News & Analysis
Ponzi-Like Social Security
Social Security: A monstrous truth ... NO PONZI scheme in the history of the world has ever lasted 75 years. Ponzi schemes depend on garnering an ever-increasing pool of new investors to pay out returns to prior investors. When the potential pool of new investors runs dry, they collapse. This will occur when the scheme runs up against the natural limits of its recruitment strategy; in the ultimate case, it can't keep going past the point where the entire population is already subscribed. This should provide us with a hint as to why, as Kevin Drum writes (rebutting Shikha Dalmia), Social Security is not a Ponzi scheme. – Economist
Dominant Social Theme: How dare Rick Perry say that Social Security is a Ponzi scheme?
Free-Market Analysis: Shock. The Economist "newspaper," which likes to pretend it is animated by a free-market philosophy, has provided a stirring defense of one of capitalism's biggest boondoggles, the American Social Security system.
The article appears in the "About Democracy in America" section of the online publication. "In this blog, our correspondents share their thoughts and opinions on America's kinetic brand of politics and the policy it produces. The blog is named after the study of American politics and society written by Alexis de Tocqueville, a French political scientist, in the 1830s."
We have no idea if Alexis de Tocqueville would have considered SS a Ponzi Scheme or not. In our analysis, we'll examine the Economist's argument (if you can call it that). We haven't made up our pointy little heads about this issue, of course. The Economist indeed may be correct. It's been correct about so many things in the 21st Century! ... Hasn't it?
The newspaper, which is likely an ornament of the Rothschild cabal, has defended free markets when it ... well, then there's ... and, of course ... OK, actually we can't think of anything much the Economist has gotten right (not for the past decade anyway). But there is always a first time.
The first point the anonymous Economist writer makes in this stirring defense of SS is that "the entire population of working Americans has already been subscribed to Social Security for decades, yet the system continues to pay out benefits on time."
Wow. Because the system has worked in the past, it's going to work in the future. OK. "The actuarial calculations underlying its revenues and benefits are sound," we learn. Rick Perry may consider Social Security "a monstrous lie," the author writes, but [his, for convenience sake we will assume it is a he] his parents and grandparents keep getting checks in the mail, year after year. You go, boy! Nothing like personal experience to buttress a theoretical argument! Here's some more from the article:
Social Security does face a shortfall in the coming decades, because of the population bulge of retiring baby boomers. Those costs are limited and, measured as a percentage of GDP, will flatten out. They can be absorbed through a modest, gradual increase in Social Security taxes and modest reductions in benefits for wealthier recipients ...
If you wanted to call Social Security an investment, you would say it is a play on the proposition that America's GDP will continue to grow over the long term. This is the safest play one can imagine making, which is why the returns are so modest. Like any investment, it could go bad. But if it goes bad, if the economy of the United States ceases to grow over the long term, it is inconceivable that any other investment large enough to feed a pension plan covering the entire working population could do better.
... What Mr Perry is doing is part of a consistent decades-long habit across much of the conservative right of attacking the foundations of Social Security. Up until about 2007, the goal of such attacks was clear: conservatives wanted to replace it with a Chileanstyle defined-contribution plan that would be invested in securities. Within its own assumptions, that programme did at least make sense; but since the financial crisis, and with average returns from Wall Street now sharply negative over an entire decade, both the logic and the political support for any such programme have evaporated.
The Economist writer seems to speculate that perhaps the fundamental hostility to the American SS program – as enunciated by Perry – is merely an evolution of attacks on the program that go back decades.
"It is a runaway train," the writer suggests, "a rhetorical and intellectual commitment too strong to give up even after it has lost its connection to an actual policy programme." From the writer's point of view such attacks are deeply irresponsible and "deepen" people's puzzlement about the program and its sustainability. "It doesn't make any sense."
If my generation does in fact fail to receive our Social Security checks, it will only be because we inexplicably decided to vote ourselves out of them. ... There is every reason to believe that their children, who have been paying taxes into the Social Security system for decades now, will also enjoy its benefits when they retire. Unless, of course, conservative politicians succeed in convincing working Americans that the whole thing is a "monstrous lie."
From what we can tell, then, the arguments that SS is NOT a lie have to do with its longevity, the ability of those who manage the program to adjust it and, finally, its rootedness in the American economy itself. But none of these points preclude the conclusion that SS is a Ponzi scheme in our estimation.
SS taxes, in fact, were supposed to be set aside, but this has not been the case, or certainly not in the modern era. The US government, spending every dime it collects and more, has filled the SS "lockbox" with IOUs. In other words, there is no "money" available to pay out SS recipients. All benefits are paid by borrowing, taxation and money printing.
SS is a pay-as-you-go system in part because the US is constantly running a deficit. Those who are paying for SS live in China, Africa, Europe, etc. Alternatively, the money funding SS is actually coming from the Federal Reserve itself, as the Fed has taken to buying up various US securities as part of its quantitative easing packages.
The US is supposedly US$14 trillion in debt, but we have long pointed out that when all of its obligations are totaled, the entire amount is closer to US$200 trillion. For this reason, it is very likely that the political process in the US will turn increasingly ugly over time. The inflows and outflows aren't adding up. The SS program will surely be the one of the victims.
Conclusion: There is no "money" for SS recipients. Everything in the program is pay-as-you-go – and those who are paying are not even entirely American taxpayers as the US is running huge deficits and regularly borrows billions from either the Fed or overseas investors. Not only is SS a Ponzi scheme, we would argue that the entire US government is a kind of Ponzi scheme at this point. It has clearly made promises it cannot afford to keep and has no money to pay for them anyway. Sounds Ponzi-like to us.
l 
|
You must be a site member to submit suggested edits or post feedback. In addition to submitting edit suggestions and posting feedback, your Free Membership to The Daily Bell gives you access to our Member Zone where you will discover a plethora of other member benefits. Want to learn more? click here |
|||||
|
|
||||
 |
Posted by David_Robertson on 09/13/11 09:20 AM
The classic Ponzi scheme is to offer investors a far above market return (20-30% p.a.) and to pay out existing investors from the new investments pouring in while skimming some management fee off the top. This kind of scheme obviously has a limited shelf life since eventually you run out of new investors.
Bernie Madoff offered a variation of this scheme to his investors with a stable and just above market return of 12% P.A.. His scheme was more sophisticated inasmuch as he pretended that the returns came from a proprietary option trading scheme which did not in fact exist. He may have lived high on the hog from his efforts but he could never have gone through the amounts it is claimed people invested with him, $65 Billion, so someone somewhere is telling fibs.
The government pension programmes are NOT Ponzi schemes and to characterise them as such is mere political grandstanding. They are as is clearly stated in the feedback from John Danforth a designated tax that is part of the general fund. If there is any deception involved it is that it is paid in separately but it is not paid out separately, in other words it is not set aside in a special purpose fund at least in the UK it isn't where it is called national Insurance. Until recently the amounts being contributed have exceeded the amounts paid out so the excess has been applied elsewhere in the welfare budget. This will change as the population ages and fewer young people join the workforce.
In the US I gather it is set aside in a special social security fund then this fund is invested in government securities very much like many private insurance annuities. This can be characterised as putting in an IOU from the government into the social security lockbox but this once again is a pejorative misrepresentation for polemical purposes.
Given the turmoil of the past century with its wars, depression, recessions and massive industrial dislocations, these pensions have provided many millions with a retirement pension that they may not have been able to set aside had it not been taken from them.
I personally believe that people should be allowed to opt out of these kinds of national insurance schemes and make their own arrangements with tax deductible contributions of their own to private pensions. This is I believe one of the ways in which Ron Paul has suggested that Americans can be weaned off their dependence on the state.
Reply from The Daily Bell
Click to view link
Pon·zi scheme
Ponzi schemes, plural
A form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors
Web definitions
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. ...
Click to view link
A money-making pyramid scheme where investors at the top of a list of names make money by recruiting more investors into the scheme. Those at the top are paid by the fees gathered from recruits up to 5 or 6 levels down. ...
Click to view link
 |
Posted by pragmatico on 09/13/11 09:07 AM
Dominant Social Meme: An economy must always grow, and if it stops growing, all manner of governmental intrusion is warranted -- including a change in the definition of growth.
|
Posted by onebornfreeatyahoo on 09/13/11 09:04 AM
Funny you should mention Mr Madoff, who apparently has said: 'The whole government is a Ponzi scheme' . How could I not like someone who comes out with a line like that?
Seems the man was more politically aware than I had previously assumed! [while taking due note of the difference between voluntary and mandatory as noted by J. Danforth ]. Regards, onebornfree.
|
Posted by RF on 09/13/11 08:36 AM
he didn't think of it
|
Posted by RF on 09/13/11 08:34 AM
we live in a socialist democracy-- democracy being the system in place to elect those that make decisions for the majority- ( of late bad decisions and way poor judgment have been the status quo),socialism follows it name, providing our society with a means to remain civilized .( also questionable as to define civilized)- true We are NOT producing enough goods to have a GNP-- we consume them and the Government juggles the graphs and charts to produce numbers that sound good-( even they've had a difficult time making the last few years look productive)the Chinese are exploiting our weakness to the max, capitalizing on it ,degrading our society and buying it up for pennies on a dollar..yes there is a tragic future ahead, those with the gold will rule untill someone takes it away from them- those believing other countries currencies will be a safe haven,will have to move there-before the collapse-you still won't be able to spend Swiss Francs in America , or any where else but Switzerland... those on welfare now will be out in the streets taking whats left, our country can only run till the gasoline runs out- then they'll have to walk, it will limit the worst destruction to the urban and suburban areas-instead of waiting for this to happen, shouldn't we be finding a way to avoid it??
 |
Posted by dotti on 09/13/11 08:28 AM
I've not even finished reading the article, but I had to comment on this:
The first point the anonymous Economist writer makes in this stirring defense of SS is that "the entire population of working Americans has already been subscribed to Social Security for decades, yet the system continues to pay out benefits on time."
So. If Bernie Madoff has just been left alone, everything would have been fine. Those pesky legal beagles ruined things for everybody!
Uhhhhhh. Couldn't Bernie just print the money he needed to pay everybody?
 |
Posted by cosmos on 09/13/11 08:06 AM
"Socialism Security"
It works, just ask "Franklin D. Roosevelt", and the "D" stands for Democrat.
 |
Posted by rossbcan on 09/13/11 07:50 AM
DB: "But if it goes bad, if the economy of the United States ceases to grow"
It is an obvious, but hidden by a profound lie regarding the definition of GDP (Gross Domestic PRODUCT) that the economies of the west have been contracting for very many decades.
PRODUCT IS PRODUCTIVITY ONLY (Goods / services produced for trade in the free market MINUS overhead costs)
The LIE is that GDP equals the sum of productivity plus costs of unproductive overhead, frauds (a negative), inverted and treated as a positive. Thus, the more that states and wars cost, the higher the GDP claimed, a false "proof" that "war is the health is the state".
A realistic analysis yields the following: western civilization is in deep economic trouble, to the point of unviability leading to inevitable collapse for the simple reason that unproductive forces are destroying and eating productive forces. There are far more cookies being consumed than cookie being produced, requiring deflating in "value" faux fiat currency (shrinking cookies) to provide the (failing) illusion otherwise. Easily PROVEN:
Click to view link
Which is why, long ago, Mao called the west a "paper tiger". I am sure that current Chinese decision makers are well aware of this.
 |
Posted by Szatyor39 on 09/13/11 07:47 AM
You wrote: "The Economist 'newspaper,'... has provided a stirring defense of one of capitalism's biggest boondoggles, the American Social Security system." Please don't perpetuate the myth that America has a capitalist system. The very fact of its inclusion of the Social Security system refutes that claim since such a system violates the per-eminent feature of a bona fide capitalist economy, namely, freedom from government intervention in people's economic affairs. Social Security is government extortion of working people's resources and that is anti-capitalist! America has a mixed economy, with fascist, socialist, welfare statist, capitalist, communist, and anarchist components--it is a bit like a smorgasbord that consists of some healthy and innumerable unhealthy items.
|
Posted by RF on 09/13/11 07:33 AM
it may be a Ponzi or Freddy,or ,Guesseupi, what ever name you choose to call it- He's not wrong t say it has been paying out ,as promised ,to those whom paid into it..for decades... right or wrong it still is functional- if the dire prediction come true (I'm always amazed how the are followed by a sales pitch by a financial planner ), they will print more money,raise taxes , surely the wealthy can afford to live on a few dollars less-,the millionaires and billionaires don't really need social security,they take it if they can get it any way, greed is still good.. but if it fails to pay then there will be no government, ie no debt in bankrupcy, no money and chaos to follow-- I can see where those with the gold will have to cut off little bits to pay thier electric bill-( provided there's a postal system left( carrier pidgions-the boys will be out shooting them down ,prospecting in the new age of man) this way the Internet will still be there to inform them of how bad thigs are, and who's fault it is..
|
Posted by Jeanna on 09/13/11 07:09 AM
A tax is a tax is a tax. No matter the justification or rationalization. But, too many Americans have made their future survival plans based upon the USG's promise of SS. I overhear many friends and relatives still talking about their plans for their SS checks in a few years, and I mentally condemn their foolishness. (Make a note never to loan them money.)
A US Congressman told an audience I attended 4 or 5 years ago that the Congress cannot get rid of SS because the elderly recipients today are the children of the Great Depression, and are afraid that their grandchildren, who currently save nothing, will have nothing in their golden years without SS. Fear is all that is keeping this system in place.
|
Posted by lhansen715 on 09/13/11 07:02 AM
Naw, come on now! The gov't lying to you, deceiving you, breaking a contract. Cant be? Can it?
|
Posted by John Danforth on 09/13/11 06:46 AM
Well, if we want to get all technical about it, technically it's not a Ponzi scheme, because Ponzi schemes are voluntary.
The law says two things, and this was hashed out in the Supreme Court:
The Social Security Tax is an income tax, same as the 'income' tax in the other little box on your W2.
The proceeds of this tax go into the general fund, and can be spent by Congress any way it wants.
Technically therefore, Social Security is a Mandatory Welfare Program.
It is suffering the same fate as all welfare programs.
Reply from The Daily Bell
Seems to us it has Ponzi-like qualities ...
Click to view link
Web definitions
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. ...
Click to view link
The Ponzi Scheme is the second studio album by the American alternative rock band Firewater, released on March 31, 1998 through Uptown/Universal.
Click to view link
(Ponzi schemes) These schemes, as Originated by a man called ‘PONZI’ are scam-schemes that promise high returns to lure the investors but in reality, their money is never really invested in the markets. ...
Click to view link
A fraudulent scheme. It is a specific form of pyramiding in which money paid by later investors or contributors is used to pay inflated returns to earlier investors-until the funds dry up because no more contributors can be found.
Click to view link
A money-making pyramid scheme where investors at the top of a list of names make money by recruiting more investors into the scheme. Those at the top are paid by the fees gathered from recruits up to 5 or 6 levels down. ...
Click to view link
|
Posted by Alan on 09/13/11 06:28 AM
The social security programme is designed to support those people who have actually PRODUCED wealth by their real work making things, growing food, providing education for the future, looking after the sick and frail, etc. The people who only shuffle the money (slipping more and more into their own pockets as they work out ways to grab even more) and TALK about work, appear to be those most opposed to the programme. We should not be surprised, after all, don't criminals the police to be a problem the country would be better off without. Funny that people seem to accept that the person who makes a chair should be paid only 2% of what the person who sits in it, and has never PRODUCED one ounce of wealth, believes they are entitled to. And why should the skilled person who made the chair, not starve to death if they cannot make another one.
|
Posted by Libertarian Jerry on 09/13/11 04:15 AM
Ponzi scheme? How dare you print such scandalous words. We all know that Social Security is a government run retirement insurance plan. Don't we? In all seriousness the Federal Government will meet all of their financial obligations toward Social Security recipients well into the future. The only problem is that the checks that the government sends out won't buy very much because the "dollar" will be almost worthless.
 |
Posted by Hognutz on 09/13/11 03:28 AM
DB- Your conclusion is spot on.
|
|
