Saturday, September 10, 2011

Paul Samuelson on Social Security

A friend calls to my attention this quotation from Paul Samuelson.  It is from a Newsweek column written in 1967, but it has some modern relevance.  Of course, at the time, Samuelson was not focused on the large unfunded liabilities we now face.
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.