Tuesday, September 13, 2011

To Ponzi or not to Ponzi

Since Rick Perry openly called Social Security a Ponzi Scheme during the September 7th debates, there's been a flurry of commentary with regard to the validity of that statement.

By and large, the current judgment seems to be that it is NOT a Ponzi scheme. From the CNN article:
As for Perry's characterization of Social Security as a "Ponzi scheme," the Securities and Exchange Commission defines such a scheme as "an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors." It is true that benefits to current Social Security recipients are paid for in part by new members of the workforce. But Social Security is not a fraudulent criminal enterprise designed only to benefit current participants in the program. It is a legitimate government program meant to serve both current and future generations of retirees.
From Politifact:

Mitchell Zuckoff, a Boston University journalism professor who has written a book on Ponzi, noted three critical dissimilarities between Social Security and a Ponzi scheme, which by definition is both fraudulent and unsustainable.
"First, in the case of Social Security, no one is being misled," Zuckoff wrote in a January 2009 article in Fortune. "...Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed on their incomes to pay benefits, with no promises of huge returns." 
Second, he wrote, "A Ponzi scheme is unsustainable because the number of potential investors is eventually exhausted. That's when the last people to participate are out of luck; the music stops and there's nowhere to sit. It's true that Social Security faces a huge burden — and a significant, long-term financing problem — in light of retiring Baby Boomers. … But Social Security can be, and has been, tweaked and modified to reflect changes in the size of the taxpaying workforce and the number of beneficiaries. It would take great political will, but the government could change benefit formulas or take other steps, like increasing taxes, to keep the system from failing." 
Third, Zuckoff wrote, "Social Security is morally the polar opposite of a Ponzi scheme... At the height of the Great Depression, our society (see "Social") resolved to create a safety net (see "Security") in the form of a social insurance policy that would pay modest benefits to retirees, the disabled and the survivors of deceased workers. By design, that means a certain amount of wealth transfer, with richer workers subsidizing poorer ones.That might rankle, but it's not fraud... None of this is to suggest that Social Security is a perfect system or that there aren't sizeable problems facing the incoming administration and Congress. But it's not a Ponzi scheme. And Ponzi himself, who died in a hospital charity ward with only enough money for his burial, would never have recognized it as his own." 
We agree with Zuckoff’s interpretation. We rated Perry's November 2010 comparison of Social Security and Ponzi schemes False, and we stand by that ruling. The comparison still deserves a rating of False. 
Seems pretty clear, no? Yet, when someone calls Social Security a "Ponzi Scheme," we all know what is being implied: the central functional aspect of a Ponzi Scheme is identical with that of Social Security. Take money from new investors to pay off previous investors. I don't see a way around that and thus think the brouhaha surrounding Perry's comments is largely manufactured.

Of course, many years ago it would seem that the "Ponzi nature" of Social Security was accepted fare. From a 1967 article in Newsweek by Paul Samuelson (Nobel Laureate and neo-Keynesian economist) :

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)! 
How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. 
More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired. 
Social Security is squarely based on what has been called the eight wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.
"Actuarially unsound." Pretty much says it all. Yet now, somehow, the opinions of a bonafide expert on the matter should be ignored? Social Security--as it currently exists--is very much a Ponzi scheme. Whether or not it is a workable one is another question.

Cheers, all.

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