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March 04, 2005

Ponzi? Not-Ponzi?

Michael Blowhard writes:

Dear Blowhards --

It seems to be up for grabs whether Social Security in its current incarnation qualifies as a Ponzi scheme or not. Lefties who root against reform tend to say No; righties who root for reform tend to say Yes.

I'm entirely unqualified to stake out a position on this vital question. (Here's Wikipedia's entry on Ponzi schemes -- decide for yourself.) But since I'm cheering for reform and privatization (although not Bush's proposed versions thereof), I've enjoyed learning that even some Social-Security-as-is cheerleaders haven't been able to avoid making use of the comparison. For example, Paul (Wrathful Prophet) Krugman -- Mr. Don't-Mess-With-Social-Security himself -- once made use of the word. Oopsie!

But I was especially delighted to learn that the awful Paul Samuelson -- the voice of '60s Great Society deficit-spendin', as well as the author of a bestselling textbook that put me off econ for decades -- once used the P-word too. Here's a passage from a column Paul Samuelson wrote in a 1971 issue of Newsweek:

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)! ... Social Security is squarely based on what has been called the eight wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

Only a true '60s Keynesian could call a program that he admits is actuarially unsound beautiful. By the way, can't you sense the self-pleased, I'm-an-all-powerful-magician smile on Samuelson's face as he wrote those words?

BTW, I'm not remotely interested in taking part in the Social Security debate and will decline any invitation to do so. (I'm painfully aware of my lack of qualifications, not that that stops me from having a strongly-held opinion.) I'm not about to get in the way of those who do want to duke it out, though.



posted by Michael at March 4, 2005


Thanks for the link to Ponzi scheme. I had always believed it was interchangeable with pyramid scheme. If I understand Wikepedia's definitions correctly a ponzi is a pyramid scheme, the perpetrators just lie about where the "profits" come from. A regular pyramid scheme is for the regular folks who don't understand economics and are told blatantly recruitment is everything; they actually believe multi level marketing can work (wikipedia said there are some legit businesses who use mlm; I profoundly disagree)

Anyways, I'm like you, I'm not an expert. I got the feeling the author was trying to equivicate between Sowell and those who disagree and it sounded a little tortured. So tortured that if you say, going by wikipedia's definitions, "pyramid scheme" instead of "ponzi scheme" the following point is mute:
"There is no belief that there are large profits coming from something; rather, it is clear that these are pay-as-you go systems, where workers (at any given time) are providing money to those who have retired."

With a pyramid scheme, it is also clear underlings are providing the money, even if those being taken in the scheme don't like to think about it too much.

Posted by: Emily B. on March 4, 2005 9:36 PM

Ponzi, Ponzi, Ponzi.

It was the artificially elevated--relative to their tax contributions--payout to the early 'investors' (i.e., retirees in the first few decades of the program) that sold the program to the masses...just as in the classic Ponzi scheme. Of course, as with any Ponzi scheme, such a sweet deal turns out to be unsustainable.

Also, the reason most Americans once (and, I suspect, many still do) believe that they're actually getting their own money back with interest is because it was sold to the American people as a pension plan by politicians (including F.D.R.) who intended to make sure that it wasn't repealed or cut back as just another welfare program and who weren't, um, too careful with the truth.

Posted by: Friedrich von Blowhard on March 5, 2005 2:45 AM

I think Tyler Cowen splits the SocSec concept into two parts: forced savings (for those who can and should set money aside for old age), and social insurance for the sick, the poor, etc. A nice point! Which leads me to think something along the lines of: Well, if we're going to have some kind of old-age program, why shouldn't those who can put their retirement money into private accounts? And have that be one thing. And -- given that there are going to be sick and poor people needing help and that realistically these days it's going to be the govt that helps them -- confine the active-bureaucratic social-insurance program (as in sending out checks to those in need, using money taxed from other people) strictly to the very poor and the infirm? Why blend the two concepts up? Seems to muddy things conceptually.

Anyway, one thing that strikes me is that for once, Boomers are getting screwed. Or at least some will get screwed. We've paid a ton of money to support the Greatest-Generation's retirement. But we're gonna get nothing like what they got.

And I thought part of the fun of being a Boomer was that you got to have it all. You got to spend the interest and the capital and be so self-centered that the consequences just didn't matter to you.

I thought Boomers didn't get screwed. I thought Boomers screwed others. But Social Security doesn't seem to be playing out like that. Where's the justice?

Posted by: Michael Blowhard on March 5, 2005 11:23 AM

The Boomers will screw us Gen-Xer's, once again! I'm a member of the group born in the high abortion years of '74-'79; the lowest birth rate was recorded in the U.S. during one of those years. In other words, we have no political power. I've always feared this issue of social security would hurt us the most.
An economist I read recently, and I can't remember his name, said that social security was one of, or perhaps the biggest, contributer to the population decline. To sum up briefly, a large family was desirable for a person in their old age (he added, of course, religiousity is probably more important). You sacrificed some in the beginning to rear your children and one of the things you received in return was being taken care of and being surrounded by your loved ones. With Social Security, that need for population growth did not change. However, there was no penalty for not having children. Why put in all the sacrifice of time and money in the beginning when most everything is going to be the same in the end?

Posted by: Emily B. on March 5, 2005 1:58 PM

On the other hand, not having a dozen children means that you can concentrate your resources on the few you do have, theoretically producing better educated, more successful children...

And while we can complain that students aren't well educated, etc. I'd wager that proportionally many more youngsters are a good deal better equipped for higher paying jobs than 80-90 years ago.

As far as SS goes, Brad Setson, an economist has an interesting article pointing out that the "huge" SS deficit is about 1/2 - 1/3 of the deficit that America has right right now. Kind of puts it in perspective.

Posted by: Tom West on March 5, 2005 2:21 PM

Speaking as the token leftist here, I'll say that the debate today would be a lot more reasonable if Bush's proposal had actually made the problem better instead of worse, and if Bush showed any concern for fiscal health in anything else he did.

Brad DeLong and Josh Micah Marshal are good sources for the Democratic point of view on this, if anyone's interested.

The Democratic proposals are undramatic -- some mix of a small tax rate increase, a small benefit cut, and raising the cap on who pays the tax.

One thing that my blog partner pointed out is that there was a big payroll tax increase 20+ years ago which was supposed to have solved the problem, but that the money was spent on other things, and now it looks as though the people who paid the increased taxes might be holding the bag (though then again, Bush seems to be taking steps to split old and young against the middle on this.)

Posted by: John Emerson on March 5, 2005 3:38 PM

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