Maytag Repairmen and Ponzi Schemes

Last week, I met my friend Jeff Bishop for early morning coffee at our local Starbucks.  Jeff has a remarkable talent for making other people feel better about, well, pretty much everything.  I’m tempted to say that he should bottle it and sell it.  However, while that would make him wealthy, it also would make him less exceptional.  I think exceptionalism wins.

There’s a Maytag retail shop a few doors down from the Starbucks.  One of their repairmen was sitting there when I walked in, sipping coffee and looking like he had no particular place to be.  It was too early for a coffee break – more like the time of day when repairmen should be loading up the van for a day of service calls.  If he had a full slate – for that matter, if he had ANY – service calls to make, it sure didn’t show.  Life imitates advertising.  He left and was replaced about 20 minutes later by another Maytag repairman.  Wash, rinse, repeat.  Life imitates advertising twice in one morning.  Perhaps the appliances really ARE that good.  As to why the store has at least two repairmen with nothing to do, that’s a question for another day.

My conversations with Jeff always touch a wide range of topics, mostly business, but we spent a few minutes talking about Social Security.  So a few thoughts on that:

MSNBC, which is terrific before 8:00 AM, has been running a promo spot in which Rachel Maddow, who tends to get her facts right and her interpretation wrong, says that in the midst of our economic struggles, seniors are actually doing pretty well. This, she says, demonstrates that Social Security is working and is not a Ponzi scheme.

My friend John Muller points out that to the extent Social Security actually is helping older Americans, it’s not because it’s working, but precisely because it IS a Ponzi scheme.

I question how much Social Security really helps.  The total amount that we spend is huge (more than $700 billion), but it’s spread over a population of more than 40 million people.  I’ve been managing my mother’s financial affairs for the past year or two.  This is the first time I’ve seen Social Security at work in someone’s life.  Her monthly benefit is below average, but she lives a pretty modest life, and Social Security still covers less than 10 percent of her expenses.  A very small dent.

In fact, the main reason that seniors are doing well is that many of them bought houses when they were priced on the basis of a single income.  There was a huge run-up in residential real estate prices from the late 70s through the late 80s or early 90s, as one market after another was re-priced to reflect the shift to two-income households.  This was a one-time step-up in value, and therefore in the wealth of people who owned homes at the time.  I wish I had a citation for this.  Forbes or Fortune did a terrific article on it many years ago, but I can’t find it.  I remember it saying that what had happened over a decade or two was that Mom went to work in order to transfer a huge amount of wealth to Grandma and Grandpa, who were at a point in their lives where they should have been spending down their estate, not adding to it.

Anyway, I digress, which I’m sure comes as a shock to my handful of regular readers.  Back to the Ponzi scheme.

Social Security was enacted in 1935.  The retirement age required to qualify for full benefits was set at 65.  Around 2000 (yes, 65 years later), a process was put in place to raise it slowly to 67.  We’re about halfway there, and when we finally arrive, we will have achieved a 3% increase in the retirement age.

In 1935, however, the average American life expectancy was 62.  The actuarial expectation was that few people would ever collect benefits, and those who did wouldn’t collect them for long.  No wonder there wasn’t a cost of living adjustment.

Today, the average American life expectancy is 79, a 27% increase over 1935.  If the retirement age had kept pace, it would now be 83, and we would be spending perhaps half a trillion dollars less.  (That’s trillion with a “T”.)  I know we can’t make that happen immediately.  But given the small-dent character of Social Security, it seems to me that a fast, forced march might be a good idea.  I can hear my more liberal friends cringing, but I gotta ask:  If setting the retirement age above the age of life expectancy was good enough for FDR, isn’t it good enough for us?

Enough on that sorry subject.  I hit 50 great balls on the driving range this morning, and then went out and shot 102.  I also had a great time.  This is golf, which is life, imitating the rest of mine.