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the main problem with Social Security isn't really changes in population size (though it still is a problem). The core problem of Social Security is this:

"Taxes paid by today’s workers are used to pay today’s retirees. If money is left over, it finances other government spending—though, to maintain the insurance fiction, paper entries are created in a “trust fund” that is simultaneously an asset and a liability of the government. When the benefits that are due exceed the proceeds from payroll taxes, as they will in the not very distant future, the difference will have to be financed by raising taxes, borrowing, creating money, or reducing other government spending."

Basically politicians (of both parties) raid the Social Security fund and just leave IOU notes behind to fund their pork projects. If the money was untouchable and only used for Social Security, the problems we'd see with just population changes wouldn't be nearly as bad... hence (I could be wrong but I feel) this is one of the core arguments that Social Security is a Ponzi scheme.

No, that is entirely incorrect. The government borrowing from SS is no different than them borrowing from the Chinese, either way it has to be repaid. At least this way the interest is going to Americans. Government borrowing itself may be a problem, but it's an entirely separate one.

The kicker is the first sentence. Today's workers pay today's retirees. The payments are designed to ensure a consistent, inflation adjusted standard of living for retirees. If the ratio of retirees to workers stayed the same, the payments would. But when there fewer retirees per worker, workers pay less, and when there are more, they pay more. It's the system's fatal flaw.

The problem now is that baby boomers paid much lower Social Security taxes than us, but they still need to receive the same standard of living that we will. You can see the historical rates here:

http://www.taxpolicycenter.org/taxfacts/Content/PDF/ssrate_h...

They paid a lower % with a much lower cap, even adjusted for inflation. They did so because the retiree to worker ratio was lower. If they paid the same percentage and cap that we do now, Social Security would be sitting on enough money to cover the shortfall in the future.

In 20 years, that ratio will be much higher than today, meaning the workers of 2018 would have to pay far higher taxes still for the system to fund itself. This would, of course, be unbearable (it's already close) so the government will have to seek other solutions, such as borrowing money or printing.

The government borrowing from SS is no different than them borrowing from the Chinese, either way it has to be repaid.

I'd like to offer you an annuity. Here's how it works: you give me about 15% of your paycheck every year, and I spend the money on whatever I feel like. I replace it with a piece of paper that says "Dear Byrneseyeview: Please tender to the bearer -- Byrneseyeview -- an amount equal to the sum borrowed)." See how this 100% foolproof scheme might break down?

Here's 2 scenarios.

a) Government borrows $4 trillion from the Chinese at 2% annually.

b) Government borrows $4 trillion from Americans, by way of Social Security, at 2% annually.

What's the difference in what the government owes after 10 years? Either way the government has to raise $4 trillion (plus interest) in taxes, borrow it, or print it to pay it off. Either way everyone is in the exact same boat, except in boat b, Americans get the interest. In boat a the Chinese do. (Unless you count borrowing from the Chinese, leaving the Social Security money in a CD, and defaulting to on the borrowed money while paying out SS an option, which it isn't.)

I wasn't suggesting that government borrowing is not a problem. It is. They probably should just not borrow the $4 trillion from anywhere. But that's just a different issue that has nothing to do with Social Security, as many economists have pointed out.

The problem is not with the borrowing; the problem is that Social Security's asset base consists of the government's ability to borrow money. It is usually a really bad sign when someone says "I totally can't pay off this loan, but I know this guy who is willing to lend me more money because he has no idea how financially irresponsible I am."

No, the problem is with the borrowing. When our nation borrows that much, everyone's asset base consists of the government's further ability to get money (by borrowing, printing, etc.). That's the way free floating currency works. Having to print $4 trillion to put the money back in Social Security is the same to every American as having to print $4 trillion to give to China.

Either way everyone is in the exact same boat, except in boat b, Americans pay the opportunity cost of investing at 2%. In boat a the Chinese do.

Well, I certainly wasn't claiming it was a top-notch investment strategy. But for Social Security to work, it has to have periods where it's overfunded, so it can pay out when it's underfunded (and the problem is that it didn't) and that surplus has to go somewhere. I can't think of anything better for it than what they do, which is essentially buy government bonds. It's the only 100% guaranteed investment, since the government can print money to replace it. Just be glad they didn't buy CDOs with it.

You're right it doesn't make any difference, but your point is irrelevant.

Social security is only as "sound" as the will of future taxpayers to pay the inevitably increased taxes required to keep it going, regardless of whether the money is borrowed, promised, set-aside, appropriated, recommended, etc.

Since its inception, social security benefits have been cut little by little to the point where middle class people must significantly supplement it with their own private investments to avoid poverty in retirement.

So there still may be something called "social security" in 20 or 30 or 50 years, but chances are it will bear little similarity to the program's initial inception or even to the program people think of it as today.

You also argue that the government should borrow money. Why not just tax today for what we spend today? Had we done that, Bush would never have been able to go to war in Iraq, the "trust fund" would not be in danger, etc.

Not to digress, however. The biggest threat to social security is that congress won't have the will to use the limited available tax revenue for the program, and the public won't want the drastically increased taxes.

Obama wisely suggested switching SS over to be a welfare program and funding it from general revenue, but the initial concept was that it's not welfare and so nobody should feel like they are on welfare when they receive their social security check. This is a fairly significant matter.

"a) Government borrows $4 trillion from the Chinese at 2% annually

Either way the government has to raise $4 trillion (plus interest) in taxes, borrow it, or print it to pay it off."

Sadly there's another option. the gov decides not to pay and basically asks for a declaration of war from China...

Which would cost far more than $4 trillion so is not really an option, if you assume it would mean war with China.

You weren't promised "an amount equal to the sum borrowed".

Good point: there should be interest.

Just like the interest you earn on your health insurance?

Insurance companies invest premium payments, mostly in fixed income, so one would expect the current interest rate to be a factor in the cost.

You actually do earn interest on HSAs right? I don't know much about them other than the bit I read, but they seem to be all the rage nowadays.

Yes, but an HSA is explicitly not an insurance account; it's a tax-advantaged savings account you use to cover routine, predictable medical expenses while a high-deductable insurance plan covers broken bones and gigantism.

This may be part of the problem. But thats not a ponzi scam. Its just mismanagement.

[Social Security] would work perfectly well if the population remained stable over time, or shrank. And it would even be alright if it grew slowly and linearly.

You got it right but say it backwards. The problem is population shrinking.

The generation retiring is much larger than the ones still working when population has shrunk at some point. Baby Boom wouldn't be a problem in this respect, had it been followed by Baby Big Bang.

You're right, I meant the ratio of retirees to workers, not the overall population. Thanks.

But long-term population shrinkage can be accommodated by raising the Social Security tax (an fund-raising option that was not available to Ponzi or Madoff). As long as the generation-to-generation increase in worker productivity is greater than the generation-to-generation increase in the tax, it won't harm the general welfare.

And if that doesn't do the trick then the US can always let in more working-age immigrants.

but the expectancy of a working-age adult ... has barely budged since before Social Security was invented. Lifespan from birth ... has risen almost entirely due to lower infant mortality.

This is not true. While it's true that infant mortality rates in industrialized countries have decreased a lot since the 1930s, so have mortality rates at every age.

Social Security isn't a Ponzi scheme because it would work perfectly well if the population remained stable over time, or shrank. And it would even be alright if it grew slowly and linearly.

Only if benefits match contributions. If benefits exceed contributions, you do have a Ponzi scheme, and you have to find ways to funnel increasing amounts of money into the system.

Social Security taxes, as a percentage of income, have risen continuously since the program was started, well before the baby boomers started retiring:

http://www.ssa.gov/history/pdf/t2a3.pdf

Again: that's not what the words "ponzi scheme" means. You could be arguing that "if benefits exceed contributions, you have a budget deficit", but that wouldn't be as emotionally manipulative, and it would also be boring.

Social Security taxes as a percentage of income were raised sharply in the '80s precisely because the baby boomers hadn't retired.

Well, you forgot about the way that benefits are systematically reduced and the retirement age is systematically increased. What about someone who worked hard in his 20s, 30s, 40s, 50s in hopes of retiring at 65 only to see the SS age be increased to 70? Is that security? No, that's a 5 year ripoff.

Now, the SS retirement age is GREATER THAN the average lifespan of African American citizens! You may consider that another "good in a sick sort of way" aspect of the program, but I don't.