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Is Social Security a Ponzi Scheme?

Posted By Don Boudreaux On September 12, 2011 @ 8:06 am In Other People's Money,Social Security | Comments Disabled

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’ [1],” 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 [2].

And as for people catching on to Social Security’s unsustainability, consider the following 1996 analysis by a Nobel-laureate economist [3] 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 [4].)

UPDATE: This cartoon [5], 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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URLs in this post:

[1] Social Security far from a ‘Ponzi scheme’: http://www.usatoday.com/news/opinion/editorials/story/2011-09-11/Social-Security-no-Ponzi-scheme/50362684/1

[2] a fraud meant to hide the true state of Social Security’s fiscal woes: http://www.xtranormal.com/watch/11226537/government-accounting

[3] 1996 analysis by a Nobel-laureate economist: http://www.bostonreview.net/BR21.6/krugmann.html

[4] Alex points out that other Nobel economists who’ve described Social Security as a Ponzi scheme include Milton Friedman and Paul Samuelson: http://marginalrevolution.com/marginalrevolution/2011/09/is-social-security-a-ponzi-scheme.html

[5] This cartoon: http://divisionoflabour.com/archives/2011_09.php#007796

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