Posted by: Jeff | April 21, 2010

Social Security Is NOT A Ponzi Scheme

I’m sorry, I just have to bitch about this for a moment, because I hear this analogy of Social Security to Ponzi schemes all the time. A Ponzi scheme, for the curious, is a fraudulent investment strategy in which investors are paid returns out of the money provided to the scheme by other investors, rather than from any profits made from the investment. Money is simply shifted around from investor to investor, rather than going into financial products that actually produce new profits. What makes a Ponzi scheme wrong and immoral and illegal is that the people running it are lying about where the money is coming from.

This does not apply to Social Security, as it’s not an investment strategy in the first place. It’s a government program of wealth redistribution. Current taxpayers pay into the system, and current retirees receive benefits from the system. The Social Security “Trust Fund,” such as it is, is made up of a special kind of government security that only the Social Security Administration can redeem. These securities are non-marketable, meaning, well, they can’t interact with the market. They cannot be invested in anything. The only thing they can do is earn interest. So there are no profits from investments involved in Social Security, and thus no profits to be lied about – the very essence of a Ponzi scheme.

This is how Social Security has always been operating for a while now. And anyone who knows the first damn thing about the program knows this is how it operates.

Furthermore, what threatens the sustainability of a Ponzi scheme is not what threatens the sustainability of Social Security. The former falls apart because investors eventually get wise to the game and realize no actual profits are being made. At that point the scheme’s sources of funding dry up, since investors have to keep voluntarily providing money for the operation to continue. And that’s when things fall apart and lots of people lose their money.

This can’t happen with Social Security because A) as stated above, there are no lies to be discovered, and more importantly B) the program isn’t voluntary. It’s the law. People pay the taxes that fund Social Security because they’re legally required to do so. There are no “investors” who are going to refuse to keep funding the program, leading to its collapse.

What does threaten Social Security are changes in demographics – if the number of retirees receiving benefits grows while the number of workers paying into the taxes shrinks, that places stress on the system. That’s what’s about to happen with the retirement of the baby boomers. But since Social Security is simply an ongoing government program of wealth redistribution, the way to deal with this problem is quite straightforward; simply adjust the flow of revenue and benefits to account for the changes. And the reason the government has been dragging its feet on that score is the simple fact that voters don’t like having their taxes raised or their benefits cut. Nothing nefarious is going on here.

So when John O’Hara, the Young Well-Spoken Guru of the Tea Party Movement, goes on The Daily Show and dismisses Social Security as a Ponzi scheme, that tells you one of two things. Either he’s mendacious, or he’s an idiot.

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