People who are on Social Security today, men and women who are receiving those benefits today, are individuals at my age that are in line pretty quick to get them, they don't need to worry about anything. But I think the Republican candidates are talking about ways to transition this program, and it is a monstrous lie. It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you're paying into a program that's going to be there. Anybody that's for the status quo with Social Security today is involved with a monstrous lie to our kids, and it's not right.
The logic behind this argument is as follows: a Ponzi Scheme is when a fraudster collects money from new investors to pay out old investors. The old investors think that they are getting a return on their investment, but really just getting the new investors’ money. The Scheme, of course, is unsustainable, illegal, and deceptive. Eventually it collapses and everyone who did not already get a payout, loses their money.
How is SS like this? SS collects money from current contributors, and uses it to pay retirees. Critics like Perry wonder whether this is sustainable. Demographic changes, declining fertility rates + the baby boom, mean that there may not be enough new contributors to cover what is owed to the guys who are cashing out. Furthermore, there is a question of popular misperception. Most people think that they are cashing out on what they paid in, when this is clearly not the case. So in those ways Perry is right. SS looks a little like a Ponzi Scheme.
The blogosphere was predictably alight with comments on both sides. Many people on the left have proposed differences between America’s Social Security Program, and a Ponzi scheme. For example, SS is a legitimate government sanctioned program, whereas a Ponzi Scheme is an illegal Scheme; there are little differences as well, the PS is deceitful; it promises huge payouts etc..
On the other hand, some on the right say that SS is even worse than a Ponzi Scheme; (a) it’s not a voluntary agreement; (b) people don’t really know how it works and so there is some deceit involved; and (c) the government can actually use the SS funds to do other things/political projects and boondoggles. Of course, PS’s share 2/3 of these qualities.
To me, these arguments kind of miss the point of the comparison. The left is drawing semantic distinctions that are true by definition (aka, one is illegal... well, thanks...); the right is exaggerating: SS is hardly worse... Overall, the general point that SS is sort of organized like a Ponzi scheme stands. Even smart guys on the left, like Paul Krugman, agree. The entire question, it seems turns on the issue of whether SS is sustainable. As has been pointed out, unless some serious changes are made to account for the changing nature of demographics, it is not clear that it can be. These changes are pretty sensible: increase the retirement age, cut back on some of the benefits etc... After all, SS was designed to give the elderly a couple of years of comfort before they die, not to provide 20 years of income to retirees with no savings.
Finally, I think it’s important to get the language right. SS should be seen for what it is: a tax on the young and a subsidy for the old. It is a straight wealth transfer. That’s it. It is clearly not “insurance” as many people believe. The Ponzi Scheme metaphor, while somewhat accurate, is not helpful because of its pejorative connotation. It paints the current contributors as victims. They are not, they are tax payers. That’s a bit different. I think most people would agree that society should take care of the elderly somehow using tax revenue. (Or course, without taxing the economic life out of the economy). My personal opinion is that the subsidy/tax should be smaller rather than larger, but that is a matter for another day.
I wonder why it is hard for Americans to accept that SS is just a wealth transfer. As Milton Friedman points out here, SS was originally sold as insurance. It was not sold as a tax/subsidy. My intuition is that Americans don’t want to feel like they are living off other people like welfare recipients. So, they gravitate toward the theory that it they are just cashing in on insurance. That way, they don’t feel like a burden to society. Thoughts?
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