Social Security vs Ponzi Schemes

by thoughtfulconservative

Over at Good Math, Bad Math, Mark Chu-Carroll heard Mayor Micheal Bloomberg refer to Social Security as a Ponzi Scheme and said,

This is, to put it mildly, bullshit. Incredibly, stupid, rampant, bullshit.

Technically, of course, he’s correct. In spite of the many times I’ve refered to SS as a Ponzi Scheme, there are differences and Mark enumerates them.

  1. Ponzi Schemes are investments and voluntary. Social Security is a tax and non-voluntary.
  2. In a Ponzi Scheme you have the investors at the top making their money while the poor saps at the bottom aren’t getting anything. In Social Security benefits are paid out to all recipients based on a formula.
  3. A Ponzi Scheme is based on deceit. No one is ostensibly trying to profit from Social Security, so there is no reason to lie.
  4. A Ponzi Scheme tries to make a profit and have enough liquidity to make good on some of its promises. Social Security is a zero-balance tax-funded benefit.

In spite of the fact that its not considered an investments, there are those statements you can have mailed to you, where they give you your earnings record along with your estimated benefits, not unlike something I might get from my 403(b).

Politicians have joined in the charade somewhat by referring to the monies collected as investments. And we refer to those benefits as entitlements.

The Trust fund has been skimmed by the government to cover deficits in the general fund, one of the reasons those in the know look at Baby Boomers beginning to collect benefits with some trepidation.

Although not technically a Ponzi Scheme, one can find enough similarities to justify the label.

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10 Comments to “Social Security vs Ponzi Schemes”

  1. The chief problem with using that kind of language to disparage it is that it gives the completely false impression that these kind of social safety net programs are bad ideas, cannot work, and should be abandoned.

  2. …and, of course, that is the very purpose of using such language.

  3. Social security is, indeed, a ponzi scheme. It has nothing to do with the trust fund or anything like that or even inflation or population growth, really. It is the decreasing force of mortality, combined with a relatively fixed retirement age. Well, it is that and the fact that SCOTUS declared that paying into or otherwise participating in social security in no way garners you an entitlement to any social security benefits.

    First of all, a ponzi scheme is not just any way of defrauding people. In fact, it is called a *scheme*, not a fraud. It is not the presence of some other fraudulent aspect that makes it a ponzi scheme, but the nature of the scheme, itself, that makes it fraud. The scheme is simply that you

    1) use new entrants to the program to make good on the promises to the old entrants

    2) require increasingly more new entrants for (1)

    That is the sum total of the ponzi scheme. The reason it is considered fraud is because such a scheme, by its very design must have an average net yield of at most 0%. Yet, anyone participating must believe they will receive a positive yield. It really doesn’t matter what your sales pitch is or if it is even true that some investors do see a positive yield — the scheme, itself, is outlawed for that reason alone.

    And, SS works precisely that way over and above any other simple “management issues” such as varying demography or economic environments that have inflation or other things going on in them. You need increasingly many new entrants to pay off the original participants who enjoy an increasingly longer retirement. The same “fraud” of a ponzi scheme is, in fact, being perpetrated this way to the public in that everyone imagines that they will be taken care of in their old age just like their grandfather is today. But, it just can’t possibly happen that way. Either the retirement age has to be raised or the benefits have to be lowered — it is just that simple. And both have happened to some degree, though not nearly enough to keep it solvent in the long run.

    Pay as you go funding mechanisms have nothing to do with this. The trust fund really has nothing to do with it. (In fact, most of the things people bring up is actually not really the main issue.) The only way to avoid this is to either raise the retirement age or to fund the liabilities and give current participants a vested interest in future benefits. If you did the latter (which is just the government requiring me to pay for my own retirement), even counting the trust fund as an asset, you will have to infuse $10 trillion or so into the system. No private pension is allowed to work the way social security does. And almost every sort of insurance has people paying their OWN premiums while the “premiums” of social security are paid by the young while the benefits are reaped by a completely different segment of the population who don’t pay anything. A lot of actuaries (members of the SOA that actually have relevant designations like ASA as opposed to members of the CAS with their ACAS who are a completely different kind of actuary than a life or pension actuary) think that social security is a ponzi scheme. In fact, I have known, specifically, *pension* actuaries that are FSAs and EAs that think about it that way. Even people that support the program and think it should be reworked to not be a ponzi scheme often concede that it is one. (Of course, all of that’s just anecdotal on my part.)

    Admittedly, calling it a ponzi scheme is a small bit of hyperbole. You should say “ponzi-like”, perhaps, if you are trying to be completely unbiased. But, “to put it mildly”, Mark is the one that is full of shit on this one, I’m afraid. He’s not “right, of course”. Most of his distinctions are not essential to a ponzi scheme — they aren’t what make it a *ponzi* scheme as opposed to some other kind of scheme or fraud. But, more importantly, this is not a case of “bad math” or something similar. He is far more in a minority as far as the actual experts (e.g. pension actuaries and economists and the like) are concerned. In fact, I don’t know that very many actual experts would come out and defend “social security is not a ponzi scheme” quite like that. Certainly, they would object to that kind of language if they support social security as a government program, but Mark is essentially lying about this when he acts like it is “bad math” as if it was some sort of well known mistake that the experts all shake their collective heads at or something.

  4. It’s essentially the same untenable “scheme” that every industrialized democracy on earth does, isn’t it? It’s a wonder that north america and europe aren’t in riotous flames as a result of all the defrauded people.

  5. No. It isn’t. There are all kinds of different public pension-type plans. Some fail wildly. Others don’t say that new entrants garner no entitlement to future benefits and they fund the future benefits of current active (non-retired) participants. Of course, it IS possible to do this correctly — every qualified employer sponsored defined benefit pension plan is a testament to that fact. But, for those plans, it is illegal not to properly fund future benefits of current participants and current participants are indeed owed a future benefit.

  6. it IS possible to do this correctly

    At least we can agree on that point. I’ll add one more point to it: it’s ESSENTIAL that we do it and do it correctly.

    What liberals fear–and with good reason–are the conservatives who seek not to do it “correctly,” but who insist that we should not do it at all.

  7. Even more important than that is that we NOT do it INcorrectly. Then, not only will you not get your social program, but a whole lot of people will be hurt in the process. Unfortunately that is what happens to most of these programs and what is apparently going to happen here.

  8. Orly? So again I ask: where is the revolution in europe and elsewhere over the many, many failed social security-type programs? Surely some programs work better than others, but “most” of them are “failures”? Next you’ll be telling me that most of the universal health care policies around the world are also “failures.”

  9. That would just be craaaaaazy!

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