Social Security is a Ponzi Scheme?

Toby: More college kids think they'll see UFOs than Social Security checks.

Bartlet: But they don't tell you how many believe in UFOs; that's the number we ought to be worried about.

-- By AndrewMcCormick - 27 Feb 2009

The Idea

The idea is this: Social Security can be distinguished from Ponzi schemes, and the (often accompanying) argument for radical privatization can be characterized as a con or damaging social exercise.

Where we left off:

It was suggested in class that Social Security is a Ponzi Scheme. The comment was probably only an observation that current inputs are financing current outputs. But, claims that Social Security is a con are not new; Googling “ponzi social security” returns 359,000 results.

The distinction offered in class was pragmatic. Roughly, it was “Social Security is successful; it brought a huge portion of the elderly out of poverty, and is a moral imperative. Deal or scheme, it looks like a good one, but it is a challenge to explain why. In the spirit of Holmes, looking at its practical effects is probably a good place to start.”

Social Security is distinguishable from Ponzi Schemes (but it will not keep Ron Paul from saying otherwise)

Social security is argued to be a Ponzi Scheme because it uses current inputs to fund current outputs. Technically, I think, this is an illicit treatment of the major term of a syllogistic rationale (“All cats have four legs. Hey, look at that dog. It has four legs, it must be a cat!”). Even if all Ponzi Schemes use present investors to pay benefits, and social security uses present investors to pay out benefits, it does not necessarily follow that social security is a Ponzi scheme.

Ponzi schemes promise gigantic returns, Social Security does not. It may be countered that the first “investors”, people very near the retirement age when social security was created, received huge benefits relative to their contributions, as would someone who is terribly injured early in their career. But this is irrelevant: Ponzi schemes’ large payouts are lures.

Ponzi schemes pay off early investors to either corroborate false explanations of a money earning monopoly (e.g. a non-existent currency trading scheme), or, recently, to lend credibility to a dark-grey financial operation. Here, an investor pays out huge dividends without explaining the source, allowing present investors, and potential investors, to assume some strong market advantage exists, creating the play of the pseudo-secret and exclusive money mill, which actors want part of.

However, Ponzi Schemes and chain letters both fundamentally differ from Social Security. Chain letters are mathematically flawed and fail by design; Ponzi schemes, if revealed, have no justifiable purpose. Social Security, on the other hand, is not mathematically untenable, even if the group paying-in is shrinking, and the groups being paid out to is growing, it is not an exponential function. Also, the money in Social Security not being used to pay out, is invested in a trust fund, rather than funneled to the operator.

The Social Security trust fund is at the center of many arguments that Social Security is a bad deal. The trust fund lends money to the government, in exchange for, essentially, IOUs. The rabble-rousing argument is essentially “hey, this is what Madoff did!” Except for the IOUs. And the creditor is the United States.

Privatization: arguments and role playing.

The arguments for privatization gained momentum after the 2005 State of the Union. Because of the present economy, it is easy to argue privatization would have been disastrous. It might be useful to investigate whether the arguments for privatization manipulate social roles, as used in sales and cons.

Conservatives drive the conversation by insisting social security is an investment program. They are arguing away from Social Security being a monopololistic redistributive system, well suited to serve present needs. They instead describe it as a bank account, held in the state’s perilous hands. Inviting marks to protect their investment, advocates invoke the rationalizing power of free-market economics. This also gives them an explanation their lack of success (“if this is such a good deal, why has it not been done?”), invoking a social myth, and well-rehearsed playlet. Leff’s “This would be good for everyone, but you stand to gain because you believe in me”, becomes “but you are smart enough to understand that the free market is better than government”, or alternatively “only the lazy suffer from the market, and you’re not one of those people”, triggering a shift in the mark to the economically rationalizing homo economicus. In this role, a person will believe that because Social Security is not driven by market economics, it cannot be a deal.

Simultaneously, the seller offers dramatized risks in the status quo. They argue that a large investment has already been made by working marks, and that they risk losing it if Social Security goes under. “You’re no dummy; you know a Ponzi Scheme when you see one, and know the only way to win is to get out. C’mon, lets go and buy some stock in banks, like real investors do.”

Advocates capture the benefit of peoples’ strong desire for self-improvement. People play the roles they are given, even if false: here, playing a rational investor that knows better than the government, and is sure to ‘win’ in the investment game. People like to believe they are good at shopping, and the choices presented in privatization appeal to our “strong heuristics for self-improvement”, ignoring the reality of investment-- that there will be losers, and the cost of losing is tremendous.

What can we do with it?

The positive effects of Social Security are significant. But, Social Security requires periodic adjustment. In making changes, looking at what Social Security does, and the effects of changes is preferable to the rhetoric of buying, selling, and scheming. Rationality is preferable to rationalizations, and pushing the discussion toward rationality and justice is a job that may be done by lawyers.

• I'm surprised you feel that the subject deserved this much treatment. It seems to me the whole thing can be put this way:

• • In the United States, we have an incomes maintenance policy designed to prevent poverty among the elderly, the permanently disabled, and the children of workers who have died. All three components take the form of social insurance systems, to which employers, workers and society as a whole contribute. For historical reasons, some portion of this policy takes the form of a notionally individual savings plan, in that workers can see the contributions they have made in relation to their eventual retirement benefits. This connection is often exaggerated by those who want to privatize the management of all that money.

• If you've gone no further here, which—a few decorations aside I think is the case—you've established what happened in both 1935 and 2005. But making terminological efforts to define "Ponzi scheme" so as to prevent an essentially metaphorical use seems peculiar to me: you can't prevent other people from using words in a loose sense by careful definition.