Asset Protection Strategies, STAFF NEWS & ANALYSIS
Ponzi-Like Social Security
By Staff News & Analysis - September 13, 2011

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.

After Thoughts

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.

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Posted in Asset Protection Strategies, STAFF NEWS & ANALYSIS
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