Sunday, September 11, 2011

Yes, Social Security is a Ponzi scheme...

...and if you don't agree, then you don't know how Social Security works.

The other day I sat in my parked car several minutes after I arrived just to hear NPR's promised response to candidate Rick Perry's criticism that Social Security is a Ponzi scheme.

Unfortunately, all the reporter said was that it wasn't. She did not go into details.

A Ponzi scheme masquerades as an investment plan, but instead of generating more money and paying investors, money from new "investors" is simply given to established "investors." There is no actual investment taking place, money is simply shuffled around. A Ponzi scheme works as long as more and more people come in - but it's a vicious circle, because they will have to be paid with money taken from more people. Eventually, the numbers get too big and it goes broke.

Social Security works the same way, it's just a much slower system. It simply takes money from working people and hands it over to the retired, and it depends on having new blood at all time. The ratio of contributors to collectors has been dropping for decades, and since the world population is expected to level off in 40 years, it's going to crash,

Social Security was sold to the public, dishonestly, as an investment plan. But to defend the program before the Supreme Court in 1937, supporters said it was a welfare scheme. In practice it is a welfare program for the rich that is paid for with a regressive tax.

There is no room for debate. Social Security is a Ponzi scheme. It was doomed to fail from the start. The mechanism is the same, Social Security is a Ponzi Scheme.


  1. The fact that Social Security is funded by taxation has always been an open fact. A Ponzi scheme, as you point out, is a masquerade. Furthermore, taxes can be raised in order to generate more revenue. Alternatively, benefits can be reduced. Social Security, for the reason, can always be maintained, marking it as significantly different from a Ponzi scheme.

  2. The simple fact that everyone knows it's a ponzi scheme does not make it not a ponzi scheme michael 2. The two options you mentioned are both options for criminal ponzi schemes as well, nothing stops the operator from reducing future payouts or raising the cost to buy in.

    The real significant difference is the fact that SS is legal and other similar, albeit secret schemes, are not.

  3. Michael, you're saying because the numbers can be changed (money paid in can increase, money paid out can decrease) that somehow disqualifies it from being a Ponzi scheme? That's silly, honestly. That will merely delay the crash. It's still based on the idea of infinite recruitment, instead of investing.

  4. So if I save money in my bedside drawer, I must be running a Ponzi scheme on myself.

  5. I think you should take a step back and look at the statement I am making. SS does not work by investing money and creating wealth, it involves taking money from one group and giving to another. Now you may be able to make an argument that its sustainable - I'm highly doubtful of that possibility - but it is Special Pleasing to say deny my Social Security is a Ponzi scheme because of some minor, irrelevant difference like that it's controlled by the government.

  6. If you save money in your bedside drawer, you are doing something that bears no resemblance to Social Security.

  7. You can't call something a "minor, irrelevant difference" when it forms a key part of your own definition: SS does not masquerade as anything but a system of insurance which everyone knows is funded via taxation. The only way this is a Ponzi scheme is if we entirely ignore the transparency involved. And if we do that, then I'm pulling a Ponzi scheme on myself when I put money in my wallet to be used later. Especially if I give a dollar to a friend.

  8. It's hardly an insurance system and as other Michael pointed out the problem is that the cart keeps filling up with people and less and less are pulling the thing.

    If you prefer we can call it a pyramid scheme, but it's the same thing. MOOOOOOOO! The call of the liberal sacred cow. MOOOOOOOOO!

  9. Your transparency statement is special pleading. I am talking about the mechanism. The mechanism is identical to a Ponzi scheme. I simply added that it has been sold to the public dishonestly, which is undeniable.

  10. I'll grant you that the mechanism is the same if you grant that putting money in your wallet is a Ponzi scheme. It's the exact same thing you've described. And in the wallet case, it's likely you know you'll be taking the money out, so there is the same transparency as SS.

    The fact that there are more people taking out of it than putting in is a product of population dynamics, not something inherent in the system. Obviously if we had the 16:1 ratio of workers to retirees today that they had in the 30's, there would be no problem. The fact that people live longer and have fewer children is outside the purview of the concept of SS. If population trends went in the opposite direction - people began dying by 70, they tended to have more children than their parents, etc - then half your argument would fall apart.

    Really, this comes down to two key points: clarity and sustainability. I know you want to dismiss transparency (even though you made it a criteria in your original post - plus you haven't actually addressed since), but something can't be called a scheme if I tell everyone exactly what I'm doing. And on sustainability, of course it is indefinitely sustainable. Aside from the population dynamics I mentioned, the rate of taxation can be altered at any given time to correct for cash flow. The same goes for benefits. That makes this sustainable and it gets at the heart of what a Ponzi scheme isn't: people have no expectation that they will get back what they put in (ideally and according to the law, false hopes and ignorance aside). I can certainly grant that the political rhetoric suggested people ought to expect otherwise, but that says nothing of what was written as law. Furthermore, building upon the fact of population dynamics, the retirement age can be raised. Nothing inherently prevents people from not receiving benefits until the age of 85. That isn't a practical age and there are other methods for continuing the system, but this knocks down your claim that it is guaranteed to crash.

  11. If you want me to address transparency, then I will. The mechanics of SS are out there to be read, but the way it is presented to the public implies an investment system. If a company's website says it sells canned toxic waste, but the magazine ads say the cans are filled with shrimp gumbo, then we have a problem.

    You are saying the system is sustainable because the numbers can be changed. And they have. The 16-1 ratio has fallen to 3-1, and it's going lower. As Michael D. Tanner of the Cato institute wrote recently:

    "In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase."

    To take your argument to the logical conclusion, we could change the numbers so that people pay $10,000 a year into the system and when they retire, collect about $5 a year. Is that what you mean by sustainable?

    If so, then yes, Social Security can be kept marching on as a government program, but as a way for workers to set aside money and collect a greater amount when they're older - the entire point of any retirement system - it's a failure.

    My use of the word sustainable means SS can not keep paying people more than what they put in. Yours means that the system can be kept moving as a shuffling, re-animated corpse.

  12. Despite the misconceptions of the public, SS is not sold as an investment plan, nor is it a retirement system. It is intended as a supplement to retirement, not an end-all plan in and of itself. That people assume they'll be all set when they hit 65 is their own mistake. The recognition of this fact is one reason we've seen such a move to 401K's and other investment and savings methods for old age.

  13. Exactly Michael. Which is exactly why I support getting rid of the program and having that money instead go into some kind of actual investment scheme.

    Instead of this "lock box" idea that is nothing but lies. The government has spent almost every penny in the trust fund, and in order to pay out those benefits they will have to issue more debt or resell that which the trust holds.

    A possible lack of debt buyers could make it impossible to fund the program in the future. Sorry Michael, but individual saving/investment accounts are a better idea, and are currently working wonders in places like Austria.

    It also has the added benefit that the government can't make off with the cash in the middle of the night.