Thursday, September 8, 2011

If Social Security is a Ponzi Scheme, so is Society

The line about Social Security being a ponzi scheme annoys me.  It is in the sense that it requires new workers to pay for old workers.  But in this sense, so is a family, a corporation, or society itself.  All organizations require constant infusions of new blood to work.  The difference between these things and a ponzi scheme is that they have actual value, they do something.  A Ponzi scheme involves a shell investment with no intrinsic worth, which is not the case with Social Security.  Just because it requires new workers to pay for it doesn't mean we don't gain value.  Does anyone really want to face the prospect of not being able to move because we might have to take care of mom and dad in their old age, or go back to having an extra bedroom in the house for when our parents are to old to work?  I don't think so.  We get value from it, just like we get values from organizations.  The inter-generational transfer aspect is shared among all social institutions pointing this out shouldn't be perceived as a gotcha.  It really shows how much damage has been done to our society that pointing this out seems like a gotcha to so many people.


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  2. The line about social security might well be an annoying verbal conceit, but I think it has more merit than you're giving it. There isn't a strict dichotomy between having a spare bedroom for mom and dad when they're old and having social security. In fact, what you're referring to is the function of social security as, in effect, old age insurance. As a social insurance institution it may depend on a certain amount of young-to-old wealth transfer, but that function most are willing to accept.

    What makes the Ponzi Pyramid Scheme analogy more relevant is that the social purpose served by a relatively high payroll tax and a large beneficiary population unwilling to give up a cost-of-living adjustment that outpaces inflation operates as a wealth transfer mechanism and any other social purpose is obscured by the wealth transfer aspect. So Social Security resembles a Ponzi scheme in the other important aspect, which is that the initial investors will reap more benefits than the later investors.

    While this still does not mean that the institution does not have inherent value, the method by which the system operates obscures that value.

  3. jtf,

    I still have to disagree with you. First of all, a Ponzi scheme usually involves earlier entrants getting nothing, which isn't the case with Social Security. The Ponzi Scheme analogy tends to focus the perception on the pay as you go nature of the program which isn't really the problem. It's custom designed to make private accounts seem like the only possible solution, which they really aren't and would likely end up bringing back the situation before social security.

    I do agree with you that to that the specific problem of the COLA adjustment being above inflation is a bit Ponzi schemish, but this isn't the only problem and not the specific issue that I usually hear critiques bring up. I agree there are big problems with the program, but I don't like the Ponzi frame scheme.

    The problem to me seems more accurately described as one of a simple problem with benefit schedules. The problem isn't just the too high COLA, it's also a problem with not adjusting retirement age to post retirement life expectancy and preferably life expectancy by income bracket (which would be easy to include since SS has the benefits information). There's an additional problem with whose going to bear the costs of the increased old age dependency ratio of the baby boomers. But I don't see that these problems are accurately described as a Ponzi scheme, they're a problem with benefit schedules and bear a lot more similarity to problems involving taxation and spending then they do with problems inherent in a pay as you go, or Ponzi scheme. Described inaccurately, I fear the politics of the problem will just shift in favor of "solutions" that fix the problem as described rather than the problem that is actually in the numbers. Which is why I think accurate description is so very important.