Ponzi Schemes vs. Social Security

-Submitted by David Drumm (Nal), Guest Blogger

In his 2010 book, “Fed Up,” Governor Rick Perry called Social Security a “Ponzi scheme.” A Ponzi scheme is an individual investment plan wherein investors are paid “interest” by the principal paid into the scheme by later dupes. A geometrically increating supply of new investor principal is required to pay off the “interest” to previous investors.

The WSJ calls Perry’s claim misleading and PolitiFact terms it False.

Social Security isn’t an individual investment plan, it’s a “pay-as-you-go” government insurance plan. While retirees depend on current workers to fund their benefits, that’s where any similarity to a Ponzi scheme ends. Some retirees will receive more benefits than they paid in payroll taxes and some retirees will receive less. There is no promise of receiving more than you put in. Any deficit is lost to your heirs.

As population demographics rise and fall, the balance of the Social Security Trust Fund will rise and fall. This vulnerability to demographic variability is one of the problems with pay-as-you-go systems. The amount going into, and the benefits going out of, the system must be adjusted to maintain the system. But, there is no unsustainable progression, unlike pyramid or Ponzi schemes.

Using current demographic estimates, the Social Security Trust Fund would become exhausted between 2036 and 2041. To maintain a 75-year solvency, Sen. Bernie Sanders (I-Vermont), has introduced legislation, Keeping Our Social Security Promises Act (pdf), that would remove the income cap on payroll taxes for those making more than $250,000. The wealthiest Americans would then pay payroll taxes on the same percentage of their income as the middle class, namely 100%. The bill is co-sponsored by Boxer, Whitehouse, Akaka, McCaskill, Blumenthal, Leahy, and Franken.

Perry has some noted company: Nobel prize winner Paul Samuelson who wrote “Social Security is a Ponzi Scheme that Works,” and Nobel prize winner Milton Friedman called Social Security “The Biggest Ponzi Scheme on Earth.” Even Nobel prize winner Paul Krugman said that Social Security had a “Ponzi game aspect.” Krugman says he was emulating Samuelson who was trying to be cute. There’s no cute in political theater.

The lifeblood of a politician is money, in the form of campaign contributions. The wealthy can invest in politicians to prevent any increase in their payroll taxes. Until the lifeblood of politicians is votes, the wealthy will continue to win the class warfare.

H/T: Kevin Drum, Social Security Online, Marginal Revolution.

32 thoughts on “Ponzi Schemes vs. Social Security”

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  3. Elaine

    What would you suggest is the mistake of the present?

    Personally I would characterize it as “Imperialist Capitalism” created by a “Regulatory Democracy” under the influence of the Elitist Anglo-Sphere

  4. noDUALISM

    “That is real progression, realising the mistakes of the past and not repeating them.”

    I agree. It’s also about realizing the mistakes of the present and trying to do something about them before they come institutionalized.

  5. Respectfully, the Hayek/Koch article does nothing to illuminate the truth that social security is unsustainable at this point in history. It may of been created with the best interests of citizens in mind (and that is debateable) but that does nothing to reassure the millions of young americans who are most likely never going to see a cent they have contributed. Even if they do it will come at further cost to them and thier children which wasn’t the deal in the first place.

    My generation is grappling with the fact that our previous generations have utterly failed us and continue to make decisions that will dissolve our individual freedoms and undermine our sovereingty. So once again the working class is saddled with debt that they never had an actual choice to incur in the first place. So its easy to point to a article that assumingly is aimed to contradict austrian economic principles and put keynesian central planning economic principles in a good light. But no one is addressing the fact that those keynesian principles are proving to be a failure. I reject central planning, fractional reserve banking, the repeal of the glass-steagal act, the politicizing of unions, collusion of government and trans-national corporations (which is Fascism by definition), and a whole host of decisions previous generations support and continue to cling to, even in the face of overwhelming evidence that those polices have gotten us into the current unprecendented financial mess we are in right now. That is real progression, realising the mistakes of the past and not repeating them.

    These little anecdotes about contradictory positions of ideaology are nothing more than muckracking and do nothing to actually engage in a honest discourse that is’nt blinded by old world partisanship. As Jonathan put it in his article in the L.A. times, its almost as if people have stockholm syndrome when it comes to politics. There is a cognitive dissonance going on in this country on a mass scale. Everyone who really cares about America needs to shatter this perpetually controlled political paradigm or we will be continually intellectually paralyzed by a system that gives us our choices instead of letting us create them.

  6. Elaine,

    I’ve now moved on from wearing a big sloppy grin to outright giggling. The only thing funnier than hypocrisy is the irony that it generates. In the case of both Koch supporters and Randians, if we could harness that energy, we could power the world. The biggest problem would probably be the carbon content and the fact that burning it smells a lot like burning manure.

  7. Gene,

    Oh…the hypocrisy. Remember how Ayn Rand took advantage of Social Security?

    Ayn Rand Railed Against Government Benefits, But Grabbed Social Security and Medicare When She Needed Them
    At least she put up a fight before succumbing to the imperatives of the real world.
    AlterNet / By Joshua Holland

    January 29, 2011 | Ayn Rand was not only a schlock novelist, she was also the progenitor of a sweeping “moral philosophy” that justifies the privilege of the wealthy and demonizes not only the slothful, undeserving poor but the lackluster middle-classes as well.

    Her books provided wide-ranging parables of “parasites,” “looters” and “moochers” using the levers of government to steal the fruits of her heroes’ labor. In the real world, however, Rand herself received Social Security payments and Medicare benefits under the name of Ann O’Connor (her husband was Frank O’Connor).

    As Michael Ford of Xavier University’s Center for the Study of the American Dream wrote, “In the end, Miss Rand was a hypocrite but she could never be faulted for failing to act in her own self-interest.”

  8. Elaine,

    In re the Hayek/Koch connection that was truly illuminating in every sense of the word. Thanks for the links.

  9. Charles Koch: Social Security for me, but not for thee
    by Joan McCarter
    Daily Kos
    September 29, 2011

    The Nation has a fantastic exclusive, demonstrating the depths of Charles Koch’s hypocrisy. To set the scene: it’s 1973, and Koch is the newly-appointed president of the Institute for Humane Studies, a libertarian think tank that was sort of a precursor to Koch’s Cato Institute. He’s trying to lure Friedrich Hayek, “the leading laissez-faire economist of the twentieth century,” from his home in Austria to the Institute as “distinguished senior scholar.” Hayek originally refuses, on the basis of having had some serious health concerns, and wanting to be in his home country—with its generous social benefits and health protections.

    Eager to have Hayek come to the Institute, staff there began researching options for his health coverage, finding out that he had paid into Social Security when he had lived in the U.S. and taught at the University of Chicago in the 1950s.

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