Okay, It’s A Slow-Motion Ponzi Scheme
August 29, 2011 4 Comments
Ezra Klein takes up the Social-Security-is-not-a-Ponzi-scheme mantle. Seems to be piggybacking off this guy’s argument, which – as far as I can tell – rests entirely on Social Security not being a fraud, but rather, out in the open.
Obviously if the government itself is doing it, according to laws it wrote, it can’t quite be a ‘fraud’ (frauds are illegal). So by that definition no government action can be a Ponzi scheme period. But what have we learned from this? That Social Security is, at worst, an overt and legal Ponzi-esque scheme? Is that better?
Here’s what Wiki calls a Ponzi scheme:
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.
Bernstein’s (and, therefore, Klein’s) defense against the Ponzi charge says that it’s not a Ponzi scheme because it’s ‘a promise to a group of people that their children will be taxed for that group’s benefit…it’s a promise that could be broken (because anything can change in the future), but it isn’t dependent on an ever-increasing group of investors hoping to earn a profit’. I must not be wearing the right goggles to notice the huge gulf of difference between (1) paying returns from money paid by subsequent investors and (2) paying returns from money paid by subsequent investors. (The ‘investors’ in Social Security are, of course, taxpayers.) At the very least there does seem to be a resemblance in the structure of the two; Bernstein’s claim that Social Security has “essentially nothing in common with such a plan” is quite a head-scratcher. Does someone need to explain it slower?
Which to me is the key. The real distinction, if there is one, between Social Security and a Ponzi scheme is the timescale. Nobody is promised high/immediate ‘returns’ in Social Security after all; they’re promised they’ll get something way down the road (when they’re old). But does the fulfillment of that promise require signing up new ‘investors’ (taxpayers)? Of course it does, by Bernstein/Klein’s own telling. The nation needs to have enough citizens N and/or tax the average citizen enough X such that N * X (plus whatever interest the government pays itself in the name of Social Security) is enough to pay Social Security recipients…er, something. So it’s a plan, one might loosely call it a ‘scheme’, in which the promise of returns to current ‘investors’ depends crucially on signing up (taxing) a sufficient number of future ‘investors’.
Um, wait. Sorry, in my book that’s a Ponzi scheme. I know it’s not technically ‘fraudulent’, but the way people abuse language to talk about and proselytize for it (e.g. ‘trust fund’), perhaps it should be.
The real defense (if there is one) of Social Security is not that it’s ‘not a Ponzi scheme’, but that it’s a slow-motion Ponzi scheme. After all, what’s so bad about Ponzi schemes anyway? What’s so bad about them is that they inevitably crash and burn and swindle people out of their money. But if a Ponzi scheme is out in the open and can be run/managed in slow motion, so that the crash and burn isn’t inevitable (for example, because new people/immigrants will be born/immigrate into the population at a high enough rate), then I’m not sure what’s wrong with Ponzi schemes. As long as the financing appears to be on sound footing.
And isn’t this exactly what Klein thinks? That Social Security’s financing will be fine, because of demographics and actuarial tables and whatnot? If Social Security’s defenders truly think the financing is sound, then the ‘Ponzi’ charge should hold no teeth and they needn’t waste their breath fighting it. If they do waste their breath fighting it (and in the process resort to hyperbole such as SS having ‘nothing in common’ with a Ponzi scheme), I start to wonder whether they really believe the financing is so sound after all; they ‘protest too much’.
In a way, by pointing out that Social Security is a slow-motion Ponzi scheme, I’m expressing more confidence in its soundness than those who are franctically denying its Ponzi nature. I’m explicitly saying it’s a Ponzi scheme but, perhaps, a sustainable one. The anti-Ponzi contingent is talking like they don’t think any Ponzi scheme can possibly be sustainable; if true, this spells trouble for Social Security.
After all, the one thing we do agree on about Social Security is that it pays current recipients out of taxing the new-additions. Ponzi or not, either this arrangement is sustainable or it isn’t. You tell me.