Commenter JA recently offered that “anyone who compares Social Security (SS) to Bernie Madoff shouldn’t be taken seriously.” Now Bernie Madoff is the latest in a list of various enterprises employing a Ponzi scheme for raising money. The comparison to Mr Madoff is not to suggest that the motives behind the SS program is the same as Mr Madoff’s, but that the SS program has a number of features which classify it as very similar to a classic Ponzi scheme. This BW article is instructive.

Superficially, these critics have a point, and there is a parallel between Social Security and a Ponzi scheme. But on a fundamental level, they are very wrong, and it’s worth explaining why.First, the parallel. Social Security taxes current workers to pay Social Security benefits for current retirees. In other words, the new entrants into the Social Security system, the young workers, pay off the previous entrants, the older workers. And despite the fact you have a Social Security “account”, there is no necessary link between what you paid into the system in taxes, and what you receive.

That’s very similar to the structure of a Ponzi scheme, where new investors pay off the original investors. As long as enough new ‘victims’ are brought into the scheme, it keeps growing and growing. But when the new investors runs out, the Ponzi collapses. Analogously, the slowdown in population growth puts pressure on Social Security finances.

But there is one enormous difference between Social Security and a Ponzi scheme: Technological change. Over the past century, new technologies have enabled the output of the country to grow much faster than its population. To be more precise, the U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times.

So SS is in fact a Ponzi scheme with the modification that unlike a standard Ponzi scheme which depends on infinite population size (victim pool) to continue, the SS program depends economic growth to outstrip any demographic changes.

It is curious to me why the left so aggressively defends this program. Time and time again you will find the left defending progressive taxation as opposed to a flat or other non-progressive tax scheme. Yet, here is SS a blatantly non-progressive tax, which they defend conveniently ignoring its very non-progressive nature.

The criticisms of this program from the right center on its size, a 13% tax, and its very poor rate of return (which calculation assuredly uses the wrong figure for the tax amount, i.e., 7.5%). The answer to that from the left, as far as I can see, is to try to buy into the accounting fiction that the 13% is really 7.5%. I think the reply to the second is, “meh”.

From the right’s point of view, the insistence by the left that this program aids the poor and indigent (yet provides universal coverage) seems myopic at best. Nobody on the right would insist that we fail to provide for the retired people without means, yet when one asks why this enormous tax is paying retirement benefits to those who are well off has no answer.

It seems to me a political feasible solution would be the following:

  1. No change to the coverage of currently retired people would be made. SS made promises and should therefore make good on those.
  2. Currently working people, starting “now” (now = when this change is put in place) would be informed that any new benefits (figured in the fictional accrued that comprises SS) will only be means tested in order for that payment to take place. That is to say, it would be as if you stopped working right “now” and your benefit would be frozen at that point. If you need benefits in excess of that amount, means testing will be required before you will receive money.

The effect of this is that over the next generation (or two) the tax would return to the 3% level at which it began. People will plan for their retirement independently, realizing that SS would be a safety net for retirement. When the “SS” generation expecting “a rate of return” sort of benefit payment are no longer in the working force, the SS tax could be removed from its special tax/payment status and tax and receive its funding from standard mechanisms.

I should point out this is not exactly the proposal I would really prefer, although it might be a stepping stone to the same.

Filed under: DemocratsGovernmentMark O.PoliticsRepublicans

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