September 13, 2011

It's a Ponzi Scheme

Carroll Andrew Morse

Ramesh Ponnuru is wrong in the New York Times discussion where he claims that one reason that Social Security shouldn't be considered a full-blown Ponzi scheme is because it is involuntary.

Think of it this way: Suppose Bernie Madoff requested that he be allowed to do community service as part of his prison sentence, in the form of administering the Social Securty program.

In the Madoff-run Social Securtiy program, planning for the future would be based on 10% annual returns on money "invested" in the "trust fund" that he would promise to deliver. And since the "trust fund" would be doing so well, there'd be no need for any Social Security reform. In fact, the aniticpated surplus promised by Madoff would be so large, the government would be able to resume its practice of a few years prior and began immediately to spend social security payroll taxes on other Federal programs, in anticipation of the new investment revenues, while all current retirees continued to receive their checks. Madoff would also need some money for operating expenses, like a fleet of private jets to take him between the 7 or 8 beachfront mansions he would need to be able to monitor the program from various locations in the United States.

But suppose that in reality -- shocking as this may sound -- Madoff applied the same financial practices that made him infamous to the new funds he had access to, i.e. instead of investing the money, he simply used the money coming in from newer program participants (current workers mandated by law to send him their money) to pay off longer-term participants (current retirees) and took some for himself.

Voluntary versus involuntary has no bearing on the issue. Madoff would still be running the same kind of Ponzi scheme he was running before. He just would have found a new way to "convince" people to give him a part of their incomes.

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

Based on the CNN article I read today that rated Perry's claim that Social Security is a Ponzi scheme as FALSE (when did they start their own PolitiFact gig?), the key distinction is actually that Social Security is a GOVERNMENT program. So if government does it, it's legal and legitimate by definition. Make sense? It's technically true, they explain, that it will go bankrupt in the near future, but it's not a Ponzi scheme because government can just raise taxes. And then do it again. And again. All legal. Not like a Ponzi scheme at all. Get it?

Posted by: Dan at September 13, 2011 8:53 PM

I heard a bit of Politifacts, or a spokesman, on NPR today. I was startled that they agreed with Perry that SS is "unconstitutional". Sorry, it just caught my ear for a second so I can't give the details. But I did understand that they could not rate it as "False".

They did label as "False" Perry's claim that the stimulus had produced "zero jobs". They believed that it had produced 3,000,000 jobs.

Posted by: Warrington Faust at September 13, 2011 9:17 PM

I just Googled Politifacts, perhaps I wasn't listening fast enough:

"In our view, Perry makes a pretty clear argument that the Supreme Court should not have granted its approval to the New Deal in the 1930s, and that one result of the court’s actions is that "we’ve been forced to accept (Social Security) for more than 70 years now." The fact that Perry never explicitly wrote the words "Social Security is unconstitutional" keeps this statement from a full True rating, but we think that the conclusion Romney draws from Perry’s book supports that general notion. We rate Romney’s claim Mostly True."

So what they are rating as "True" is Romney's claim that Perry believes that SS is "unconstitutional".

Posted by: Warrington Faust at September 13, 2011 9:24 PM

I heard Politifacts on NPR too. Actually, they admitted that the three million includes jobs "created or saved", a critical distinction that I think is germane to Perry's point. Many of the jobs in that three million are government layoffs that never happened because of the stimulus, not new jobs.

Posted by: David C at September 13, 2011 9:25 PM

Stimulus claims are untestable and unfalsifiable - fundamentally unscientific. I can just as easily claim that the stimulus destroyed 3 million job as the administration can claim that it "saved" 3 million jobs and there is no way to prove which of us is correct. Economics is not a hard science and shouldn't be treated as such - it's more like a study of history than of chemistry.

Posted by: Dan at September 13, 2011 9:55 PM

ponzi scheme, house of cards, call it what you will.

Everyone knows that as presently constructed it will fail.

Sounds familiar, doesn't it?

Let's continue to let the Gom't take care of all our retirement plans for us. It's worked so well so far.

Posted by: stuckhereinri at September 14, 2011 11:01 AM

The only difference I can see between SS and a "ponzi scheme" is that a private sector ponzi scheme is illegal.

In operation, I do not see much distinction. Both rely on "new money" to make payments on old obligations. In the private sector, these contributions are voluntary, but perhaps misinformed. It the public sector,it is compulsory.

So, let's call it what it is and say "that is what we decided on".

Posted by: Warrington Faust at September 14, 2011 11:23 AM
Post a comment

Remember personal info?

Important note: The text "http:" cannot appear anywhere in your comment.