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From: orb@whuxl.UUCP (SEVENER)
Newsgroups: net.politics
Subject: Re: Social Security,Pyramids, Banks and Insurance
Message-ID: <826@whuxl.UUCP>
Date: Mon, 18-Nov-85 10:38:34 EST
Article-I.D.: whuxl.826
Posted: Mon Nov 18 10:38:34 1985
Date-Received: Tue, 19-Nov-85 02:46:58 EST
References: <591@drutx.UUCP>
Organization: AT&T Bell Laboratories, Whippany
Lines: 70

Dave Olson repeats the old refrain that Social Security is
"just a pyramid scheme":
> 
> Tim, you obviously do not understand a pyramid scheme.  People who collect
> from it (no matter how badly it is needed) are collecting from people at
> lower levels of the pyramid, who inturn must collect from still more peopel
> at still more levels.  The money you put into SS does not grow; it goes
> right into somebody else's pocket.  Once you have collected the same amount
> of money from SS as what you put in (you are actually collecting the
> equivalent amount of what someone else put in) on average, you will then
> start collecting on what 3 more people placed into the pot.  Those 3 no
> longer have their hard earned dollars for a pension; you ate it up.  For
> *each* of them to collect what they were "promised", requires 4 others
> (one to replace the money they placed into the pot + 3 others to provide
> what is needed once that is gone) to put their money into the system.
> And on, and on, and on...
> 
> David Olson

Social Security has several important differences from pyramid schemes
such as Amway.  In a true pyramid scheme like Amway, members are
encouraged to suck in more new members because they get a percentage
of the profits from every new member, AND every new member that member
recruits AND every new member that members recruited by your own new
member recruit.  For example, if I get a new member to sell Amway products
I may get $10 out of every $100 that member sells.  If that member gets
other members to also sell I *still* get $10 from every $100 sold by
every member after me: so if my member recruits 3 new members who each
sell $100 apiece, and my original recruit still sells $100 then I
can get $40 for doing absolutely nothing. (One sees this is really simply
an exaggeratted version of capitalism in the crassest sense).
The originators of a scheme such as Amway obviously stand to gain LOTS
of money from naive suckers if they can convince hundreds or thousands
of them to go for this scheme.  Social Security does not work in this
fashion - there is no multiplying effect - the receipts from Social
Security are divided amongst members of every generation as they 
become eligible for retirement.  
Moreover as I have tried to point out (probably hopeless to blind
ideologues) payments to Social Security and benefits are time-deferred.
This is really not that different than the operation of a bank.
When I put money into the bank that money does not just sit there-
it immediately goes out in loans to other people.  Those loans are
almost always *more* than the actual amount of money placed into the
bank.  These loans then provide immediate benefits of housing, cars,
new capital equipment, and other goods to people.  If I have
a 20 year deposit or timed deposit then I cannot get the benefits
of my own money paid in until that period is up.  Similarly with
Social Security -  I pay in for my own retirement which is money used
to pay the benefits of people currently retired.  I cannot obtain
my own benefits until I have worked 10 years and have reached age 62.
My own benefits are dependent on those working later paying into
the system themselves.  But so my deposit in the bank is dependent
on those who have already received the benefits of my funds paying
them back.  If they did not and the bank went bankrupt and there was
no federal insurance I would lose my money.  In fact this used to
happen to people before the Federal Deposit Insurance Corporation 
was established: which was why mattressess were a frequent store for
savings.  Of course if *all* the banks in the country went
bankrupt so the FDIC had to pay insurance for all those accounts,
the FDIC would be unable to do so - just as auto insurance companies
would go bankrupt if all cars got in wrecks at one time, or
any other insurance company would go bankrupt if *ALL* those insured
made claims.  Of course this is EXTREMELY UNLIKELY! 
AS Jeff Myers' article pointed out, the Social Security System should
be in good shape for years to come.  This also points out Dave's
mistake in saying that Social Security requires constant increases
in those in the system like an Amway pyramid scheme.  Social Security is
in good shape *despite* the decline in population growth projected
in the next decades.
                           tim sevener  whuxn!orb