Social Security and other Pyramid Schemes (was Help with a Minimum Wage Model)

From: Lee Corbin (lcorbin@tsoft.com)
Date: Mon Apr 07 2003 - 22:24:24 MDT

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    Damien S. writes

    > Lee Corbin wrote:
    >
    > > > For 2002, this person would have had $797 in FICA taxes withheld, $186 for
    > > > Medicare, and $518 for federal income tax. On top of this, depending on
    >
    > > or, taxes amounting to (797 + 186 + 518)/12854 = 11.7 percent.
    > >
    > > Shocking, really. There's no escape even for the poor---this is
    > > even a little beyond the tithe extracted by theocracies!
    >
    > Although they're supposed to get a lot back in Social Security, possibly more
    > than they 'earned' by paying in. Assuming they don't die too early, which
    > they might well do, in which case their children get none of the 'saved' money.

    Well, yes, there is *that* particular kind of unfairness
    (dying early). But "getting your money back later, with
    profit!" is the key characteristic of any pyramid scheme,
    and it does work, except for those who are still owed
    when the whole thing crashes.

    But let's suppose that (a) people don't die early, and (b)
    one particular Western country (e.g. the U.S.) never crashes.
    In this case, can we really say that the pyramid scheme
    enriched anyone?

    I doubt it. Here is a semi-proof: suppose that the scheme
    by which government seizes the money of the young and
    immediately transfers it to the old appears in dollar terms
    to pay the old more than it cost them in turn when they were
    young.

    If this assumption is true, then it means that (1) the money
    properly invested would yield less, and (2) society is better-
    off in the forced transfer of resources, despite the weakening
    of incentives for both younger and older people.

    I find both assumptions unlikely. The first is unlikely
    because it discourages savings and investment, and has the
    same drawbacks that usually attend artificial distortions
    of the natural economy that governments are so fond of.
    It also discourages the cultivation of prudence in a society.

    The second is also telling, IMO. Older people who are very
    possibly still able to contribute to an economy are "paid off"
    not to work, and younger people, known for their short time
    horizons, see less reward for their labor. (This really becomes
    a strong factor when it finally requires more and more workers
    per retiree to keep the scheme going.)

    Lee



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