Saturday, September 10, 2011

social security is a Ponzi scheme

(Well I just posted something an hour ago but this'll probably be old news by tomorrow...)

Matt Yglesias gets it wrong; Alex Tabarrok refutes him, but not very clearly, mostly by appealing to authority. Judging from the comments, no one seems to know what a Ponzi scheme IS, just that some bad guy got caught running a big one two years ago so it must be bad.

Let's get this straight. In a typical investment vehicle, like a mutual fund or a 401k plan or the stock market or whatever, you put money in, that money is transferred to people who are using it to build more wealth through their business, and that growing pile of wealth is shared with the investors, who thus end up withdrawing more than they put in.

In a Ponzi scheme, some number of people originally invest in it, the guy running it takes their money, and then finds more people to join, using their money to pay back the original investors with some attractive rate of return. Eventually, he fails to find enough new investors to keep paying back his old investors, and the scheme goes bust with lots of people losing everything they put in. No wealth is created in this process.

Social security is a Ponzi scheme, at least partially. The current young pay for the current retirees, with the first generation of covered retirees getting a free ride. Social security doesn't collapse because there are always more young people to join, and the government has the power to force them to.

Whatever is paid into the system that isn't immediately distributed is invested, and yes, this is not part of the definition of a Ponzi scheme. But, just because a Ponzi scheme uses investment as a side tool doesn't make it not fundamentally a Ponzi scheme.

I'm not sure how this is even a controversial statement. It wouldn't be, if Rick Perry hadn't said it, and if the terms 'Ponzi scheme' and 'social security' didn't translate immediately to 'bad' and 'good' for most people, and if those who don't like Rick Perry didn't reinforce the confusion for political purposes. Did I mention I hate politics?


JohnRaymond said...

There are plenty things about politics that I hate as well (though I won't say "I hate politics" just because I believe a country, as a group of people/society that elects others to lead them, needs a political system. We just haven't figured out yet how to make this system work without all kinds of corruption taking over. And that's the reason why Social Security has partially become a ponzi scheme, as you state. Originally the system was meant to be an investment program, but because the wimpy politicians never provided the kind of funding mechanism to make that possible, we have what we have today.

Vera said...

actually I think it's gone the opposite direction... it was originally a pure ponzi scheme (young people paying for the retirement of old people who had never paid SS taxes) and has morphed into more of a coercive retirement savings plan, both out of fiscal necessity (slowing population growth, longer retirement, etc) and because it's just more intuitively palatable.