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Sure, Social Security's A Ponzi Scheme - But Is It A Sustainable One Or Not?

This article is more than 6 years old.

Bless our little friends over at Salon with their knowledge of things economic. We have today the insistence that Social Security isn't a Ponzi Scheme because it uses the taxes being paid today to cover the benefits earned in the past. When that is in fact the very definition of a Ponzi Scheme. Thus we've actually got an entirely different and very much more interesting question in front of us. For yes, of course, Social Security is indeed a Ponzi, the interesting question being whether it's a sustainable one or not. Ther answer there is yes, it is, even though there are going to have to be some changes to it.

So, the piece itself from Salon:

So I am particularly exasperated by a sample dished up by scaremongers, namely that the Social Security program, our rock of security and stability for an aging population for the last 80 years, is a Ponzi scheme — a swindle designed to cheat Americans out of their money with false promises.

No, a Ponzi doesn't have to be a swindle at all.

In the start of the boom year that we call the Roaring ’20s he launched a new con, promising investors in a securities firm that he set up, that he would double their money in 90 days or increase it by half in 45. Skipping the details, which can be found easily in many search engines, it involved speculation in foreign postage stamps, which in itself was legal.

Well, no, it wasn't even speculation in foreign postage stamps it was in international reply paid coupons, not stamps. And it wasn't even speculation, it was arbitrage. The same thing could be bought and or sold in different places for different prices. The trick being to buy where the price was low and sell where it was high.

Now, Ponzi himself might have set it up to be a scam right from the start, I don't know. But those claimed profits were in fact possible. But they were only possible in small amounts, there was absolutely no possibility at all of it being able to handle the flood of money that came into the scheme.

It's at that point that Ponzi's scheme became what we call a Ponzi Scheme, the definition of which is:

A Ponzi scheme (/ˈpɒn.zi/; also a Ponzi game)[1] is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.

And at this point that's a very good definition of Social Security--minus that word fraudulent of course. Salon again:

The “Ponzi scheme” lie folds neatly into the prediction of the doomsayers that the growing number of retirees combined with the shrinking of the work force is leaving the yearly intake less than the outgo and will soon cause the system to go broke, ultimately leaving current and future beneficiaries — the old and the young as high and dry as Ponzi’s victims.

Well, yes, exactly. The amounts that you and I are paying in SS taxes this year are heading out the front door to pay the benefits of those already retired. When it gets to our turn to collect retirement benefits they will be paid from the SS contributions of those still in work. Old investors are paid out by the contributions of new investors in--that's our definition of a Ponzi Scheme and it fits SS so therefore Social Security is a Ponzi Scheme.

That's not even the interesting point though, despite it being unarguable. So much so that Paul Samuelson, he who was the brightest guy in any room he entered and who gained the Nobel for economics described it so:

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.

…A growing nation is the greatest Ponzi game ever contrived.

Now, the question is, is this a sustainable Ponzi or not, that's the question we're actually interested in. Back to Salon:

But it is a problem that can be fixed with adjustments to the tax to boost collections, and a start might well be made by raising the cap that allows salaried employees to escape payment after their paychecks reach $118,000 and the tax is a smaller bite out of their income — a regressive idea if ever there was one. Or by other reasonable adjustments to retirement age, the percentage of deductions in the payroll tax, the progressive taxation of the benefits, or means tests to eliminate the rich from the system altogether.

Quite so, we can raise the taxes being paid now, we can pay it for fewer years, we could reduce the amounts being paid by taxing them. Sure, there are all sorts of things which can be done. We could even, as the equivalent scheme in Britain does (that's national insurance) just abolish the ring fencing of Social Security and just treat the incoming as general taxation and pay the benefits out of general taxation.

There is no major problem therefore here. Social Security is most definitely a Ponzi Scheme but with a few tweaks here and there it's a sustainable one.