Monthly Archives: September 2011

It’s ‘prolly not fair, but after just one debate I don’t think I’m a Perry fan.  I don’t think that he necessarily believes what he’s sayin’ and, in order to SHOW that he does, he defends it so vehemently that I don’t see an ability to … “flex”.  Be that as it may, he made a comment, or rather a collection of statements, that seems to have the interlinks a’buzz.

Social Security is a Ponzi scheme.

Interesting.  Never thought of it that way, bt now that ya mention it; sure.

Let’s check the tape:

• A swindle in which a quick return, made up of money from new investors, on an initial investment lures the victim into much bigger risks.
• A fraudulent investment operation that pays quick returns to initial contributors using money from subsequent contributors rather than profit.
• Investment scam by which early investors are paid off from the contributions of later ones, 1957, in ref. to Charles Ponzi, who perpetrated such a scam in U.S., 1919-20.
• An investment swindle in which early investors are paid with sums obtained from later ones in order to create the illusion of profitability.

A general characterization of the Ponzi scheme seems to be the fact that there is an illusion or an act deception.  If you take away the deception that Social Security is solvent, which we can do for this argument, then the comparison doesn’t hold water.  Social Security is up front about the fact that we are contributing today in order to care for the retirement of others.  And later, when we need that same care, the workers of tomorrow will be there for us.

However, the later definitions rely less on the illusion and more on the method of paying out.  And in this regard, Social Security is EXACTLY the definition of a Ponzi scheme.  Investors are paid out with money obtained by later ones.

This later point is taken up by Shika Dalmia over at Reason.com:

A Ponzi scheme collects money from new investors and uses it to pay  previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

Shika goes on to make a second point that I think is much weaker:

Two, participation in Ponzi schemes is voluntary. Not so with Social Security. The government automatically withholds payroll taxes and “invests” them for you.

It would be hard to say that participation in a Ponzi scheme is strictly voluntary.  The “fund” is founded on fraud.  Few would invest if they knew the truth.

And finally, his third point is close, he doesn’t go far enough:

When a Ponzi scheme can’t con new investors in sufficient numbers to pay the previous investors, it collapses. But when Social Security runs low on investors—also called poor working stiffs—it raises taxes.

What this means, of course, is that when a Ponzi scheme runs out of clients, it’s sunk.  But when Social Security runs out of clients, it just walks over to their house, draws their gun and forces EXISTING clients to up their investment.

Now, to be sure, there are those who wouldn’t agree with said characterization.  Kevin Drum offers his over at Mother Jones:

Here’s how Social Security works: every month we take in taxes from working people and every month we turn around and distribute those taxes to retirees. That’s it. That’s how it works, and everyone who actually knows anything about the program knows that’s how it works. Taxes come in, benefits go out. And the key to solvency is simple: making sure that those taxes and benefits are in balance.

Emphasis Kevin’s.

So his defense that Social Security isn’t a scheme is to demonstrate that it works JUST like a scheme.  Except that because it’s done in the light of day, it’s apparently okay.  After all, when you tax people for an Army man, you pay the Army man.  So, see?  No scheme here.

He continues this like of thinking:

For example: we have an obligation to today’s seniors to fund the Pentagon and keep them safe from al-Qaeda. After all, they did their bit and funded the Pentagon back when we needed to kick Hitler’s butt and stop the commies from taking over the world.

But this isn’t an equivalent.  He’s trying to connect the fact that I am paying into a system that doesn’t benefit me now in the hopes that it’ll benefit me later to a program that I pay into now for a definite benefit now.  After all, when the seniors funded the Pentagon way back then, they received the benefit of a Pentagon.  They continue to pay today and, as it so happens, continue to realize the same benefit.

I’m not saying that in this case that Social Security being a Ponzi scheme is bad; it may very well not be.  Personally, I’d like to see some more privacy associated with the money so that we can’t just spend it out from our investors, but whatever.  The point isn’t the worthiness of the scheme, only if it IS one.

And it is.