Social Security: Pretty Damned Close To A Ponzi Scheme

Interesting interpretation of the “Social Security is a Ponzi scheme” thought.

But why a Ponzi scheme? The distinguishing characteristic of a Ponzi scheme is its intent to defraud. Charles Ponzi, and his modern cousin Bernie Madoff, meant to rip people off. Whatever disagreements we may have over policy, no one believes that FDR meant to rip people off, and neither do modern liberals who wish to maintain the program.

But most of those who refer to Social Security as a Ponzi scheme are not thinking intent so much as effect. What makes the Social Security/Ponzi references so common is the similarity in the way they are financed. In both cases, early participants receive payments, not from interest on their own investments, but directly from inflows from later participants. If you were describing the mechanics of how Social Security’s financing works, it wouldn’t be illogical to refer to a Ponzi scheme.

And, also like a Ponzi scheme, Social Security paid early participants incredible returns on their money, because they contributed to the system for only a few years but received a full retirement’s worth of benefits. A person who retired in 1950 received around a 20 percent annual return on the taxes he paid (which happens to be exactly the same return that Madoff promised to his investors). Put another way, that person received around 12 times more in benefits than he’d paid in taxes. That helps explain why Social Security became so popular: it was simply an incredibly good deal.

[…]

Similarly, like a Ponzi scheme, there really isn’t any actual investment going on with Social Security. While the trust fund has a $2.5 trillion balance it can call on to pay benefits, this fund won’t be of any help to the taxpayer. When Social Security goes to redeem bonds in the trust fund, the Treasury must raise taxes, cut other programs, or borrow the money—exactly the same steps as if there weren’t a trust fund at all. The trust fund records how much we have borrowed from Social Security but, as the Congressional Budget Office points out, “trust fund balances convey little information about the extent to which the federal government has prepared for future financial burdens.” While legally important, the CBO says, the trust fund has “little economic meaning.”

The biggest difference may be that Social Security can go on forever while a Ponzi scheme can’t, but that’s mostly because Social Security can force you to participate. If Madoff could find enough people willing to accept a 2 percent return rather than a 20 percent return, his plan could keep going indefinitely.

Wow. Makes you wonder what right-wing apologist talking point spewer this guy is, right?

Andrew G. Biggs is the former Deputy Commissioner for the Social Security Administration.

If you’re going to tell me he doesn’t know what he was talking about, you’d better have a better piece of paper on your wall than he does.

Source

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  • http://twitter.com/post406 Jeff Egnaczyk

    “The distinguishing characteristic of a Ponzi scheme is its intent to defraud.”

    So, the most important part of a Ponzi scheme is its intent to defraud. I would argue that means you shouldn’t say Social Security *is* a Ponzi scheme.

    “But most of those who refer to Social Security as a Ponzi scheme are not thinking intent so much as effect.”

    Maybe, but the fact that they are comparing Social Security to a program passed into law by a democratically elected government is disingenuous. It’s a rhetorical device used to discredit the program. And honestly I must be using the wrong meaning of “effect” here, because I don’t see how the intent of Social Security (to provide social insurance) is any different from its effect (providing decades of social insurance), just like I don’t see any difference between the intent and effect of a Ponzi scheme (to defraud, and actually defrauding).

    “And, also like a Ponzi scheme, Social Security paid early participants incredible returns on their money”

    The difference though is that a Ponzi scheme is going to continue to promise those returns (and then disappear), while Social Security does not. Despite the lessening returns, Social Security is still a popular program.

    (It only took me 6 posts to respond. Thanks for believing in me.)

    • http://www.insignificantthoughts.com Vinny

      “So, the most important part of a Ponzi scheme is its intent to defraud. I would argue that means you shouldn’t say Social Security *is* a Ponzi scheme.”

      No.  The distinguishing characteristic between social security and a Ponzi scheme is the intent to defraud, not that the intention to defraud is what makes a Ponzi scheme a ponzi scheme.  You misread that.

      “Maybe, but the fact that they are comparing Social Security to a program passed into law by a democratically elected government is disingenuous. It’s a rhetorical device used to discredit the program. And honestly I must be using the wrong meaning of “effect” here, because I don’t see how the intent of Social Security (to provide social insurance) is any different from its effect (providing decades of social insurance), just like I don’t see any difference between the intent and effect of a Ponzi scheme (to defraud, and actually defrauding). ”

      The effect that Mr. Biggs speaks of is clearly the idea that people paying in are paying the people getting out, like a Ponzi scheme.  You keep focusing on the legality as if the only thing that makes a Ponzi scheme a Ponzi scheme is illegality.  When people (like pretty much every honest person) look at Social Security and call it a Ponzi scheme, the idea is clearly that it works in a similar manner (with the added benefit of coercion) not that it’s fraudulent or illegal.  The constant “It’s not the same because it’s legal” drumbeat is, to borrow your word, disingenuous.  I think you know that, too.

      “The difference though is that a Ponzi scheme is going to continue to promise those returns (and then disappear), while Social Security does not. Despite the lessening returns, Social Security is still a popular program. ”

      And Social Security has continued to promise its returns and is destined to disappear, in spite of its “popularity.”  I don’t know about you, but seeing as you’re roughly the same age as me, are you realistically expecting this system you’re paying into to be around when it comes time for you to collect on it?  I certainly am not.  As it is right now, the system has 1.7 workers for every 1 person collecting.  Anyone with a brain knows that’s unsustainable.  The surplus they once had?  Dwindling.  Why?  Because it’s paying out more than it’s taking in.  The system is officially upside down now.  The money I’m supposedly putting in as an “investment” and for my “insurance” in the future?  It’s paying out the people collecting as of right now, a la a Ponzi scheme.  The promise of return is meaningless because the system won’t sustain itself.As the article noted, if Madoff had mandatory participation and promised a small return, you can bet that system would have gone on a lot longer also, but once the well of people leaving got larger than the well of people joining, it would be in the same situation.

      The idea that Social Security isn’t a Ponzi scheme despite sharing almost all of its characteristics save for its legality is just quibbling over semantics and focusing attention on the one difference instead of the numerous similarities.  And just for the record, I’d argue that the mandatory part of Social Security actually makes it more insidious than a Ponzi Scheme; no one forces you to participate in a Ponzi scheme.