemealert.com bullets, the second bullet point listed above is using euphemistic language that explains nothing.  Of course, Social Security can be 'recalibrated' to even further reduce the return — this is something that has already happened (such as raising the retirement age), and will continue to happen — this has no relevance to the question of Social Security being a Ponzi scheme.  How does making Social Security even less effective by 'recalibrating' it, make it NOT a Ponzi scheme.  Charles Ponzi could also have 'recalibrated' his postal coupon scheme by paying investors a much smaller return to make that fraud seem sustainable.

The third bullet point above is a total non-sequitur — disclosing the structure of anything has no effect on what the structure actually is, and whether that structure constitutes a Ponzi scheme.

The fourth bullet point, that states Social Security is an insurance program, confuses the nature of insurance.  Insurance plans are risk pools that pay out for uncommon events.  This must be the case for an insurance plan to be economically viable, since insurance plans must pay out less than they collect in premiums to remain solvent.  So, insuring a regular expense must cost more than the expense itself.  Who will not draw on SS when they reach retirement?   Every SS contributor will draw benefits when they retire, making it impossible for SS to function as a typical insurance plan, taking in a small fraction of the normal benefits it pays to a beneficiary.  This is 'Sandra Fluke Insurance' — trying to fund a risk pool for normal expenses that have close to a 100% probability of occurring, with a fraction of that cost (think of why you can't buy 'Grocery Insurance' to cover your food costs — the plan would have to cost more than the typical person spends on food, so it wouldn't be cost effective to purchase such insurance, even if it were offered).

Here's another odd quote from the same page on pyramidschemealert.org --

---

The program pumps $727 billion into the economy in benefits each year. Additionally, the reserves are invested in our government bonds and earn interest.

---

This is an obvious begging the question fallacy — where did the $727 billion come from?  Social Security payments to beneficiaries must be taken out of the economy before they can be paid.  It's absurd to claim that such payments benefit the economy — Social Security payments must be a net loss to the economy, after administrative costs (however small) are taken into account.  And note, again, the fallacious statement that the interest paid on government treasuries should be viewed as income, and so taxpayers who must make these interest payments should view them as a benefit.

There is one crucial respect in which Social Security is not a Ponzi sheme — Charles Ponzi had no way to force people into his scheme, so it had to fail before it could harm the entire population.  Given the ability of government to force people into Social Security, it's inevitable that the entire population will suffer.  Notice that the vast majority of even current recipients receive less than they would have, had the money simply been put in bank CDs — so the vast majority are already being made to suffer, since even if Social Security were sustainable, it's a bad investment —
       http://research.stlouisfed.org/publications/review/05/03/part1/GarrettRhine.pdf

And here's an interesting quote from a 1967 Newsweek article by the famous economist Paul Samuelson that highlights the assumptions that supported the belief in Social Security --

---

https://www.princeton.edu/~dixitak/home/PASLegacy2_WP.pdf
http://www.economicpolicyjournal.com/2011/09/samuelson-thought-social-security-was.html

    The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!
    How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.
    More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.
    Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

---

Well, we all know how that turned out — you can't assume a constant population growth (even if you could, wouldn't that create another set of problems?).  Social Security desperately needs to be reformed — it's already in the process of failing —
    http://www.cato.org/sites/cato.org/files/pubs/pdf/PA689.pdf

But reform isn't possible when a majority of people are determined to pretend there isn't problem.