Is Social Security a Ponzi Scheme?

by Don Boudreaux on September 12, 2011

in Other People's Money, Social Security

Here’s a letter to USA Today:

Arguing that Social Security isn’t a Ponzi scheme, you write: “Ponzi schemes have two salient features.  First, they are criminal enterprises, which Social Security is not.  Second, they work only until people get wind of what is going on, at which point they inevitably collapse.  Social Security’s finances are plainly visible for all to see. (“Social Security far from a ‘Ponzi scheme’,” Sept. 12).

Your first point fails: a government declaration of legality no more renders a Ponzi scheme a legitimate mode of investment than it renders slavery a legitimate mode of employment.

As for Social Security’s finances being “plainly visible,” the Social Security trust fund – for which Uncle Sam writes IOUs to himself and then assures the public that Social Security’s liabilities are fully backed by marketable assets – comes awfully close to being a fraud meant to hide the true state of Social Security’s fiscal woes.

And as for people catching on to Social Security’s unsustainability, consider the following 1996 analysis by a Nobel-laureate economist who, after noting that Social Security is designed to look like an ordinary pension plan, observes that “In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in.  Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in.”  That is, as with all Ponzi schemes, reality is obliging people to catch on.

Oh, the Nobel economist quoted above is Paul Krugman.

Sincerely,
Donald J. Boudreaux

And as my friend Dimitri Vassilaros points out to me by e-mail, “Social Security is worse than a Ponzi scheme, because it is not voluntary, and everyone suffers, not just Ponzi’s greedy participants.”

(HT to Alex Tabarrok for alerting the world to the above-linked Krugman essay.  Alex points out that other Nobel economists who’ve described Social Security as a Ponzi scheme include Milton Friedman and Paul Samuelson.)

UPDATE: This cartoon, posted over at Division of Labour by Frank Stephenson captures a genuine difference between a run-of-the-mill Ponzi scheme and Social Security.

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{ 132 comments }

Rob September 12, 2011 at 8:13 am

Here is a Mankiw post on Samuelson.

Pfloyd September 12, 2011 at 8:24 am

I’ve been spending a lot of time reading Krugman’s earlier work and have to wonder where he made the leap from respectable economist to left-wing ideological operative. . . they scarcely seem the same person at all.

http://3.bp.blogspot.com/_tBwJjx9tk78/THgYw-KJEDI/AAAAAAAAAv4/xyfLYbQ23rw/s1600/Star_Trek_Evil_Spock-thumb-550×432-34475.jpg

whotrustedus September 12, 2011 at 9:18 am

I presume he made the leap when he realized that it provided for a lucrative career as a NY Times columnist.

kyle8 September 12, 2011 at 10:40 am

Yes chalk it up to either greed, ideology, insanity, or space aliens controlling his mind. Or a combination of the above.

Terry Noel September 12, 2011 at 8:25 am

Don,

I wrote on this topic the other day as well:

http://commonsenseliberty.wordpress.com/2011/09/08/a-ponzi-scheme-you-bet/

Best,

Terry

Jim September 12, 2011 at 10:22 am

Clean, concise well written article Terry.

I thought I had seen the dumbest argument in defense of SS when I watched Tom Friedman on Youtube argue against a Ponzi scheme with Rick Santelli.

But this USA Today article is worse. It is a child’s argument in search of adult supervision. It is not illegal? Are you kidding me? It would be illegal in any private practice. That is the point!

It would collapse if people understood it? Huh? In what world is this a definition of a Ponzi scheme? Perhaps my neighbor’s business would collapse if he understood his love for his work.

The whole article is illogical and most of it is a straw man.

indianajim September 12, 2011 at 8:36 am

Every time I think I’ve seen your best work I discover my error; now if only I could clear that adaptive expectations crap I learned in macro out of my head. :)

Methinks1776 September 12, 2011 at 8:38 am

Second, they work only until people get wind of what is going on, at which point they inevitably collapse.

Only because people are no longer willing to “invest”. I don’t remember anyone getting that option with SS.

jjoxman September 12, 2011 at 9:04 am

Yes, that seems an important difference.

“This is a Ponzi scheme!”

“True, but we’re taking your money anyway. Just go along, citizen.”

Martin Brock September 12, 2011 at 9:49 am

Right. SS is not a Ponzi scheme precisely because a Ponzi scheme is not compulsory. A Ponzi scheme is fraud rather than theft.

Of course, the Bush reform proposal was even worse. It essentially promised safe “investments” to anyone who wanted them, in the form of more special Treasury securities, like the SS Trust Fund and the G Fund available to Federal employees.

Treasury “investment” is more like a Ponzi scheme than than SS, because “investment” is not compulsory; however, it’s unlike a Ponzi scheme because a Ponzi schemer may not threaten to shoot anyone refusing to bail out the scheme.

Here’s another opportunity to link this discussion of Social Security. I wrote it over ten years ago, so “requires substantial increases in Federal spending in roughly ten years” refers to the present.

Unfortunately, many nominal “libertarians” are free riders as much as anyone else and are perfectly happy for the state to sell entitlement to rents as long as they’re in a position to buy.

I’m surprised that this forum isn’t discussing the patent reform that Obama will sign into a law in a few days. It’s the strongest nail in the coffin of entrepreneurial free enterprise I’ve ever seen.

kyle8 September 12, 2011 at 10:45 am

The patent law is very troubling. Some libertarians however, are opposed to strong intellectual property rights.

As for the Bush reform proposal, or something like it. I am not so sure as you are. If I had an actual group of government bonds with actual expiration dates and rates of interest in my Social security account, It seems I would be better off as those bonds would have some actual value and could be sold.

Martin Brock September 12, 2011 at 3:58 pm

That’s exactly my point, Kyle. That your “return on investment” is seized from taxpayers at the point of a gun is not your problem with the scheme. That you don’t actually purchase any real means of production but only buy entitlement to tax revenue collected from others is not your problem. Your problem is that you don’t think the statesmen will collect all the booty they’ve promised or that you can’t sell their promise to someone.

But if you want to sell something, I suppose you can. You can contractually obligate yourself to sign your Social Security checks over to me when they arrive. Why can’t you sell me the right to these checks?

kyle8 September 12, 2011 at 5:10 pm

Ok you are not making sense, you rightly rail against the system for its lack of transferability, but then you say an alternate system that would be transferable would be just as bad.

Methinks1776 September 12, 2011 at 6:53 pm

Kyle8,

Martin is against any entitlements to taxes extracted from other people.

Treasury bonds owned by me are a claim on your income. My entitlement to social security is a claim on your income. Both are a promise made by our government to me to extract payments from you and to transfer your wealth to me.

The Treasury bonds the Chinese (not to pick on them) are effectively promises by the U.S. government to shake down its citizenry.

Contrast a Treasury with a corporate bond that is a voluntary arrangement whereby the money used to pay off the bondholder comes from the cash flow generated by the company. No guns are held to anyone’s head (ideally, I’m not addressing rent seeking).

Martin Brock September 13, 2011 at 4:27 am

I generally oppose the sale of entitlement to tax revenue, and Social Security fits this model reasonably well, except that the “sale” is involuntary.

I’m not strictly against any taxation, but as a minarchist, I want minimal taxes, and I want the state purchasing only genuine public goods with costs paid as much as possible by people consuming the goods.

Kyle cannot comprehend what I’m saying, because he sees the Social Security system only in terms of a personal value proposition. John Dewey describes SS similarly below. Dewey has “paid in” for many years, so he wants the promised “pay out”.

But who did Dewey pay in [b]to[/b] and why does he expect any pay out? When the state collectivizes the support of the old by the young with a model superficially resembling return on investment, it raises these questions without answering them.

The system is fundamentally deceptive in this way, and it’s also terribly inequitable, because while it collectivizes the support of the old by the young, it does not similarly collectivize the support of the young by the old.

When I pay into the banking system to purchase a house, by making a mortgage payment, I expect no “return on investment” for my payment. Everyone understands the folly of this expectation, because I have the house. My payment is itself a return on the home builder’s investment.

When I support elderly parents who earlier supported me, I expect nothing in return for my support of them. I’m not doing them a favor. I’m returning a favor they’ve done me. I am their investment, not the other way around.

Social Security turns this traditional, reciprocal obligation on its head. Now, my children owe me support not because I supported them but because I supported old people in the generation preceding me. Other children also owe me support for the same reason, even if I never raised any children myself.

The winners in this game are people who don’t raise children. Their “return on investment” is not poor. It’s incredibly rich, because they never actually invest at all. They return an investment in them, and the state then commands a redistribution of the yield of other people’s investment to them.

But Kyle is mistaken to oppose Social Security for the reasons that he opposes it. Sure, he could buy Treasury securities instead of paying payroll taxes, but does he really buy more security this way? I doubt it. Social Security is still the third rail.

We’ll default on obligations to Treasury holders before cutting Social Security entitlements. This default is built into the system, because Social Security benefits have a COLA while U.S. monetary policy practically guarantees inflation. A conventional Treasury security has no COLA.

Again, I’ll make this bargain with Social Security Administration right now. I’ll be fifty in a few months, so I’ve paid hundreds of thousands of dollars in payroll taxes. I’ll surrender my right to a pension from the system, right now, if my children and I may exit the system, owing no more payroll tax and accumulating no entitlement to a pension. I’ll take [i]nothing[/i] for my payroll taxes on these terms, right now. The offer’s on the table.

Methinks1776 September 13, 2011 at 5:17 am

The state will never free you from its clutches, Martin. The point of welfare programs is not to help you but to ensnare you.

Brian Donohue September 12, 2011 at 8:45 am

Don,

There are obvious Libertarian arguments against Social Security, but Ponzi scheme is not one of them. An unusually illucid and poorly-thought out argument. C-.

dsylexic September 12, 2011 at 8:49 am

nonsense.social security is an intergenerational scheme dependent on more workers than retirees existing in the workforce.that factor is not guaranteed by economics or demographics -it is a mere hope-even if one ignores the “forced contribution” part of SS

Methinks1776 September 12, 2011 at 8:56 am

In what material way is it NOT a Ponzi scheme – except that participation is forced and it’s not called a crime by the United States government?

Peter September 12, 2011 at 9:28 am

Exactly.

A bunch of people designated by elections convened in a few designated rooms and performed a secular-pagan ceremony around a bunch of words. They even had priestly titles like “Speaker” and “President” and everything. This clearly makes SS not Ponzi in a very meaningful way.

It all goes back to one of Don’s favorites: “Reality is not optional.”

Brian Donohue September 12, 2011 at 10:29 am

I said there are certainly Libertarian arguments against Social Security. You have made one, which has nothing to do with whether or not it’s a Ponzi scheme.

The way the term is being used here, any bond issued by any company could be considered a Ponzi scheme, particularly if the bond ultimately defaults.

The issue is: how reasonable are the assumptions used? If Madoff had actually been able to generate the returns he was paying, his scheme would not have been Ponzi-like. The reason it was a Ponzi scheme is that there was no way he could generate these returns, so the fund was unsustainable and bound to end badly.

I have some familiarity with the annual actuarial analysis run by the SSA. Is Social Security sustainable? Well, it depends on how things play out? Key variables are fertility, immigration, life expectancy, productivity increases, and retirement ages. Increasing the normal retirement age to 70 produces a system that is sustainable using reasonable (i.e. something like steady-state, not unbounded growth) assumptions for these other variables.

If productivity, fertility, immigration collapse, Social Security will have problems (hell, the country will have problems.) Similarly, if a company issues debt and then everything breaks wrong and the company defaults, that’s a problem. In neither case, however, is it a Ponzi scheme.

For most of human history, societies have enjoyed a “demographic pyramid”, which allows for Ponzi-like programs. It is my distinct impression, however, that in this country anyway, most generations have bequeathed a legacy to posterity far richer than they inherited, so, for example, I don’t begrudge the Depression/WWII generation some Ponzi-like benefits via Social Security.

Baby boomers, maybe not so much. This was the whole point of amassing a $2.4 trillion Social Security surplus over the past 25 years.

Don refers to the “fraud meant to hide the true state of Social Security’s fiscal woes.” This is sloppy thinking. The woe belongs to the general taxpayer, who has benefited from lower income and capital gains taxes by virtue of the government’s ability to spend the Social Security surplus over the past 25 years.

The “general taxpayer” is not the same thing as the “Social Security taxpayer/beneficiary.” In particular, state and local government employees, federal employees hired before 1983, and those whose income derives from “unearned” sources have all gotten a free ride.

Social Security is largely the retirement plan for private-sector workers, whose interests I seek to defend.

kyle8 September 12, 2011 at 10:51 am

You are doing a poor job of defending those workers if you do not recognize just how morally, intellectually, and economically bankrupt the Social Security scheme is.

You are putting lipstick on a pig. It is an immoral scheme because it is coercive, it promises a return without any actual investments, and it is an inter generational wealth transfer from the poorest workers, (young people) to the richest(old people).

It is also wrong because of opportunity costs. The money taken during the working lifetime of the individual could have been much much more profitably invested and would have given higher returns without bankrupting the country.

Brian Donohue September 12, 2011 at 11:11 am

Guh. I spoke to the “immorality” below, viz.: I don’t want to live in a country that allows people to make poor decisions and die in the street as a result. There are limits to the Libertarian world view, IMO.

“It promises a return without any actual investments.” I see little or no difference between the Treasury bonds held by the Social Security Trust Fund and Treasury bonds held by other investors.

Yes, of course, many people might do better on their own (although, considering the S&P 500 has produced a negative total return, including reinvested dividends, over the past 12 years may make folks a bit less sanguine about this opportunity cost), but, as mentioned above, many would do worse, and the reality is taxpayers would have to bear the brunt of these poor decisions. As a taxpayer, I think this is a dumb idea.

Methinks1776 September 12, 2011 at 11:59 am

Brian,

There’s an ocean of difference between between letting people die in the street and transferring massive amounts of wealth from the young to the old simply because they’re old. Especially, Brian, since the old are, on average, MUCH wealthier than the young from which taxes are extracted.

but, as mentioned above, many would do worse, and the reality is taxpayers would have to bear the brunt of these poor decisions. As a taxpayer, I think this is a dumb idea.

I’m surprised that an actuary or anyone familiar with actuarial techniques would make such an argument.

We know that government spends every dime it takes in. Thus, every payer into the government “retirement scheme” is losing 100% of their principal. You, as a taxpayer, will be required to cover 100% of everything promised to anyone collecting SS. There is a 100% probability of being forced to pay for 100% of the promises.

Your cherry picking the performance of the stock market sounds scary, but, in fact, the stock market has historically returned around 7-10% (inflation adjusted and depending on the historical the period studied) over a 40 year period Moreover, stocks, which are a more volatile asset, are not the only available investment.

Even with your cherry picked decade, and assuming everyone just invested in the stock market over that 12 year period only, the probability of any individual losing all of their principal is MUCH less than 100% and the probability of all individuals losing all their principal approaches 0%. As a taxpayer, there is a probability lower than 100% that you will have to pay to support some of the losers.

In fact, your expectancy is a 7-10% annual inflation adjusted return over your working lifetime. That means the number of people you’ll expect to have to support as a taxpayer because they lost everything in the market will be miniscule.

As a taxpayer, you’re much better off letting people take care of their own retirement programs.

kyle8 September 12, 2011 at 12:31 pm

Even if there had been forced savings, but those savings had been actual investments then we would all be better off.

If you cannot see the difference in Social Security and treasury bill you are in sad condition. If my money had been placed in treasury bills, then I would have something that could be sold, traded, and left to my heirs.

The rate of return of the overall of private investments over the last thirty years (the average working lifespan) is significantly more than the return from SS.

Methinks1776 September 12, 2011 at 11:34 am

Brian,

The way the term is being used here, any bond issued by any company could be considered a Ponzi scheme, particularly if the bond ultimately defaults.

That is incorrect. A bond is a loan paid from the wealth (income) created by the company. It does not use new investors (equity or debt) to transfer wealth to old bond holders. And you wouldn’t buy its bond if it did.

The government creates no wealth and requires a growing number of people transferring wealth they created into the system to pay off former “investors”.

The reason it was a Ponzi scheme is that there was no way he could generate these returns, so the fund was unsustainable and bound to end badly.

That is incorrect. Madoff could have generated those returns. There are plenty of managers who have generated even better returns for a longer period of time. The fact is, Madoff didn’t generate those returns. There is no evidence that Madoff even ever made a single trade. It was a classic Ponzi Scheme.

I have some familiarity with the annual actuarial analysis run by the SSA. Is Social Security sustainable?

I have no problem with your analysis except that it’s tangential to the point. Nobody doubts that the United States government will be able to hold a gun to your head and extract tribute from you. As Peter points out, this scheme must rise to the immorality of a Ponzi Scheme.

The woe belongs to the general taxpayer, who has benefited from lower income and capital gains taxes by virtue of the government’s ability to spend the Social Security surplus over the past 25 years.

I find it ironic that you’re accusing Don of sloppy thinking and then produce this nonsense.

If government used SS taxes for general spending, how has it ever been anything but an income tax? The SS is a tax on income and it was never invested the way a pension fund is invested. I don’t see how income tax payers got a break. Where’s the break from government theft?

those whose income derives from “unearned” sources have all gotten a free ride.

How? They are also not entitled to social security payments. I can see the “free ride” argument for people who received payments and never paid FICA, but I can’t see how people who have never paid in nor ever received anything have gotten a “free ride”.

Unless, of course, you see anyone who is not collared and forced to pay the government mafia whatever it demands at gunpoint as a “free ride”. Your argument boils down to a claim that serfs should be happy that the crown asked for so little of them.

Brian Donohue September 12, 2011 at 12:15 pm

This is helpful to me. I accept that “conscious effort to defraud” is a characteristic of a Ponzi scheme.

From this view, Medicare could be considered a Ponzi scheme, because LBJ knew at the time that the cost forecasts would get ugly pretty quickly and that the taxes would need to be raised. He actively discouraged this kind of analysis.

Social Security wasn’t like this. The 1983 reforms did not rely on an ever-expanding pool of workers to make the system sustainable. Do the math yourself. An average-paid worker with an average lifespan comes out about even under Social Security- this wasn’t true based on the original FICA tax rate in 1935, so arguably, Social Security was Ponzi-like for its first 50 years, but I have no evidence that FDR (unlike LBJ) was aware of or hid any long-term sustainability issues.

I’m not talking about the government holding a gun to anyone’s head. I’m talking about realistic long-term sustainability based on current law, which is largely-indexed (other than for life expectancy.)

Finally, you and everybody else continues to miss an important point. You say: “The SS is a tax on income”. Wrong! It is a tax on “earned” income, only for those covered.

If the government did not have access to this money over the past 25 years, it would have had to levy higher taxes on other sources of income to finance its spending.

So, the Social Security surplus has allowed income and capital gains taxes to be lower than they otherwise would have been.

So, anyone who pays income or capital gains tax but NOT Social Security taxes (state and local government employees, federal employees hired before 1983, individuals with large amounts of “unearned” income), has enjoyed a tax break over the past 25 years at the expense of those who are covered by Social Security.

cmprostreet September 12, 2011 at 1:12 pm

“So, anyone who pays income or capital gains tax but NOT Social Security taxes (state and local government employees, federal employees hired before 1983, individuals with large amounts of “unearned” income), has enjoyed a tax break over the past 25 years at the expense of those who are covered by Social Security.”

It is impossible to simultaneously hold both this view and the view that the SS fund securities are exactly the same as Treasury bonds held by ordinary investors.

cmprostreet September 12, 2011 at 12:54 pm

“This is sloppy thinking. The woe belongs to the general taxpayer, who has benefited from lower income and capital gains taxes by virtue of the government’s ability to spend the Social Security surplus over the past 25 years.”

Example of sloppy thinking: I stole from your retirement account, but the benefit really goes to you since I didn’t steal from your checking account.

cmprostreet September 12, 2011 at 1:05 pm

“So, anyone who pays income or capital gains tax but NOT Social Security taxes (state and local government employees, federal employees hired before 1983, individuals with large amounts of “unearned” income), has enjoyed a tax break over the past 25 years at the expense of those who are covered by Social Security.”

It is impossible to hold both this view and the view that the securities in the SS fund are identical to Treasury bonds at the same time.

If the SS fund securities are just like Treasuries and have value because they will be payed for out of the government’s general funds, then income and capital gains taxpayers are on the hook for this money, not future FICA taxpayers.

You are arguing that for every $1 payed into SS, $1 is invested to make future SS payments, and also $1 is used to pay for general obligations of the government. $2 =/= $1.

Even if you are simply splitting the $1 between the two purposes, whatever amount reduces the general tax burden by paying for general obligations, that amount was not invested in SS and thus MUST be taken from general taxpayers to make the SS fund whole again.

EG September 12, 2011 at 10:40 am

He’s not making a “libertarian” argument. He’s making an economic one. “Libertarian” arguments are inherently ideological in nature. This is a simple numbers game.

indianajim September 12, 2011 at 8:45 am

Today in Nat. Review online, an extensive history of the comparison of SS to a Ponzi:

http://www.nationalreview.com/articles/276859/perry-and-ponzis-stanley-kurtz?page=1

Peter September 12, 2011 at 8:53 am

Social Security is not a Ponzi scheme because it would have to be morally superior to be one.

I am not forced to participate in a Ponzi scheme; I am forced to participate in Social Security. (as mentioned above)

I don’t have free movement in and out of Social Security. I can’t put more in on the expectation that things are going well or take money out on the expectation that they won’t.

If a Ponzi scheme fails, the currency that I am forced to use doesn’t get printed and devalued to cover the losses (ideally, sadly, not necessarily true in reality). The same is not true of Social Security.

A Ponzi scheme doesn’t have a graduated investment rate. If I am more productive (in terms of generating liquid assets at my disposal), I am neither expected nor forced to place a higher percentage in the Ponzi scheme. I am forced to do so with Social Security.

In a Ponzi scheme, there is an incentive for the people at the “top” of it to keep it going. There is a set of incentives promoting natural growth and stability. No such set of incentives exist with Social Security.

Seth September 12, 2011 at 9:15 am

“because it is not voluntary”

This is the main difference between SS and ponzi schemes. At least ponzi scheme investors have a choice.

John Dewey September 12, 2011 at 9:23 am

Don,

I agree on all these points:

1. Over their lifetimes, Social Security is a bad deal for almost everyone who is covered by this law;

2. Due to demographic and life expectancy changes in the 1950s through 1970s, Social Security developed funding problems because the ratio of workers to retirees changed drastically;

3. At current tax levels, Social Security cannot provide all the benefits the program has projected it will provide.

I do not agree that Social Security is a Ponzi scheme. There was never any attempt to defraud. The problems facing Social Security have always been out in the open. Social Security can very easily become a sustainable program. That Congress and the American people faced tough choices in the future has been known for three decades at least.

Please note that, like your post, I am referring to just Social Security – not Medicare – when I argue that Social Security can easily be made sustainable.

Peter September 12, 2011 at 9:34 am

You say this:
At current tax levels, Social Security cannot provide all the benefits the program has projected it will provide.

And this:
There was never any attempt to defraud.

John Dewey September 12, 2011 at 10:11 am

That’s right, Peter. Social Security Trustees have consistently told Congress that additional funding will be required. Congressional leaders have for at least two decades acknowledged that either tax increases or benefit cuts would be required in the future. Some Congressional leaders – in fact, a whole political party – proposed partial privatization.

It is voters – not government – who are to blame for Social Security not being changed ten years ago or twenty years ago. Voters have been told over and over again that not reducing benefits was just pushing the problemn down the road. Yet those same voters – through preference polls and through town hall meetings – told elected officials to not touch Social Security.

Martin Brock September 12, 2011 at 10:24 am

It is voters – not government …

I thought voters were the government. I guess that’s only true when it makes the government look good.

Peter September 12, 2011 at 10:43 am

What you’re saying amounts to, “it could totally work if we just took in more money and/or paid out less, and some people have recognized this for a while, and that makes it not fraud.” The problem with that is that there was a time when it was believed (ostensibly) that the tax rate and payouts were sufficient for perpetual existence.

Those people were wrong. Those people either knew what they were saying was wrong or they didn’t. Therefore, those people were either liars (and therefore did ‘attempt to defraud’) or stupid (and therefore did not attempt to defraud).

In the case of the former, I think we’d both agree that it’s a Ponzi scheme. In the case of the latter, whether we attach the word “Ponzi” to it isn’t really all that relevant: it’s still taking other people’s money by force and making them ‘invest’ in a financial scheme that is on the brink of failure due to mismanagement.

Don Boudreaux September 12, 2011 at 9:44 am

John: I disagree that there was never any attempt to defraud. All the talk of a “Social Security lock box” – talk by officials at the highest level of the U.S. government – seems to me to be utterly fraudulent. That people could, in principle, see through these lies if only they were sufficiently skeptical and prudent is true – but the same holds true for victims of private Ponzi schemes.

muirgeo September 12, 2011 at 10:04 am

The fraud is perpetuated by people who try to cover the fact that social security has taken in $2.6 trillion more than it has paid out. It has NOT added one cent to the deficit.
The fraud is perpetuated by people who want to re-write pre-social security history and forget about old people starving, freezing or being sent to poor farms.

That is NO fraud Don. Old people do not starve, they do not freeze and there are no or poor farms. Also social security has supplied a constant demand of well spent dollars to our economy more than adding into our economy than it took out. We became the most prosperous nation EVER after the so called Ponzi scheme was instituted. Yet some how you get away with the claim that it is a bad thing. If it is/was such a bad thing how did our economy blossom under its institution? Does reality matter to you?

Ponzi schemes do not make nations stronger. The true Ponzi scheme was what you neo-liberals gave us when we deregulated Wall Street and let the private sector you bow faith and allegiance to to invent unregulated financial derivatives that have blown up the global economy. THAT was the Ponzi scheme Don… and the results have been CLEARLY terrible unlike the results of social security.

But again you are capable of simply ignoring these massive facts of history that so brilliantly contradict your position that it’s hardly worth arguing with you. Reality seems to be optional here.

Edward Cox September 12, 2011 at 10:22 am

No, the REAL ponzi scheme is “Two and Half Men.” And the Dallas Cowboys. Also maybe cancer.

kyle8 September 12, 2011 at 10:59 am

As usual your point is a ridiculous side note. Sure it took in more than it has paid, but the money WAS SPENT, not invested, dumbass, that is why it is bankrupt.

PrometheeFeu September 12, 2011 at 1:01 pm

If I promise you a -10% rate of return and then go off and spend all the money I got from you promising that I will find some other sucker to pay you back, I would still be running a Ponzi Scheme.

cmprostreet September 12, 2011 at 1:10 pm

“social security has taken in $2.6 trillion more than it has paid out.”

“Also social security has supplied a constant demand of well spent dollars to our economy more than adding into our economy than it took out.”

Within the same post, you claimed that SS took in more than it spent, and also that it spent more than it took out. I would love to have a look at your finances.

J. M. Keynes September 13, 2011 at 12:00 am

Muirgeo, you have an excellent grasp on books of fiction about old people starving in the streets in the 1920s. Poppycock! You would do well to study economics. Bring you brain with you and check those silly emotions at the door.

Chucklehead September 13, 2011 at 9:00 pm

Poppycock? What happened to Balderdash and Hogwash?

Dan J September 13, 2011 at 8:46 pm

Failure to accept the FACT that govt coercion in the lending played a massive role in the housing debacle means your claims of deregulation or any offering of information on ‘how’ the collapse occurred is worthless.

John Dewey September 12, 2011 at 10:29 am

You are correct, Don. Some members of government – but ceertainly not all – have attempted to bamboozle voters into believing that the U.S. treasury securities in the SS trust fund are real assets. I’m not sure that was done at the highest levels of government, though. Al Gore’s lock box comments were about the relative safety of U.S. government securities (and future taxation) vs private equities. For the past ten years, at least, I think he’s been right.

I disagree with the implication that seeing through those lies required some extraordinary level of skepticism. Newspaper reports I read in the late 1990s and early 2000s made it clear that full future funding of SS was dependent on future tax revenues.

indianajim September 12, 2011 at 10:36 am

John, Given the “rational ignorance” of voters, an extraordinary level of skepticism is not typically required for politicians to successfully bamboozle a majority of voters.

John Dewey September 12, 2011 at 10:52 am

Jim,

Voters had a choice of which politicians to believe. IMO, it was not ignorance which caused them to accept the Democrats argument that SS was OK. Seniors accepted the Democrats’ argument because doing so made them more comfortable. I think most of the Greatest Generation knew SS would need to be adjusted. I also think that most of our Boomer generation knew that as well.

What I’m saying is that both Democrats and their followers knew that SS taxes would need to be eventually raised. And I think they believed then and believe now that is not a problem. As I see it, SS was not a fraud. Most voters have long known it was going to require changes.

indianajim September 12, 2011 at 11:52 pm

John, Maybe you are right but consider this: Ponzi schemes have been entered into without coercion. Remember what WC Fields said about there being a sucker born every minute? Especially where voters are concerned (and rational ignorance prominent), isn’t it tough to persuade without some potent evidence that on the issue of Social Security most voters were prescient?

vikingvista September 13, 2011 at 3:04 am

The only choice voters had was a Hobson’s choice.

Democracy is not a rational defense of anyone’s malfeasence, whether he works for the government or not. Each individual retains his own will. Collective will is an absurdity.

John Dewey September 14, 2011 at 8:59 am

Jim: ‘Remember what WC Fields said about there being a sucker born every minute?”

Are you meaning that seniors were suckers for not realizing they could have achieved higher returns had they been able to invest FICA taxes in private accounts? Given their experiences in the 1930s, I’m not surprised that most of the Greatest Generation preferred a defined benefit plan guaranteed by the federal government.

kyle8 September 12, 2011 at 10:56 am

I would say that the totality of Democratic Party attempts to sell and promote Social Security through the years does indeed amount to total fraud.

We have been told that it was an investment, it is not
We have been told that your money was in an account, it is not.
We were told the system is secure, it is not.
We were told that after reform there was a trust fund with actual wealth in it.
There was not.

In what meaningful way was it not a collasal fraud?

Luther September 12, 2011 at 9:29 am

Brilliant – I love when Keynesian “economists” (more accurately, political shills) are exposed for their voodoo!

muirgeo September 12, 2011 at 9:49 am

“for which Uncle Sam writes IOUs to himself and then assures the public that Social Security’s liabilities are fully backed by marketable assets – ”

Yet apparently those same marketable assets are great for funding our trade imbalance. Or maybe “free trade” is a fraud.

Anyway those assets are the ones Wall Street ran to… they ran fast to them when they were downgraded to AA+.

Anyway you do have the creationist, global warming denying Rick Perry on your side… and on that basis alone I want HIM to be the republican nominee because most Americans are pretty happy with the Ponzi scheme.

Peter September 12, 2011 at 10:18 am

The only way you can believe in a ‘trade imbalance’ is to believe that the ‘marketable assets’ paid for previously-foreign-existing goods are more valuable overall than the goods received. Since the persons involved in those voluntary transactions don’t seem to believe it, call me skeptical.

The comparison with voluntary, foreign (I assume foreign, since you mentioned ‘trade imbalance’), private trade is exciting. In fact, let’s go with that. Let’s make Social Security voluntary and private. Let’s open it up to foreign competition and participation. Then we’ll see just how the market aligns those ‘marketable assets’ when people are free to choose.

muirgeo September 12, 2011 at 9:50 am

n 1954 Republican President Dwight D Eisenhower wrote a letter to his brother. Here is a passage from that letter.

“But to attain any success it is quite clear that the Federal government cannot avoid or escape responsibilities which the mass of the people firmly believe should be undertaken by it. The political processes of our country are such that if a rule of reason is not applied in this effort, we will lose everything—even to a possible and drastic change in the Constitution. This is what I mean by my constant insistence upon “moderation” in government. Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt (you possibly know his background), a few other Texas oil millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid.”

dsylexic September 12, 2011 at 10:37 am

wtf is that? eisenhower refusing to engage with economic reality? how is that relevant to this discussion.another misguided appeal to ignorant authority

John Dewey September 12, 2011 at 10:58 am

The “economic reality” is that SS can be made sustainable. All that is required is adjustments to benefit formulas.

Medicare is a different matter. Eisenhower did not address Medicare because it did not exist when he was in office.

Of course, I don’t believe Eisenhower’s remarks to be relevant today. In the 1950s, voters were still sufficiently influenced by the great Depression that they were not going to accept alternatives, such as privatization.

kyle8 September 12, 2011 at 11:01 am

Perhaps it can be made to be sustainable, but it would still be a huge rip off because of opportunity costs and because it is a wealth transfer.

So the question is why prop it up? Why not pay out the older folk but start something new and better for younger people?

John Dewey September 12, 2011 at 11:27 am

Kyle8: “Why not pay out the older folk but start something new and better for younger people?”

Privatization has not been sold very well. Given the performance of U.S. equities over the past decade, I can see why it’s a tough sell.

The bigger problem, of course, is that even today’s SS tax rates are not enough to pay out the promises made to older folks. The challenge younger folks face is how to convince the Boomers and their parents to give up some of their benefits. Calling us thieves is not a very persuasive argument..

Methinks1776 September 12, 2011 at 12:21 pm

Privatization has not been sold very well. Given the performance of U.S. equities over the past decade, I can see why it’s a tough sell.

Yes, because most people don’t understand basic statistics and cherry pick data. You’re in your 60′s. Over your working lifetime, if you started investing in a stock index fund right after college, you would not only still have all your principal, but you would have earned a positive rate of return – even with the stock market performance over the past 10 years.

As it is, 100% of your principal has been lost and you are now dependent on the government’s ability to squeeze that money out of other people to return to you.

I know you favour privatization, John. I just don’t understand how other people don’t understand such simple things.

BTW, I think the way the young’uns are going to convince the Boomers to give up some of their benefits is by simply producing less taxable income in response to higher taxes that will be required to pay Boomers. You’re still going to win over your profligate peers.

kyle8 September 12, 2011 at 12:36 pm

“Calling us thieves is not a very persuasive argument”

Although it has the virtue of being true.

John Dewey September 12, 2011 at 2:29 pm

methinks: “I think the way the young’uns are going to convince the Boomers to give up some of their benefits is by simply producing less taxable income in response to higher taxes that will be required to pay Boomers.”

You may be right. But I think a far better alternative is to cap total SS benefits at the level of current SS revenues. That would mean that Boomers and other seniors would see a 10% reduction in benefits in about 7 years and a 20% reduction in benefits by 2025. Boomers and their parents would have time to alter lifestyles to levels of those reduced benefits.

The reason I think such a scenario is politically workable is that seniors may accept the idea that young people should be no more or no less burdened by SS than they were for most of their working years.

There is no solution for making Medicare sustainable, of course. Just like employer-provided medical insurance, Medicare did solve the problem of adverse selection. But the American people do not have the stomach to force any sort of fiscal discipline on medical spending. I do not even have a guess about how this program will turn out.

Methinks1776 September 12, 2011 at 6:43 pm

John Dewey,

The program will turn out the way all such programs turn out.

It will increase denial of treatment by offering only the least expensive alternative or refusing to pay for a procedure altogether (as it does often now). For instance, it will pay for the $40 to pull your tooth, but not $2000 to do a root canal and save the tooth, even though the technology exists – that’s the way Medicaid works now. Costs will have to be capped and that means long wait lists. Just as in Britain, people who exceed certain age limits will be denied expensive treatments like dialysis. The denial may not be so blunt, but the net effect will be a denial.

In other words, if you want actual health care, you’ll have to pay out of pocket. I predict a lot of medical tourism to India, the Caribbean and even China among Boomers.

Given that medicare is bankrupt and that it’s only going to get worse, I don’t think we can claim that it solved the adverse selection problem without creating a worse problem. There were much better ways to solve adverse selection and we have a funny definition of “insurance” when it comes to health insurance. I like the way Arnold Kling defines it – not “insurance” but “insulation” from medical expenses. All of them, not just the emergencies in our lives that insurance typically covers.

John Dewey September 14, 2011 at 9:13 am

methinks: “we have a funny definition of “insurance” when it comes to health insurance.”

I very much disagree with Arnold and our hosts here at Cafe hayek on that point. Much of what they would desdcribe as “routine” health care is anything but routine.

Diabetes is not a routine illness. Yet the treatment requires “routine” medical exams by different medical specialists several times a year. It also requires, for me, at least, five different medications which must be taken daily. I think Arnold would look at expenses for medical exams and prescription drugs and argue that these are not catastrophic events, and should not be covered by health insurance. I disagree completely. Diabetes is a catastrophic event, even though its very expensive treatment includes exams and prescriptions which seem routine if viewed in isolation.

Diabetes is one of a number of diseases and conditions which drive medical costs sky-high. IMO, costs for the treatment of these diseases and conditions are properly included in health insurance plans.

I also see no reason why prepayment of the truly routine health treatments cannot be part of the health insurance bundle. Kling, Boudreaux, and Roberts have argued that third-party payment leads to overuse. I disagree on that point also. Insurance companies would control usage of routine health care – if government stopped interfering with their ability to do so.

High medical costs are caused by government – not by third party payment contracts.

vikingvista September 13, 2011 at 3:08 am

The economic reality is that SS can be made into something other than the Ponzi scheme that it is.

I wonder how many times Madoff told himself that in the years before he was exposed.

Methinks1776 September 13, 2011 at 5:20 am

Well…zero. Madoff’s intent was always to defraud for as long as he could and his game was to see how long he could get away with it.

Like government.

Tim Fitzgerald September 12, 2011 at 9:55 am

Evading the discussion of whether the gov’t should compel citizens to “invest” in SS, I skip to the discussion of private accounts.

Detractors of private accounts dislike them because they expose investors to the risk of losing principal.

What if it was run as a private account but, instead of being invested in conventional investment vehicles, the gov’t simply added 6% (or whatever) to the principal each term. This would provide the ownership that advocates of private accounts like and eliminate the risk that the detractors fear. It eliminates the Ponzi scheme aspect of SSand it would also prevent the parasites in Washington from spending the money on something else.

Any obvious reasons, other than political, that this wouldn’t work?

Tim

Economiser September 12, 2011 at 10:00 am

Where does the government get the money to add 6% to the account every year?

SweetLiberty September 12, 2011 at 10:31 am

My question exactly. Also, who says 6% is a good deal, especially if the rate of inflation exceeds this value?

Economiser September 12, 2011 at 10:51 am

Good point. More generally, the concept of interest doesn’t work without “conventional investment vehicles” (i.e., investment in productive enterprises). It’s not possible for any debtor, even the US government, to pay interest without some sort of risk attached.

rhhardin September 12, 2011 at 10:03 am

1. Social Security isn’t a Ponzi scheme, in particular not mathematically.

Social Security is an annuity that insures you against outliving your savings.

The people who die young pay for the people who die old, like any insurance system.

People whose houses don’t burn down (ie die young) pay for people whose houses do burn down (ie die old).

The only thing wrong with SS is that the demographics is out of balance.

Just raise the retirement age to whatever balances the demographics.

A Ponzi scheme or pyramid scheme can’t be fixed by changing a parameter. They have what is mathematically called an exponential failure, unlike SS.

SS can’t go exponential because people are mortal and die. Just get the parameter, the retirement age, right.

If you want to retire earlier, save to bridge the gap on your own dime..

2. IOUs in the trust fund are the only option. The government must return to the economy every cent it takes in, lest the money supply fall. No matter how you do this, you wind up with IOUs in the trust fund.

The payroll tax is indistniguishable from a general tax no matter how much you might want to dedicate it to this or that purpose.

In fact the payroll tax is one of our best taxes, being a flat tax, and in fact owing to the upper limit being anti-progressive, levelling the curve a little.

Economiser September 12, 2011 at 10:28 am

Social Security is an annuity that insures you against outliving your savings

No, it’s not. Social security is a tax levied on current workers coupled with a benefit paid out to current retirees. All that the current taxpayers get is a promise from the government that they too will receive this benefit when they retire. There’s no direct link between inflows and outflows, and as you say demographic changes are going to make SS unsustainable at current levels.

Nearly everyone participating in SS would do better with a private account. SS doesn’t invest money; it just takes in from one group and pays out to another. SS participants are losing out on the benefits of compounding interest over their 40-year working lives.

John Dewey September 12, 2011 at 10:35 am

Economiser: “There’s no direct link between inflows and outflows”

I don’t think there are direct links between inflows and outflows of private annuties, either,

Economiser: “as you say demographic changes are going to make SS unsustainable at current levels.”

I don’t think that is correct. demographic changes will make SS unsustainable at promised levels. Promised levels of SS benefits are significantly higher than current levels of SS benefits. SS can easily be made sustainable by reducing the projected growth in benefits and raising slightly the retirement age.

rhhardin September 12, 2011 at 11:31 am

The promised levels work out better if you take the promise as retiring the last (say) ten years of your life rather than all the years after age 65. Thus the retirement age is tied to whatever demographics makes it balance, as part of the promise.

PrometheeFeu September 12, 2011 at 12:56 pm

Actually there is a contract that you have with your annuity’s provider which requires them to pay you and regulates how much they can pull out of the fund etc… There is no such thing with SS. Funding it and paying it out is entirely at the discretion of legislators.

Edward Cox September 12, 2011 at 10:31 am

Actually, you could “fix” a ponzi scheme by changing the payout to balance the suckers’ contributions. At that point people would stop buying. SS, however, doesn’t give anyone the choice to stop buying. This is the main difference.

dsylexic September 12, 2011 at 10:31 am

the demographics going out of whack is in general,a predictable outcome of prosperity.so why act surprised when prosperous people (not to mention 2 income familes) choose to have lesser children.it remains a ponzi scheme because this is not a quirk of demography -in fact it should have been the primary consideration based on which it should have been rescinded

John Dewey September 12, 2011 at 10:44 am

I disagree on this point. It wasn’t prosperity which caused families to have less children. It was birth control. And I do not believe the pill was a rpedictible development.

I agree that SS should have been rejected or privatized long ago – before Boomers reached retirement age. But now Boomers have the votes to prevent changes, and I predict we will continue to vote in our own self-interests. That shouldn’t be surprising. The senior population has favored continuation of SS for at least five decades.

John Dewey September 12, 2011 at 10:40 am

rhhardin: “IOUs in the trust fund are the only option”

I agree with almost all of your comment. But this statement seems to ignore what could have been done the past 20 years when all those surpluses were accumulated. Congress could have used SS surpluses to retire other government debt. They could have returned SS surpluses to the taxpayers (by reducing FICA rates to levels required to fund benefits, for example). So either the overall debt would have been lowered or else the economy would have grown faster.

rhhardin September 12, 2011 at 11:13 am

All government revenue offsets government debt, and to that extent retires it.

As to privatizing SS, the advantage of government SS is that’s inflation adjusted, which is not easy to work privately. Inflation isn’t an insurable event since all the policies go bad at once, and your annuity company goes out of business in 30 years instead of increasing your payout.

Also against it, the retirement age would increase in any case because future goods and services will be provided by future workers. You can’t hoard that today for use tomorrow.

The specific mechanism, were people all to save for retirement at once, is that stock prices would fall at retirement age, owng to too few savers (young workers) buying stock for the too many retirees selling stock. Thus the retirement age would go up to match demographics in any case owing to a fall in return on investment.

The growth of the economy is inhibited by government spending, which is mostly malinvestment and a misallocation of resources, not the social security system, which in itself is just an annuity company.

John Dewey September 12, 2011 at 3:25 pm

rhhardin: “were people all to save for retirement at once, is that stock prices would fall at retirement age, owng to too few savers (young workers) buying stock for the too many retirees selling stock. “

Not sure I agree. Like most retirees, I’ll be selling only a tiny portion of my holdings each year. Those shares of stock will be purchased not just by young U.S. workers, but by investors throughout the world. Also, a large portion of the wealth of retirees will not be cashed out but will be passed on to heirs.

I also believe that productivity of workers will continue to rise, and so young folks will have much more income from which to save than did earlier generations.

John Dewey September 12, 2011 at 3:34 pm

rhhardin: “All government revenue offsets government debt, and to that extent retires it.”

I think you miss my point. From about 1993 to 2008, Social Security took in many billions more in revenue than it paid out. Congress could have used that revenue to retire debt from previous years, and reduced the total government debt held by the public. That would have reduced the debt burden of future generations. Instead, Congress increased spending even more than the level of SS surpluses, and increased the debt burden of future generations even more.

I agree with your point that the federal government has to spend revenue it receives. But it does not have to spend more revenue than it receives.

Martin Brock September 12, 2011 at 10:45 am

1. Social Security is not annuity. With an annuity, you and other retirees agree to reduce your present consumption in order to support the longest lived among you. This arrangement is not susceptible to demographic imbalance in the way that Social Security is.

Social Security is a program of elder support imposed on the young. It replaced the traditional support of aging parents by their children, not “saving for retirement” or insurance schemes like annuities That’s what Franklin Roosevelt and others said it was at the outset. You’ve only forgotten.

You now perceive your parents’ support as an entitlement. You’re a free rider on your parents’ shoulders, and you like it that way. You don’t associate their support of you with their receipt of your payroll taxes, because you don’t support them specifically. You support all older people collectively.

2. The money supply has nothing to do with government returning what it takes in. Money is not a substance obeying some kind of conservation law. The money supply expands (or contracts) with demands for credit.

Josh September 12, 2011 at 11:09 am

Excellent post. I think alot of people posting against SS would change their tune if they could see some of the misery and hardships that would be in a world with no social programs. Many of their elderly relatives and friends quietly depend on SS like 54 million other Americans. The burden of these folks wouldn’t go away, just be shifted around creating a load of winners and losers.

rhhardin September 12, 2011 at 11:22 am

1. If you buy an annuity, you’ve saved to buy it, thus reducing your consumption in your working years. This is the payroll tax. The elder buying an annuity isn’t reducing consumption to do it. He’s using his savings from working years. He prefers the annuity to savings because it’s insurance against the risk of a long life, which his savings are not. What corresponds to the retirement age imbalance is the insurance company setting the premium wrong, or the payout wrong, depending on which side you take as the mistake. It’s very simple to fix in each case.

2. The SS fund could take possession of actual dollars in bill form, and it wouldn’t matter. The Fed would offset the out-of-circulation money by replacing it until they turn up in circulation again, buy buying back debt. The debt in the Fed’s hands would correspond to the IOUs in the trust fund hands. It’s a wash against an invariant – the dollars have to be returned to the economy and the government winds up holding IOUs.

Martin Brock September 12, 2011 at 2:41 pm

This is the payroll tax.

The payroll tax is nothing like saving to buy an annuity. The payroll tax does not reduce consumption, because unproductive old people consume it.

The payroll tax is much more like supporting your parents in their old age. Supporting your parents this way is completely honorable and proper, because they supported you. You are literally a means of production that they created (along with other contributors). You are their investment, and your support of them is their return on the investment.

Expecting a return on your payroll taxes yourself is like expecting a return on your mortgage payment.

But I’m not defending the Social Security system here. I’ll be fifty in January, and I have three children in college. I’ll make the following deal with the Social Security Administration right now. I’ll surrender my entitlement to a Social Security pension benefit, without any return of any payroll taxes I’ve paid, if my children need never pay the tax.

I’ve never seen my payroll taxes as any sort of “retirement savings”. I see them as (a very poor) substitute for my duty to support my parents. My duty to support my parents has nothing to do with my own retirement.

The elder buying an annuity isn’t reducing consumption to do it.

The elder buying an annuity and dying soon thereafter consumes less while elders buying an annuity and living longer consume more.

He prefers the annuity to savings …

An annuity is a perfectly reasonable contract between older people coinsuring each other, but Social Security does not fit the annuity model at all.

Annuities are part of the alternative to Social Security that I discuss here.

What corresponds to the retirement age imbalance is the insurance company setting the premium wrong, or the payout wrong, depending on which side you take as the mistake. It’s very simple to fix in each case.

What does not correspond to an annuity is a lot of unproductive old people consuming the vast majority of the payins.

In a true system of saving (or investment), the savers create real means of production that younger people later employ to produce goods that the older people consume in retirement.

When my parents fed, clothed, housed and educated me, they created a younger person himself, so I’m here, and I’m productive, and goods I produce are available for my parents to consume.

By contrast, when I pay Social Security taxes, the vast majority of the money flows directly to older people (like my parents) who have ceased producing and never expect to produce again before they die.

The difference could hardly be more stark. Child support is the purest form of investment, and elder support is the purest form of consumption. You incredibly confuse the latter with some sort of investment. Your impression of the system is the best reason I can imagine to call it a fraud.

2. The SS fund could take possession of actual dollars in bill form, and it wouldn’t matter.

The SS fund could purchase real means of production, and it would matter, but that ship has already sailed. The SS fund receives a small fraction of payroll taxes anyway. The vast majority of payroll taxes flow directly to SS recipients and always have.

erp September 12, 2011 at 10:19 am

As usual, commenters here “get it.” Social security isn’t voluntary. It’s confiscatory. Ponzi schemes aren’t.

steve September 12, 2011 at 10:28 am

All mammals have much in common, but a giraffe is not a lion. A Ponzi scheme shares traits with SS, but they are not the same. Ponzi scheme is set up so that the individual starting it, makes the lion’s share of the money. It is deliberately fraudulent and deceptive. It is not created with the idea of benefitting millions of people. They do not last for 75 years. They are not transparent. You link to studies looking at its finances. They have always been available for public scrutiny. We have known fo ryears that it faced a shortfall. In a true Ponzi scheme, the person running the scam hides information or provides false data, or both.

While you claim to be libertarian, this prolonged effort to carry water for a GOP candidate is odd. I read this blog every day, seldom comment and frequently read that you are not pro-Democrat or pro-Republican. Then I read this kind of stuff. Very disappointing. Yes, you can distort and twist SS to call it a Ponzi scheme, but it does not pass the smell test. It is so obvious that you might as well turn in your libertarian card. Since I prefer to read libertarian sites, real ones, I will ask if anyone has a referral to a real one.

Steve

Steve

dsylexic September 12, 2011 at 10:33 am

SS is based on the idea of free lunch (or bill it to the kids scheme).that makes it not only a ponzi one,but a decivilizing immoral one

Edward Cox September 12, 2011 at 10:34 am

Here’s one that suits you: huffingtonpost.com

kyle8 September 12, 2011 at 11:06 am

So if a politician happens to say something that Don agrees with, then he is carrying water for that politician? That is nonsense.

SweetLiberty September 12, 2011 at 10:41 am

No analogy is perfect. Comparing SS to a Ponzi scheme is an analogy – not a strict definition. There are similarities, and there are differences, but as a rough analogy, I think the comparison works – as did Samuelson, Krugman, Friedman, and others. As for libertarians, this might help using your opening words…

All libertarians have much in common, but a Don is not a Steve.

SweetLiberty September 12, 2011 at 10:42 am

@ Steve ^

Brian Donohue September 12, 2011 at 10:59 am

The proper Libertarian argument against Social Security is, of course, its mandatory nature.

Behavioral economics shows us something we all intuitively understand: deferring gratification, like responsible saving for retirement, can be hard. Sometimes, people don’t do what they “want” to do, or know they should do- this is a kind of schizophrenia most of us struggle with.

So, if you’re a hard-core libertarian, prepared to step over starving old people on your way to work, feel free to grouse about mandatory Social Security. Otherwise, recognize that almost all of us will need income beyond our working years, Social Security amounts are modest enough not to “overshoot” the minimum required floor of income most of us will require, absent Social Security a segment of the population will not make appropriate provision for retirement, and taxpayers will be required to pay for the maintenance of these people.

Dan H September 12, 2011 at 11:54 am

“So, if you’re a hard-core libertarian, prepared to step over starving old people on your way to work, feel free to grouse about mandatory Social Security. ”

(yawn)

Why are they starving? And why are they my responsibility?

I so believe I am my brother’s keeper. Should I fall on hard times, my brother would surely take me in. If my brother fell on hard times, I would surely take him in. But I can also hold my brother accountable and kick him out if he’s not making an honest effort to get back on his feet.

Regardless, I am not YOUR brother’s keeper, or anybody else’s brother’s keeper. So stop putting a gun to my head and calling it charity.

Methinks1776 September 12, 2011 at 12:09 pm

These threaded replies are not working.

Brian,

I’m certain I’ll be stepping over old people starving in the streets – just as Rusisans were forced to when the whole thing collapsed. The money will run out. The promises won’t be kept. The people looking forward to SS to sustain them in their golden years will be unprepared and the rest of us will be too poor to keep them out of the gutter.

That’s how your romantic liberal schemes always end.

Brian Donohue September 12, 2011 at 12:20 pm

Methinks, I have to laugh.

Your gloom and doom reminds me of nothing so much as the eco-apocalyptics. Seems everyone today is convinced the world is going to hell in a handbasket, they just disagree on how.

As an antidote, I recommend Matt Ridley’s “The Rational Optimist.”

Methinks1776 September 12, 2011 at 1:21 pm

Well, eco-apocalypse is ridiculous. I’m from the Soviet Union and that’s exactly what happened there and every other country caught in the “from each according to his ability to each according to his need” web. I can remain optimistic as long as that’s not the road we’re headed down, but I think we are.

Brian Donohue September 12, 2011 at 12:22 pm

Kudos on consistency Dan.

Just watch your step.

Dan H September 12, 2011 at 12:32 pm

You have no idea who you’re talking to asshole.

Until you reach out like my fiance and I have and give shelter to victims of human trafficking, don’t you dare try to judge me.

Seriously, fuck off.

T Rich September 13, 2011 at 1:01 am

Dan H,
You are one of the more interesting (newish) commenters on this blog. Your experiences and those of the future Mrs. H. are clearly what inform your viewpoints. They are valid and extremely useful – much like the awesome comments of Methinks.

I appreciate your good manners in apologizing for popping off. That shows good upbringing and genuine concern for those of us “in the room” with you. I think most of us are grown ups and can handle sharp words. Also, sometimes particular people need a sharp punch in the nose to let them know that they have crossed a line.

Thanks for your honesty and passion.
T Rich

Dan H September 12, 2011 at 12:37 pm

Pardon the language. It’s been a rough Monday.

But the point still stands.

Dan J September 13, 2011 at 1:33 am

Dying in the streets? Avg lifespan in 30′s was 60……. 58 for men and 62 for women. Age to collect SS….. 65.

By those standards, todays recipient should be no younger than 83 since avg lifespan is 77.7 yrs of age.

I’m curious, how many old people should we see dying in the streets at that age, which is an age for collecting SS that most were not suppose to live to see…. Or collect SS?

Were 60 yr old men lying in the streets in 1938? I’m supposed to pay tens of thousands of dollars to govt, for safe keeping, on the expectation that I will not live to get it back?

This is how it was set up. This is partially why it is failing. Most of us were not supposed to be alive to hold govt accountable. And, those of who were, are unlikely to complain. Dead men don’t vote, except in New Orleans.

Josh September 12, 2011 at 11:03 am

Calling SS imoral is like calling roads immoral. I dont have a car, building roads is threfore coercive theft of my money. I happen to think a world without any public goods or a social contract is immoral.

Slappy McFee September 12, 2011 at 11:24 am

Roads are immoral.

But then again, believing a moral social contract includes forcibly removing my property for your own benefit is childish to begin with.

Even my one year old understands that taking things is wrong.

Grow up.

Edward Cox September 12, 2011 at 11:28 am

Roads? Where government spending is taking us, we won’t need roads.

Dan H September 12, 2011 at 2:10 pm

All government programs are at best amoral (since I have no choice… you can’t have morality without choice) and at worst immoral.

Jim September 12, 2011 at 11:39 am

Morality aside, there seems to be two fundamental arguments against SS being a Ponzi scheme:
1. There is no conscious attempt to deceive. Like Don, I disagree, for it is neither insurance nor secure. But aside from wilful deceit, the argument implies that because people are gullible enough to participate despite its shaky qualities, it is ok. Really? I am not even sure Don’s point #6 is required.
2. Tweaking will allow its survival. This argument lowers the bar so far as to be laughable. Perhaps Madoff could have continued on if he had lowered pay-outs as well. The unalterable fact is that poor black men are subsidizing rich white women (who live longest). Even a life insurance style risk and investment vehicle would both end the Ponzi nature of the plan (which is decidely NOT insurance) and provide almost immediate benefit to the working poor or their descendents.

Defending SS’s original purpose or how to ‘save’ it is irrelevant and proposes straw man arguments.

SS structurally precludes most of the population from the benefits of ROI, the principal vehicle used by the rich to get richer. And in any private practice, it would be very appropriately deemed illegal for any number of financial and accounting reasons. That is indisputable, and where all discussions of the current SS system should begin.

Methinks1776 September 12, 2011 at 12:04 pm

FDR understood that it was unsustainable, as did every politician who pushed it. the record is clear.

There is just no argument to be made that there was no intent to defraud.

Brian Donohue September 12, 2011 at 12:24 pm

Methinks,

Do you have a citation for this? I have seen this wrt LBJ and Medicare, but I was unaware of intent to defraud on FDR’s part, tho I’m always willing to learn.

Seems kinda beside the point based on the 1983 law change and some comparatively minor tweaks gong forward, but I’m still interested.

Methinks1776 September 12, 2011 at 1:18 pm

Brian, I first learned this in Amity Shlae’s book about the Depression called The Forgotten Man. I’m sorry I can’t offer more evidence than this FDR quote because I’m at the office and my book is at home.

“It is almost dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980. We can’t do that. We can’t see the United States short in 1980 any more than in 1935.”

The pamphlet used to sell Social Security to the public promised that the tax rate of 3% an every dollar up to a certain amount was all they would ever have to pay. That was false and every politician already knew that.

John Dewey September 12, 2011 at 2:41 pm

Methinks: “That was false and every politician already knew that.”

Two changes made SS unsustainable at the tax rate of 3%:

- the increase in life expectancy from 1940 to 1990;

- the baby bust which occurred after the invention of the birth control pill.

Can we know that most 1930s politicians could foresee those changes? I don’t think we can know that they did.

Methinks1776 September 12, 2011 at 7:01 pm

John Dewey,

The politicians of the 1930′s projected that SS would be in deficit by 1980. Note how FDR balked at first.

John Dewey September 13, 2011 at 1:45 pm

I don’t have a copy of The Forgotten Man, so I guess I’ll have to take your word for it. However, I do not understand how politicians of the 1930s could have predicted the increases in life expectancies or the decline in birth rates which occurred over the next five decades.

John Dewey September 12, 2011 at 5:20 pm

Jim: “SS structurally precludes most of the population from the benefits of ROI, the principal vehicle used by the rich to get richer.”

I agree that over a middle class lifetime, the benefits received are a miserable, and perhaps negative “return” on the taxes paid. But the majority of voters will not evaluate the program that way. That’s because all the taxes already paid are sunk costs.

Someone like me, who has already paid SS taxes for 47 years, should only consider the cash flows for the remaining 20 to 30 years of my life. From that perspective, SS going forward looks like a pretty good deal. So I’m going to voice my support for the program. I’m going to act in my own economic self-interest. Sunk costs explain why SS has the support of almost everyone older than 50. And that’s a big chunk of voters.

Dan J September 13, 2011 at 1:35 am

JD – govt program that robs Dan J to pay John Dewey will always have John Dewey support for that program.

Martin Brock September 13, 2011 at 4:40 am

You should just start shooting old people, Dan. It’s your only hope.

Methinks1776 September 13, 2011 at 5:26 am

We have medicare for that.

John Dewey September 13, 2011 at 1:42 pm

And some day in the future, when the same govt program “robs” Dan J III to pay Dan J, will it have Dan J’s support? I predict that it will.

Dan J September 13, 2011 at 8:39 pm

I am not against SS for people currently or close to accepting it. Their lives were based on thinking it will be available. But, I want option of cutting out now, at 36, and even relinquishing what wad taken, if need be.

At whatever age, I will be allowed l start drawing, I will take it. Assuming, they have found a way to push the debt further and it is not reformed, I will look to take what I paid, not giving govt a break from their perpetual lies, but will indeed vote for those who would claim to reform or wind it out of existence. I look forward to breaking govt, if it cannot find the strength to legislate reforms or controls. I will hold my breath…….. I have no hope, with muirgeo’s procreating.

John Dewey September 14, 2011 at 9:29 am

Dan J: “But, I want option of cutting out now, at 36, and even relinquishing what wad taken, if need be.”

I wanted that option at age 36 and at age 46. But SS is a program by which the working-age population pays for the living expenses of those beyond working age. If the working-age population stopped paying FICA taxes, they would still pay for SS through income taxes.

“I am not against SS for people currently or close to accepting it.”

and

“But, I want option of cutting out now, at 36″

are impossible, IMO. That is, unless almosty all other government functions are eliminated. Not a bad idea, but an idea which is politically impossible.

PrometheeFeu September 12, 2011 at 12:51 pm

“Second, they work only until people get wind of what is going on, at which point they inevitably collapse. Social Security’s finances are plainly visible for all to see.”

The accurate way to put it would be: “until people get wind of what is going on, stop participating, at which point they inevitably collapse.” If Madoff had been able to force his customers to keep contributing at gun-point, his fund would undoubtedly still be in business.

steve September 12, 2011 at 1:12 pm

1) Not if people started withdrawing. Most people were staying in the fund and just counting paper gains.

2) It would still fall apart since he and his family were taking most of the money. Contributors were getting little of the money.

Steve

BonnieBlueFlag September 12, 2011 at 4:19 pm

A Ponzi scheme is a method of investment which the law declares fraudulent. Social Security is based on the same method, but is compulsory instead of voluntary and not declared fraudulent. If anything, Social Security is worse than a Ponzi scheme, because the original Ponzi did not take money at gunpoint and congratulate himself the way our federal overlords do.

kyle8 September 12, 2011 at 5:14 pm

Nor did he then tax you to pay for it.

Stephen A. Boyko September 13, 2011 at 11:10 am

Social security asks the fundamental question as to which was invented first – “sheep” or “fleecing?”

This can only exist so long as capital is a cost-free byproduct of a political system.

Carly EngageAmerica September 15, 2011 at 5:02 pm

Whether or not Social Security is a “Ponzi scheme” doesn’t change the fact that the program is projected to go bankrupt in 2037. The the way in which the program functions now is simply unsustainable. Currently Social Security and Medicare use 8.5% of nonentitlement revenuees (federal revenues dedicated to all other programs besides the two). By 2020, the deficits will grow to almost 25%. This means that within 9 years, in order to pay projected benefits to retirees and the disabled, the federal government will have to stop doing about one out of every five things it does today (http://eng.am/poetWU).

All of the following solutions will substantially eliminate these problems. Choose one and let Washington know what you think:
a.Reduce benefit payments by 5% AND increase the retirement age to 70 over time
b.Increase both the employee and employer contribution immediately by 1.1% for income up to $106,800 (its current limit)
c.Reduce benefit payments by 5% AND increase both the employee and employer contribution immediately by 0.05% each year for the next 20 years for income up to $106,800 (its current limit)
d.Remove the $106,800 limit and count all income towards the SS tax
e.Decrease the cost of living adjustment by 1% per year AND raise the retirement age to 67.
f.Tax income over $106,800 at 3%, index the retirement age to longevity AND decrease cost of living adjustment by 0.5%
Source: http://eng.am/oTlck2

Hmmmm September 17, 2011 at 12:30 am

“Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong… Wherever communal action can mitigate disasters against which the individual can neither attempt to guard himself nor make the provision for the consequences, such communal action should undoubtedly be taken,” – The Road To Serfdom (Chapter 9). – Friedrich Hayek

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