Is Social Security A Ponzi Scheme?

Some think Rick Perry committed political suicide at The Republican debate Wednesday night, when he vigorously defended his assertion that Social Security is a “Ponzi Scheme.” The atmosphere is improving, though I’m not sure the extent to which he has. But if in fact, if such a statement proves suicidal, it will say much more about the American public than it will about Rick Perry. Not wanting to chase away anyone who might read, I chose not to use the title, “Of Course Social Security is a Ponzi Scheme!” I will explain why and would love to know what I consider a non-existent argument why it is not.

First, for the sake of those most anxious about the program, let me say as Gov. Perry did and WI Rep. Paul Ryan provided in his actual plan to reform the even more imminently insolvent Medicare program: No one in or anywhere near the beneficiary stage of the program, will see any change in their benefits under a reform plan. NO ONE is or has proposed otherwise. There is nothing on any government official’s table that would even suggest it. That A) would certainly be political suicide, and B) it would be morally wrong! Irrespective of the prudence of the program, a promise is a promise (in this case it is an outright contract). And people have had their wages withheld for a lifetime or near ones, under the promise that the benefits will be delivered upon maturity of the contract. So whether Ponzi Scheme or any other ignoble device, our major entitlement programs are an obligation, and any necessary reform must acknowledge that to the greatest extent possible. The problem with Ponzi Schemes is that they promise what is ultimately impossible to deliver.

The fantasizing defenders of maintaining of the program as is, can only deliver on its promises in two ways, both of which would likely be engages, and both of which are terribly malignant in social terms. 1) They can inflate and ultimately destroy the integrity and value of the currency, which is a process that is unfortunately already well underway for the sake of financing pressures beyond Social Security alone. And 2) They can raise tax rates, which will not produce the revenue that foolish people plan, but will reliably drain the society of economic dynamism and diminish the potential of both individual and social prosperity. But as suggested above, I would like to know in what respect anyone would claim that Social Security is not a Ponzi Scheme. Consider all of this:

The inquirer of Perry last night, said that no less a supposed conservative fiend than Dick Cheney had said that Social Security is not a Ponzi Scheme: “It's a program that a great many people depend upon.” The questioner and presumably Cheney said this as though clarifying a contradiction. But there is none. Social Security is a program that a great many people depend upon, and it is a Ponzi Scheme. The question is, “What are we going to DO about that fact?” The term “Ponzi Scheme” has come to be taken as a fraudulent contrivance. But in fact, the most recent example of what was generally affirmed as a Ponzi Scheme was not contrived but developed from a legitimate operation. Bernie Madoff had run a successful investment business. Only after a time came when the market did not allow Madoff to earn the return that he had previously and had been selling on, did he try to get over the slowdown by borrowing from some accounts to pay others, hoping he would correct it later. But as is typical, once he started to hide and cheat the truth, it was easy to do again. And the problem only worsened, until one day the expanding deficit was entirely unmanageable. In fact, Ponzi himself had not conspired to deceive and cheat people, but let the pursuit get beyond his control.

And though not long after the “nice” but foolish idea was conceived for the country to take from the many to promise a benefit for retirees, the trajectory of longevity and disbursements brought people to project that in the long-term, the math would add up. But with the aging successfully severed from the responsibility of family and community, which is social corrosion in itself, Social Security became the fabled “third rail of politics.” No one wanted to touch it. And today, the “long-term” concern is past. The catastrophe is near to upon us, and the longer we take to change the system, the greater the pain will be. That is definitively a Ponzi Scheme. Had any private entity run a comparable operation, they would be in jail with Bernie Madoff. CNBC’s Rick Santelli and The New York Times’ Thomas Friedman had a nice set-to over just this question.

So however successful anyone is or isn’t in attacking Rick Perry for calling Social Security a Ponzi Scheme, the facts are the facts. And though I wouldn’t oppose his nomination, Rick Perry isn’t even in my top few favorites as a Republican candidate for President. But the problem isn’t the terminology or anyone’s feelings about it. The problem is that it only gets worse and worse every day we delay reforming Social Security. Perry said right off that those in and nearing retirement have nothing to worry about. But Perry is absolutely right that to suggest to younger people that the system is sound, or even avoid discussion of the matter, is to participate in “a monstrous lie.”

Comments

Your thesis is completely incorrect.  Social Security is not a Ponzi scheme.  Fundamentally a Ponzi scheme is a 1) FRAUDULENT program whereby, 2) individuals contribute into an account that is their own, are 3) promised a guaranteed return 4) are presented information that their accounts are still in their name and valid, 5) while their contributions are diverted to pay the first contributors.  Only until after the system collapses are they generally found.

Social Security is a 1) Legal program, 2) whereby everyone contributes to a general account, 3) promised a guarantee of a payment assuming they reach a certain age, become disabled or pass away, 4) have no accounts in their name and 5) have current contributions put into a reserve to pay for current and future beneficiaries. 

There is nothing about Social Security that makes it a Ponzi Scheme.

Your argument boils down to the position that a legal program (Madoff's investment program) become fraudulent so we should blow up a totally separate legal program (Social Security) because it could become fraudulent at some point down the road.  And merely basing future payouts on the assumption that a working population will support the plan down the road does not make it a Ponzi Scheme.  In the 1980's President Reagan realized that Social Security (as configured then) would not be able to satisfy future retirees and worked out a simple adjustment to assure it's financial viability based on the assumptions at that time. 

The government can actuarially calculate the amount of money that needs to be put away to make the plan solvent for very long times (ie 75 years into the future).  Even with current assumptions (that require minor tweeking to maintain solvency), in 20 years beneficiares will receive 75% of what is  projected. 

Social Security is nothing more than an insurance program.  You pay money today with the guarantee that if you should die (your kids and/or spouse), become disabled or retire than you won't have to dumpster dive for food or live in a tent.

One can argue the merits of SS as a program and the benefits of creating side accounts for people to fund their own retirement, but calling it a Ponzi scheme is a lie and a gross distortion of language.

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The differences "anonymous" presents between "fraudulent" and "legal," between "individual" and "general" accounts, and so on, are minor and inconsequential. The fact remains that current returns are paid out of the contributions of later participants, exactly as in a Ponzi scheme.

The crucial difference is that a Ponzi scheme promises quick returns, and it fails when it runs out of contributors. Social Security never runs out of contributors because returns are deferred until there is a new generation of workers to chip in. Contributors are born and start working as fast as recipients retire and die.

The intent of Social Security is to take part of the earnings of the working generation and use them to provide some minimal support for retirees. If our nation does not have enough aggregate wealth to do that, we are in deep trouble.

Facts as follow: I am 25. I will put money into Social Security.  When I want that money when I am older I will get screwed. Thus Social Security is a Ponzi Scheme. Ponzi Scheme defined: an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risk. There is nothing more to discuss.
 

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