Ponzi Schemes for Beginners

By James Kwak

On the theory that the best defense is a good offense, Rick Perry has been insisting to anyone who will listen that Social Security is a Ponzi scheme. Probably hundreds of people have already explained why it isn’t, but I think it’s important to be clear about why Rick Perry thinks it is—or, rather, why his political advisers think he can get away with it.

A Ponzi scheme, classically, is one where you promise high returns to investors but you have no way of actually generating those returns; instead, you plan to pay off old investors by getting new money from new investors. Social Security is obviously not a Ponzi scheme for at least two basic reasons. First, there’s no fraud involved: all of Social Security’s finances are right out in the open for anyone who cares to look, in the annual report of the trustees of the Social Security trust funds. Second, a Ponzi scheme by construction cannot go on forever; no matter how long you can keep it going, at some point you will run out of potential new investors and the whole thing will collapse. I’m sure there are other obvious differences, but that’s enough for now.

So why do people ever think it’s a Ponzi scheme? It’s the combination of two factors, each of which is relatively innocuous on its own.

First, Social Security is, from a cash flow perspective, a pay-as-you-go system. That is, payroll taxes being paid by current workers are immediately going out the door to pay benefits for current retirees. This is different from a pre-funded pension system where the pension plan already has enough money, today, to pay for all promised future benefits. Employer-sponsored pension funds in principle (though not always in practice) work this way: at any moment, the fund is supposed to have enough money to pay off future benefits. A commenter on an earlier post of mine said that if Social Security were a corporate pension fund, I would be attacking it as a fraud for this reason.

Not so fast. There’s nothing wrong in principle with a pay-as-you-go system, as long as the future revenue stream is secure. With any pension plan, the fundamental question is whether the plan will be able to pay future promised benefits. We want private pensions to be pre-funded because we wouldn’t trust a company that said, “We know we don’t have enough money to pay the benefits we promised, but don’t worry, we’ll be really profitable starting twenty years from now, so we’ll be fine.” It’s not a question of whether corporate executives are honest; it’s that the future is uncertain. As we know, companies can go bankrupt almost overnight (remember Enron? WorldCom?), so the only way to ensure that they will pay future benefits is to require pre-funding. Even then, pre-funding is not a magic bullet because you have to make some assumption about future investment returns. Under today’s rules, companies assume some rate of return on their pension fund investments (actually, I think they assume some discount rate for their future liabilities, which works out to roughly the same thing)—which means that even with pre-funding, there’s no assurance the money will be there to pay benefits.

Social Security is different because it knows that, unlike future corporate profits, the trust funds’ revenues will be there in future years. That’s the great thing about being the federal government: you know people will pay their taxes. Yes, there is uncertainty about economic growth, but Social Security’s future income stream is a good deal more predictable than a corporate pension fund’s future investment returns.*

But, you may be saying, and this is the second factor, the trust funds will go bankrupt in about twenty-five years!** That is probably true, but it is not because Social Security is a pay-as-you-go system. A pay-as-you-go system can easily go on forever, as long as you have a constant rate of population growth (or even a constant rate of population decline): Generation A’s benefits are paid by Generation B, which is 10 percent larger than Generation A; Generation B’s benefits are paid by Generation C, which is 10 percent larger than Generation B; and so on. With a few more simple assumptions, this can go on forever.

The Social Security trust funds will run out of money because the current structure of taxes and benefits requires a certain minimum dependency ratio (the ratio of workers to retirees) and the actual dependency ratio will fall below that required minimum as the Baby Boom generation retires. It’s the combination of those two facts—that Social Security is a pay-as-you-go system and that the trust funds will run out of money—that makes Rick Perry thinks it’s a Ponzi scheme. Ponzi schemes are also pay-as-you-go systems that will run out of money, but that doesn’t make Social Security a Ponzi scheme, just like all giraffes are mammals, but not all mammals are giraffes.

As all informed observers realize, you could close the seventy-five-year Social Security budget gap simply by raising the payroll tax rate by two percentage points (or by other means that have a similar financial impact, such as eliminating the cap on taxable income). This in itself should make clear that it isn’t a Ponzi scheme.

Now, it is true that the benefit-tax structure was already changed in 1983, so it’s a reasonable question whether the system has to be “fixed” every thirty years, which would raise the question of sustainability. But there’s no good reason to think the dependency ratio will keep getting worse and worse, because the Baby Boom was a one-time historical event. Right now the dependency ratio and the funding gap are expected to level off around 2035 (as the last Baby Boomers retire) and remain roughly flat for half a century. (See the 2011 annual report, pp. 10–11.) So any policy change that brings Social Security in balance in 2035 will keep it more or less in balance as far as we can see. Yes, it’s possible that the birth rate could drop again, but it could also go up; we just don’t know. (And if the birth rate drops, what that means is that we need more immigration by working-age people, but that’s another topic.)

Wait, Rick Perry might say: Doesn’t the fact that we all know Social Security’s future revenues are not enough to pay its scheduled benefits make it a fraud all by itself? Not in a legal sense, since all the information is out there for everyone to see. But it does raise a legitimate issue: By 1983, the Baby Boom had happened, so everything that is going to happen with the dependency ratio was easily predictable—yet Congress and the Reagan administration consciously underfunded the system.  (As of 1983, Social Security was in 75-year actuarial balance, but that was because a large surplus in the first thirty-seven years balanced a large deficit in the last thirty-eight years. See the 1983 Annual Report Summary, Chart F.) Isn’t that a problem?

But saying that Congress underfunded Social Security is not a valid criticism of Social Security as a program: it’s a valid criticism of Congress. As a logical matter, you can criticize our political leaders, past and present, for not fixing Social Security’s long-term funding problem, but you can’t use that fact to criticize the basic structure of the system, where people pay taxes while working and receive benefits while in retirement. There’s nothing wrong with that, try as Rick Perry might to confuse the issue.

* Private accounts would solve this problem, but not in a useful sense. Because you would only be entitled to the money in your private account, Social Security would have no obligations, and hence could never be underfunded. But you would be subject to inflation risk and investment risk; today, Social Security absorbs both inflation risk and investment risk, so all you are subject to is political risk (the risk that benefits when it comes time for you to collect them).

** “Bankrupt” isn’t quite right: what will happen is that the trust funds’ accumulated balance will run down, so the only money they will have to pay benefits will be the current year’s payroll tax revenues—which will not be enough to pay scheduled benefits. It’s not clear that these “scheduled” benefits should even count as “promised,” since both the law and the financial status of Social Security are public information, but that’s another topic for another time.

68 thoughts on “Ponzi Schemes for Beginners

  1. “Second, a Ponzi scheme by construction cannot go on forever…”

    No, James. You should know better than this. For example, O’Connell and Zeldes (IER 1988) set out conditions under which Ponzi schemes last forever under perfect foresight. Roughly speaking, they are stable when the growth rate of contributions g is higher than the interest rate r promised to investors.

  2. A Ponzi scheme, classically, is one where you promise high returns to investors but you have no way of actually generating those returns; instead, you plan to pay off old investors by getting new money from new investors. Social Security is obviously not a Ponzi scheme for at least two basic reasons. ….I disagree here James, if you actually had no way to generate funds you would not try to start a ponzi. SS does have a way and it comes from the tax rate.

    First, Social Security is, from a cash flow perspective, a pay-as-you-go system. That is, payroll taxes being paid by current workers are immediately going out the door to pay benefits for current retirees…… And secondly, pay as you go only works when the numbers go up, if not, it then has to be borrowed upon. We have seen a hugh decrease in the growth rate from a decades average of 8% to a new low of 2-4%. That is a drop of revenue also, and it has the look of a long term low. To try and bring a trust/gvt issue as the means of support/enforcement might have worked yesterday, but today and tomorrow holds greater sway and trust me, when I say that trust itself has been erroded and is barey holding its banks together more less anything else.

  3. “yet Congress and the Reagan administration consciously underfunded the system”

    Actually, if one were to listen to Robert Reich — a former SS trustee — the problem is that since
    distribution of wealth has moved towards the higher end a smaller percentage of the population
    is paying into SS. In 1983 90% of all income was subject to payroll taxes. Now that percentage
    is something like 85%. According to Reich raising the cap to approximately $180,000 would
    bring the system back into balance.

  4. Social Security is obviously not a Ponzi scheme for a different reason. In a Ponzi scheme, the investor voluntarily gives their money to the schemer for the promise of a guaranteed high return in the future. In social security, the government requires us to turn over our money for the promise of an uncertain return in the future.

    Totally different.

  5. Social Security currently has a 2 Trillion dollar surplus. The surplus was invested in US bonds. The federal government has used the surplus to fund the government, as they continued to cut taxes on the elites. Social Security is a creditor of the federal government which according to Perry is not a protected creditor. If Perry and others can destroy Social Security then the 2 Trillion will not have to be paid. Perry’s position is a cleaver scheme to rob all of us who have contributed to the fund. No doubt he will propose a pension plan where we all must invest in Wall Street. Perry believes in privatization of all government services with the possible exception of defense. Those defense contractors really need our tax dollars.

  6. There are lots of unpalatable solutions to fix social security. The lack of sustainability given the current incarnation does not indicate that it is a Ponzi scheme, just that it needs alteration. Needs test, raising the income cap, raising the retirement age, negotiating discounts with big pharma, socializing medicine. I am prepared for any of those things.

    But first, we need to write down real estate and take the Big Haircut…

  7. SS will continue to need tweaks as the life expectancy for those over 60 continues to increase. This increase could theoretically be offset by those individuals working and contributing longer, but an increase in life expectancy does not necessarily translate to increased health and fitness to work.

  8. James, excellent analysis. Our politicos in their rush to cut future SS benefits once again overlook the obvious. A small increase in the income cap on contributors would fix this. Sure, there will always be fluctuations in the workers/social security recipient ratio, so small adjustments need to be made from time to time. How is this different from fluctuations in private home insurance costs, depending on the vagaries of economic conditions?

    The sad thing is that far too many of us are so drunk on the “dependency” mantra that social security robs us of our self-sufficiency (see Paul Ryan’s plan) that we are blinded to the larger reality. That people like Rick Perry, Michelle Bachman, Rick Santorum, Ron Paul, Newt Gingrich and other Kool Aid providers are taken seriously by either political party or the wise pundits/propagandists of our media simply illustrates why we will continue to get the hose job we deserve from our elected representatives.

    Let’s not let the Democrats off the hook either. Obama’s cat food commission and now the Super Committee are guaranteed to ignore reality and good policy in favor of tearing down SS.

    Perhaps what’s driving the anti-SS witch hunt (chiseling down a program with $2 trillion in the kitty in the name of austerity) is the big money that buys our politicians. If economic growth slows, then the ratio of money for corporate welfare and cost plus defense contracts to money for social security must also drop.

    Umm. Less money for handouts to campaign contributors? No way! Let’s whittle down social security and medicare and other programs we the oligarchs can’t get our hands on. Thus spake the oligarchy.

  9. ‘Generation A’s benefits are paid by Generation B, which is 10 percent larger than Generation A; Generation B’s benefits are paid by Generation C, which is 10 percent larger than Generation B; and so on. With a few more simple assumptions, this can go on forever.’

    But, sir, in matter of fact this is not the case. You must know this, and your failure to mention it is puzzling.

    Population growth is not keeping up with anticipated future demand. One figure I hear cited often is that when Roosevelt signed the SS act, there were 13 workers to support every recipient. That number now approaches 2. Let’s then factor in the declining workforce participation percentage. Hmmm….looking uglier and uglier. Let’s factor in the years of inflation-adjusted (and more) increases in benefits, the addition of benefits for surviving children, the addition of benefits for disablility. Eeeew….the ol’ calculator begins to smoke a bit.

    Then let’s add in a dash of ‘Anyone, anywhere, anytime who dares point out that this is completely unsustainable is immediately branded with any number of horrible names. Let’s scare the bejeezus out of Grandma anytime anyone anywhere raises a hand to point out the obvious.’

    (It’s Rick Perry’s turn these days…)

    Stir gently, pour into a tin can. Kick down road.

    Is this a ‘classic’ Ponzi, as you so elegantly attempt to define what is and isn’t? Don’t know. But it is definitely one huge mess that will blow up in our children’s faces, fueled by rank dishonesty, encouraged by economists who refuse to do math.

    (That would be you and your colleagues, by the way.)

    When my father, now deceased, received his first Social Security check over twenty-five years ago, he opened it in my presence. He had spent his career as an accountant. He blurted out–‘This can’t be correct! I did not contribute anything close to enough in taxes to justify this payout!’

    If my old dad with his tech-school accounting degree back in the 1980’s could do that math in his head, why can’t the BestAndBrightest figure it out? Why do they not care to?

    Rick Perry (NOT my preference for Prez) is correct. The Left know it, and they hate hearing the truth delivered in a Texas accent.

  10. If Rick Perry and his advisers truly believed SS was a Ponzi Scheme, then how can they square this with his statement that current beneficiaries will be unaffected by any changes to the system he would propose? That is, after discovering this “Ponzi Scheme”, why allow one generation to receive “ill-gotten” benefits even though current payees will not receive them in the future? For some reason, Perry seems to believe that because SS isn’t insolvent now, but will face a shortfall in the (distant) future, it’s OK to allow current recipients to continue receiving payments from payees who will receive discounted payments in the future. Using this logic, it seems Perry would have allowed the Madoff or Stanford scheme to continue so as not to cause any abrupt discontinuation of payments for existing clients.

    I suspect that they don’t truly believe this, but it is a carefully calibrated position to appeal to an older, anti-government strain of the American electorate (likely primary voters) who will be unaffected by any future termination of Social Security benefits, while not alienating younger voters who probably heavily discount the importance of social insurance benefits because of their current ineligibility. Essentially, they’re exploiting a time inconsistency problem facing current payees (who are not immediately impacted by discontinuation, but will suffer in the future), and current recipients (who would only be impacted by current discontinuation).

  11. Free public education is a pay-go system (or ponzi scheme) to the same extent as SS. There is a (revocable) political commitment to keep levying taxes to pay for both kinds of future promised benefits. If it’s somehow wrong to tax 40-year-old John now to fund my SS benefits, was it also wrong to tax me 30 years ago to fund 10-year-old Johnny’s free public education, which btw was a much more valuable freeby? http://economistsview.typepad.com/economistsview/2010/04/public-education-worth-more-than-social-security-and-medicare.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View+%28EconomistsView%29%29

  12. I appreciate the discussion, but I think you undermined your case when you noted that in order to continue to pay out at the projected payment growth rate, we would have to increase our population or increase our taxes. We can’t determine the speed at which our population grows and not everyone wants it to; we can increase taxes, but at some point (we’re there already) it stops being social security and starts being welfare for the masses, i.e. an entitlement. It’s one thing to ask those who produce the most wealth to help pay for welfare for those who struggle. It’s another thing to ask them to relieve the entire populace of the responsibility to plan adequately for a financially secure retirement.

    Private accounts + welfare would be a better system, but it is very hard to withdraw from a Ponzi scheme.

    @Anonymous, I read the Reich column. He wasn’t saying a smaller % of the population was paying in, he was saying that there’s more untaxed wealth at the top. It’s a rhetorical bait and switch. Reich was also quick to dismiss the idea that SS is out of money, since it’s owed money by the federal government… but neglected to mention this money is not budgeted.

  13. ***Old South,

    The reason there was a high ratio of workers to retirees early on is that, in the original legislation, you had to earn $5000 of income and pay the tax over the course of five years in order to qualify for the benefit. That was later amended to allow people to start receiving the benefit three years after the government began collecting the tax. The first beneficiaries started receiving “old age” annuity money in 1940. From 1936 until that year the ratio of contributors to recipients was infinite. Believe it or not, the actuarial analysis in 1935 was born out with extraordinary accuracy over the course of the next several decades in the matter of life expectancy growth. There were subsequent instances of high ratios of contributors to the numbers of recipients when, for instance, agricultural workers were first enrolled in the system. Understand that in the ’90s when the ratio of workers paying in and beneficiaries taking out was 3:1 the system was running a 40% plus surplus.

    One problem for the system is because of the rising inequality of income something like only 83% of wage income is taxable these days when that number used to be something like 91% of aggregate wages that were below the cap and taxable.

    Tim Russert never understood any of this but you should.

    ***James Kwak you write:

    “Private accounts would solve this problem, but not in a useful sense. Because you would only be entitled to the money in your private account, Social Security would have no obligations, and hence could never be underfunded. But you would be subject to inflation risk and investment risk…”

    You leave out two points. Paul Krugman has explained that if Social Security taxes were directed into private accounts the system will experience a massive shortfall in funds available for beneficiaries who paid into the general account, and not their own private accounts, until those who have paid into the current system died off. If I remember correctly – and maybe I don’t – , Dick Cheney used to claim that shortfall would total about $2 trillion dollars if 2% of both worker and employer contributions were diverted to private accounts. Krugman says that $2 trillion would only take you through the first decade. The actual number would be $45 trillion unfunded the government would have to pay out to finance that conversion.

    Dean Baker points out that those with private accounts would earn an average rate of return on their investment that would be equal to average rate of return for the financial products the money was invested in assuming financial planners and service companies were not raking in noticeable sums from the investments for themselves. However, for every dollar earned by those individuals who received higher than the average return that excess would be matched by individuals who earned a lower rate of return assuming all of those private accounts reflected what was going on with other investors who invested in those same instruments independent of the Social Security system. The government could end up with a group of recipients who made unsuccessful investments requiring subsidies for themselves to keep them from destitution which would be in excess of what the government finds itself responsible for under the current system.

  14. Always grateful for an analysis that makes sense.
    After Ponziperry got straightened out, I found one point missing, however:
    how do the “payroll tax” cuts affect the balance of SS?
    In an effort to stimulate employment payroll contributions were lowered
    and more on both employees and employers end is in the forecast.
    Is the idea that a rising economic tide will fill this bucket, too?

  15. Whoops, I have a blooper in my text. I wrote $45 trillion when I should have written $15 trillion. Here’s what Paul Krugman said in a column about the 2005 Bush privatization plan:

    …The administration expects us to believe that drastic change is needed, and needed right away, because of the looming cost of paying for the baby boomers’ retirement.

    The administration expects us not to notice, however, that the supposed solution would do nothing to reduce that cost. Even with the most favorable assumptions, the benefits of privatization wouldn’t kick in until most of the baby boomers were long gone. For the next 45 years, privatization would cost much more money than it saved.

    Advocates of privatization almost always pretend that all we have to do is borrow a bit of money up front, and then the system will become self-sustaining. The Wehner memo talks of borrowing $1 trillion to $2 trillion “to cover transition costs.” Similar numbers have been widely reported in the news media.

    But that’s just the borrowing over the next decade. Privatization would cost an additional $3 trillion in its second decade, $5 trillion in the decade after that and another $5 trillion in the decade after that. By the time privatization started to save money, if it ever did, the federal government would have run up around $15 trillion in extra debt.


  16. @Jeff Simpson:
    I would agree except for raising the eligibility age for either SS or Medicare. Some of us are “fortunate” enough to sit at a desk for a living, we can hold out until 70. But, there are many who have physcally demanding jobs who would have a tough time working longer. I think the idea of raising the age is totally unacceptable especially given the fact that raising the cap to $180k or higher will fix SS. Making this relatively minor adjustment to SS should be simple. The only thing stopping it are demagogs like Perry and those like him.

  17. James Kwak said, “As all informed observers realize, you could close the seventy-five-year Social Security budget gap simply by raising the payroll tax rate by two percentage points … ”

    Please show your work. CBO scored 30 different options for fixing Social Security. One, “Increase the Payroll Tax Rate by 2 Percentage Points Over 20 Years” was predicted to ” … improve the 75 year actuarial balance by 0.6 percentage points of GDP and would extend the trust fund exhaustion date to 2083.”

    Click to access 07-01-SSOptions_forWeb.pdf

    And we have a rich history of raising Social Security taxes without reaching a premanent solution.
    “In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.”

  18. I’d like only the opportunity to illustrate Gov. Perry’s irrational behavior as that of a totally lame “Southern Baptist” twangy steward (which vote in a 15ml block, mind you,… just ask Clinton) and pathetically directionless, secessionist, no-taxes governor! Indeed this guy has of little character, as he swaggers about, impressing a broken political compass in his vest pocket – around his red scarred neck,… a fused charlatans Christians’ Cross in all its turgid gratuity – this grandiose governor whom is about to bankrupt Texas, (eventually, if Bush hadn’t become president, that would have been his legacy,… but #43 bankrupted the United States instead – wait for it ?) and I’m not talking about the drought?

    Perry wants to “Opt-Out” of Social Security, as he has implemented opt-out programs in three large Texas counties. But, are they, or can they be judged successful,… or just another plagiarized boxed-in/ baked-in recipe for disaster, awaiting-round-the-bend in a two-score delayed-time event? We all remember Bush #43 trying to privatize SSA and how the idea was gaining traction until the crash? When I say gaining traction, that wasn’t the right characterization of full meaning, or of the responsive color-coded transitory shameful moment felt,… but, as the public knowingly, and wearily has become frighteningly aware of,… their (POTUS) voice in todays’ congress doesn’t amount for very much. period!

    Here’s the Gov’s agenda in a nutshell:
    *Low Taxes (imho – absolutely no revenue, homeowners lose big time in a couple of years as infrastructure disintegrates eg. cigarette taxes and new margin taxes on businesses won’t cut it, coupled that, or better said augured that with no state tax)
    **Low Regulation (imho – Texas has basically no regulatory framework to speak of except for the EPA’s “Clean Air Act” which Obama has just recently handed over to them, a body-part to cannibalize in any way fashion)
    ***Tort Reform (imho – Don’t get hurt in Texas in an accident, etc,. etc.,or on the operating table,.. your financially a dead corpse for a necrophiliac hot night out [?],… where loser pays!)
    ****Texas Enterprise Fund {and to be a good saver[?] } (imho – This is an anti-capitalism/ free-marketing racketeering scheme,… a slush fund that provides ambiguous opaque subsidies, and sweeteners to rustle unsuspecting enterprises, and business west, north, and east of the border – and guess where the sweets come from? You got it,… less education resources, health care, and infrastructure, etc., etc,… )
    Note: The Bush’s (#41 & #43) have brought alot of Government Contracts and big money into the state keeping unemployment slightly less than the national average. But the jobs created are low wage, needing little or no skill sets. I remember living in Boston when Kennedy became president and how well off the state had become because of his presidency,… and I also remember the wrath of Nixon when he had (LBJ dropped out?) won, and it was only Massachusetts that didn’t vote for him, amongst the fifty-all, and the financial military base-closures and hard times that followed,… just musing my thoughts)

    Ponzi Schemes make whole for those at the top,… the very top layers, but little for the bottom. They don’t last very long in years,… perhaps five – ten years, and are self destructive in nature.
    The Social Security Administration (FICA) takes in enough money, whereas an eligible recipient gets a fair return on his/ her money over their remaining defined-benefits lifetime. Remember that adjustments must be made timely, because of longevity issues today, and contributors shortfalls (years ago people died a few years after retiring, especially males).

    What is needed: immigration overhaul; raising retirement age; raising maximum contribution [ a fair-means test ?]; increasing payroll tax by 0.25% for both employee/employer; and the most important factor of all is to get Obama out of office, with Mitt Romney,… a business savvy replacement! Remember this – Obama is cutting the payroll tax as I write and that is $175 bn. less that goes into the pay-as-you-go social security fund! Believe me,… this is a back-field lateral pass right up the middle, a round-about-hail-mary that QB Obama is willing to wager for re-election and make permanent in his playbook! Let me reiterate,… the gov’t has already given the SSA a couple trillion in IOU’s, and now they want to stimulate the old-age with a transfusion! How quaint?

    Thankyou James and Simon

    God Bless You, Julian Assange :-))

  19. Call it what you like…. Fact is, like every aspect of American life it’s function is to make the rich even richer. Don’t believe me, then why are contributions capped at $106,000? Why is their no means test? Why has President Zero helped to defund the program?

  20. Perry is extending the whole “unfunded liability” meme and saying that SS is a ponzi scheme because the money to pay all SS beneficiaries until the end of time is not sitting in a bank vault somewhere waiting be be distributed. By that definition, nearly everything is a ponzi. My mortgage? Auto loan? Credit card? Ponzi. There is no guarantee that I will have future income sufficient to cover those obligations. And since i don’t have that much cash sitting in a safe, all of those things are some sort of ponzi scheme by Perry’s definition. Heck, the entire banking system is a ponzi because my cash is not sitting in a vault awaiting my withdraw. The bank relies on luck and other depositors to have the cash the day I go and ask it back. I suppose Perry wants to abolish all of that and go back to a barter system.

  21. Mike makes some valid points and I can add some not so good ones. The snowball effect being automation, not only do macines take away jobs, they make human jobs eaiser. The debate today is to divide the type of work done to the benifits derived from it. A concrete jackhammer job is harder on the body than the same paid assemblymen or financial gambler. Right now the cost/benifits are fixed, but a more fair system would allow the jackhammer man different benifits than the man staring at a screen all day. The list of options are endless, but the ratio of workers to benificiaries are going in a negative direction for the foreseeable future. And $2 trillion in the trust fund today does not stack up well with the current liabilities which are both tapping the trust fund and getting even more unperportional as every day passes. Yesterdays workers were hard made people, todays future payees are computer/phone game wimps, the ones inbetween are juggling madmen.

  22. due to decline in birth rate and longer life expectancy, the assumption that pay-as-u-go can continue w/o modification is flawed. The imperative for SS is moral, not financial. If as a society we decide that we want to allow people to retire at a certain age and still live with dignity we will find a way to pay for it, just like we find a way to pay for the military.
    If Perry was queried by an intelligent press, he would be asked just that – if not SS then what? does he think it important to guarantee to all that in their Golden years they will be allowed some dignified repose, or should that only the privilege of the lucky few? Better that quibbling about his metaphors.

  23. ‘If Perry was queried by an intelligent press, he would be asked just that – if not SS then what? does he think it important to guarantee to all that in their Golden years they will be allowed some dignified repose, or should that only the privilege of the lucky few? Better that quibbling about his metaphors.’

    Very cogent! Rick Perry is not a wise choice for President for a number of reasons. This would reveal one of them, at least.

  24. It is not a Ponzi scheme! It is not a pay-as-you-go system! I presume that people who believe that also believe life insurance is pay-as-you-go, with new clients paying off the benefits of those that die.
    There is a Social Security Trust Fund with a current balance of around $2.5 trillion, projected to grow to $3.7 trillion by 2022 (which probably will not happen if Obama’s payroll tax cuts are passed). The Trust Fund exists because more money has been collected than has been paid out.

    In the past, proposals were made to invest the SS Trust Funds in the same types of securities held by corporate pension funds. Congress didn’t like that idea, for a couple of reasons: (1) US government bonds were believed to be the only safe investment, (2) corporate managers did not want a government agency to become a major stockholder in corporate America, because they feared a power shift and political mischief.

  25. To me, this is a no-brainer.

    Remove the wage-base limitation on FICA, that is, tax people more in upper income brackets. The Feds employ an array of qualfied and competent actuaries, so the computational projection for continued solvency is assured.

    This will actually benefit the rich, who would otherwise be subject to ugly reprisals, if the Re-THUGS get what they’ve been itching for a VERY LONG time. That is, the elimination of the program, and further relief from taxation. And a return to serfdom and a life of penury for the serfs unlucky enough to have not been born to the manor.

    In any case, as a class, most feel taxation is for the *little people*, anyway.

    It’s class warfare, and the middle class and poor are getting the shaft.

    No to MORE WALL STREET thefts of the commonwealth of the United States!!

    What’s OLD Jaime Dimon got such a “puss” on about today, anyway?

    Oh, maybe he dreamed CITI really is a ZOMBIE bank?

  26. Woop made a sound recommendation above: “Remove the wage-base limitation on FICA, that is, tax people more in upper income brackets. The Feds employ an array of qualfied and competent actuaries, so the computational projection for continued solvency is assured.”

    For anyone who appreciates models for policy analysis, there is a model available demonstrating that removing the upper cap would keep Social Security in the black indefinitely.

    The American Academy of Actuaries’ website is:


  27. @Josh,

    You said, “It’s one thing to ask those who produce the most wealth to help pay for welfare for those who struggle. It’s another thing to ask them to relieve the entire populace of the responsibility to plan adequately for a financially secure retirement.”

    I agree. Tell me when is the general population educated, by the public education system, on the topic of personal finances? And why is that so?


    If an “investor” is aware their future monies will be dependent on the system where future participants, who they too will expect the same type of “profit”, must contribute to keep the funds from being exhausted why is that not a Ponzi Scheme? The S.S. fund is not self sustainable. (Especially if the effective custodian is allowed to dip into the fund and leave pretty I.O.U.s.)

  28. For those writing that SS is a Ponzi scheme I hope they read Robert Samuelson’s take on SS. He agreed by calling it a successful Ponzi scheme. He did point out however it was not subject to catastrophic collapse and was not for the benefit of the few at “the top” differing it from a criminal activity. Of course his use of the term was for effect and a wee bit tongue in cheek.

    Governor Perry uses the term “Ponzi” to denigrate a program that has been a success for american senior citizens. Perhaps he will focus next on Medicare which, along with SS, has lowered the poverty rate among seniors dramatically from what it was previous to those programs inception. “Socialized Medicine” anyone?

  29. I have nothing really to contribute to this particular dialogue on Social Security, other than to ask one question: How often does the average American ponder in their mind, where this country would have been in late 2008 and up to now, if we had privatized Social Security funds, as the Republican party was insisting for, during the “W” Bush years??? And this is the same Republican party spewing phony rhetoric about “ramrodding” health legislation???

    In separate news, I got my “Marv” action figure from “Sin City” merchandising today. It was a little pricey, but Marv is that awesome. I’m setting him next to “MiniBatman” (which I acquired for free from a box of Cheerios).

    I wouldn’t pay for “MiniBatman”!!! What do I look like, a full grown adult stuck in a suspended stage of emotional development???? I just put him on the nightstand to keep the metropolis safe.

  30. A Ponzi Scheme”
    Since 1981 to present ~ 30years the U.S. has gone from ~$3.1Tn to $14.6Tn – an increase of $11.5Tn!
    This is a Ponzi Scheme fabricated by the FRB, period! Starting with Reaganomic’s who gave us a tax rate cut of 35% from 70%, but Carter and Ford played a minute part,… so not worth mentioning, period!
    Let’s start with LBJ’s “Great (medicare& medicaid) Society”, but let us not forget FDR’s “New Deal” all long ago and solid programs?
    Next, we move onward to Clinton, that basically ended welfare as we know it, and gave us NAFTA! This screwed the unions royally, and so began the off-shoring of America’s manufacturing base.
    Then came the Bush’s #41 & #43 with their endless perennial wars and tax cuts for the wealthy. GHW also brought us CAFTA, and opened up a seat for China on the WTO with alittle help from Willy.
    Finally we get Mr. “Believe-Just-the-Opposite-I-Say, Bo`Jangles, which adds an incredible $4.0Tn to the debt in just ~32months!
    This is a Whopper of a Classical Ponzi Scheme, so big you can’t see it? I mean this is a “Sometimes you have to be deafly silent, just to be heard?” situation at crises mode!
    The laws of general monetary relativity are out of sinc, and that’s contrary to Milton Freidman & Co.!
    The laws of the fiscal universe have lost their gravitational field, thus pulling the fiduciary sane into a finite death spiral – brought about by a creature from Jekyll Island, that has poisoned the world’s financial liquidity oceans in a “Not-So-Mystical/ Mythical Greek Tragedy” called “A Ponzi Scheme”,…

    Ref: National Debts by US Presidents (1981- present/ note: Obama’s debt is tallied @ ~ $4.0Tn, and counting)

    Thankyou James and Simon

  31. “What feeds a Ponzi Scheme is a good-ole Sino-US Relation”___ circa: Kissinger/ Nixon; Bush#41; Clinton; Bush #43; ?
    Ref: [pdf] Breaking the Cycle? :Sino-US Relations under George W. Bush

    Click to access 3-4.pdf

    ,…and there you have it.

    Where is the ghost of Cheney hiding?

  32. ==But saying that Congress underfunded Social Security is not a valid criticism of Social Security as a program: it’s a valid criticism of Congress.==

    Translation: Social Security is a sound program as long as it’s not under the control of politicians.

    Logical conclusion: Social Security should be privatized like Australia’s Superannuation.

    Politicians can’t be trusted. Problem solved.

  33. Regardless of whether it’s a classical Ponzi scheme or not, it’s a liberal fraud. Prof Johnson certainly knows how to do discounted cash flows and future values. Just take the money an employee and an employer contribute over the course of one’s lifetime. Take the future value at even a modest rate and it will always be significantly higher than the benefit you will receive from the government. Try it. Try any discount rate. I’m 58 and it galls me that the return is so paltry. With a 4% discount rate (certainly achievable over the past 40 years that I have been working) my payout (which would last 25 years would be more than 3 times what the government wants to give me. When I was 18 I tried desperately to find a way to opt out because I wanted the freedom and independence to take care of myself and not leave something as important as my retirement in the hands of government idiots and eggheads. A privately run system would allow people to do that.

  34. To Simon van Norden:

    It is a tried and true tactic to construct mathematical models with bizarre, unrealistic presumptions in order to deduce outlandish conclusions that have no relation to empirical reality – e.g. neoliberal economic theory. I challenge you to adduce just one example of a Ponzi scheme that did not eventually fail.

  35. Lenny,
    I think you need to recheck your math. According to the GAO, the average rate of benefits received from Social Security ranges from 130% amount of taxes paid for the bottom fifth of earners to 60% for the top fifth of earners. Somebody who contributed at the maximum rate his/her entire life, would hit a floor of 48% payout ratio. These numbers are based on somebody who began contributing in 1985 or later, after the Reagan increase in tax rates and reduction in payout benefits. You also fail to take into account the disability and survivor benefits included, which can ultimately be far more substantial. Paying into Social Security certainly doesn’t preclude anybody from additionally participating in a private program. In fact, I would highly recommend it, and hope that anybody over the age of 40 is well on their way. And say what you will, you will still collect benefits, and outside of the risk of being defunded by politicians, the money is invested virtually risk-free and will never run out no matter how long you live.

    Social Security is projected to be fully solvent and able to pay all promised benefits until 2037, 100 years after being initially created, and continue to pay 80% benefits thereafter. Not shabby, any business would be proud to claim their track record. Since when do we condemn a healthy financial enterprise based on a projected decline in performance 25 years in the future?

    I challenge you to adduce just one example of a company/fiat currency/government that did not eventually fail. Given a long enough timeline, everything will fail.

  36. The Economist explains quite clearly why SS is not a Ponzi scheme here:

    Social Security also explains quite clearly why it is not a Ponzi scheme, concluding:
    “Ponzi vs. Social Security

    Social Security is and always has been either a “pay-as-you-go” system or one that was partially advance-funded. Its structure, logic, and mode of operation have nothing in common with Ponzi schemes or chain letters or pyramid schemes.

    The first modern social insurance program began in Germany in 1889 and has been in continuous operation for more than 100 years. The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi’s scheme lasted barely 200 days. ”

    What is a Ponzi scheme is continually and permanently cutting the payroll tax as a “stimulus” and not expecting it to affect social security’s finances!

    Finally, I recall reading that Reagan’s fix of social security would have been almost complete, but the actuaries underestimated further increases in life expectancy.

  37. To place earles statistics abit more in perspective. Every working man and woman would have to have the resources to work for free for one complete year in order to pay off todays national debt (I barely have that in food and fuel). Thats not considering the additional $40 trillion of personal debt or the $116 trillion of unfunded liabilities. So the debt problem should really be laughed at as something that will never be addressed or paid off, in dollars.

  38. Kwak the Quack is at it again. He says that SS isn’t a Ponzi scheme because it simply needs to be a better funded (Ponzi) scheme. And then it wouldn’t be a Ponzi scheme.

  39. Madoff’s ponzi scheme began in the 1980s and lasted until his arrest in 2008 after the market collapsed. Imagine how long it would have lasted if membership was compulsory. He’d still be earning healthy “returns” for clients to this day.

  40. James, At some scale of participation (percent of population) the plain macroeconomic character of social security’s income redistribution becomes clear. At the same time, once the population level of participation in financial investments reaches a certain level – it is impossible to maintain the illusion that anything is going on other that all return on investment is simply productive transfer from today’s workforce to those who have wealth claims to “their” rents. The accumulation of so called financial wealth occurs strictly as an ideational claim within subjectivity and has no material grounding in physical things. The point you should make is that people make things today by working and consume thing they need for living. And some people don’t work making things today but still get consume things today for their living. The question before us is how do we make all the arrangements for who has to work and who gets to not work?

  41. Some say Social Security is a pay-as-you-go system. Others say that the Social Security trust fund has a $2 billion surplus. Isn’t somebody wrong?

    Steve H

  42. Some bloviate, others read the links explaining SS isn’t a Ponzi, or see it directly explained on the page here…..moreover, launching ad hominen invective against the blog owner, is REALLY bush league.

    This form of closed-minded belief system is indicative of *right wing brain syndrome*, which is profound mental incapacity through all its’ bizarre manifestations.

  43. Update: As we all know, state pension plans are in a funk – terribly underfunded, eg. Calif., N.J., Mich., etc., etc.,and the list goes on.
    There currently is a line being drawn in the sand for mandating Social Security in all states that chose not to opt-in years ago, or try preserving their status-quo Retirement Security Defined Plans.
    Guess what? Yes,… Texas is leading the charge, and for good reason,…
    Ref: “House Committee on Ways and Means” (June 23,2011)

    Click to access Tim%20Lee%20CPRS%20Testimony%20(June%2023,%202011).pdf

    *If link fails Google@ Note: Excellent read :-))

    Thankyou James and Simon

  44. Earle is correct, the amount of unfunded pension liability is astronomical. Ask people working in the field auditing these plans.

    A Perfect Storm could be around the corner. Cuts in SS in conjunction with defined benefit plans not having sufficient capacity to pay-out actuarially-determined benefits.

    Sebastian Unger, you listening? :)

  45. Nobody has the foresight to design a pay-as-you-go system that is sustainable forever. Inevitably, contributions and benefits needs to be adjusted for the difference between estimates and reality. If sustainablity without changing the rules is the only criterion, then all programs with defined contribution and benefits are necessarily ponzi schemes.

    While social security is not a ponzi scheme, it does require regular modifications to its terms to be sustainable. The key issue is that these modifications be made fairly. It does seems like “raising the taxes for future generations” solution is unfair. What type of adjustment is fair is of course a deep moral issue.

    It also seems to me that America has never really accepted the idea of social insurance. If social security is just a government managed savings program, then privatization is the way to go. The point is that everybody would be better off if there is also an element of insurance in the program. The trade off is that individuals would not be able to opt out of the program (it is enforced by law). There was a similar debate with the healthcare bill. I think democrats should stop framing this as a moral imperative (helping the poor), but tell it for what it is (social insurance). On the other hand, if republicans rejects this idea on a fundamental level, I don’t see the discussion going anywhere.

  46. The fatal error was when the Democrats agreed in 1983 to buy Greenspan’s idea of running those pointless surpluses in the first 35 years in order to create a mythical “trust fund” that could be drawn down in the following 35 years — thereby creating an enormous and highly regressive revenue stream that could be used (directly or indirectly) to offset equally huge tax cuts for the ultrawealthy.

    But the most brilliant part of the scam was the insight that once the “trust fund” was exhausted — or soon would be — and thus of no further use for offsetting tax cuts, the alleged “bankruptcy” of the system could be used to build political support for privatizing it entirely.

    Lex Luthor ain’t got nothing on the GOP in the evil genius department.

  47. They are not evil geniuses – they’re just evil. Stop admiring them.

    FRAUD is not a new idea or a new business innovation. It’s as old as can be. It always ends in the same way – a *moving object* gains enough force to slam through the “NO!” wall of Nihilism.

    Good people aren’t any less *genius* when they make up their minds to put an end to the puerile, operational math equation:

    More misery for others = More $$$ for ME ME ME

  48. Even PAUL KRUGMAN once used “Ponzi” regarding Social Security:

    “I like Freeman’s idea of providing each individual with a trust fund when young
    rather than retirement benefits when old, but we had better realize that this is a
    significant change in the character of the social insurance system. Social Security
    is structured from the point of view of the recipients as if it were an ordinary
    retirement plan: what you get out depends on what you put in. So it does not look
    like a redistributionist scheme. In practice it has turned out to be strongly
    redistributionist, but only because of its Ponzi game aspect, in which each
    generation takes more out than it put in. Well, the Ponzi game will soon be over,
    thanks to changing demographics, so that the typical recipient henceforth will get
    only about as much as he or she put in (and today’s young may well get less than
    they put in).”

    See http://www.bostonreview.net/BR21.6/krugmann.html

  49. @ LilOldLady

    Yep! Let the naysayers drop out, and take their petty contributions with them? Perhaps they should invest in the Military (the only manufacturing base in America today) Complex via China,… who knows what tomorrow brings, eh!
    Golly gee, maybe in the not so distant future they’ll make edible bullets to?
    What say you,…

  50. It is unhelpful to argue about the definitions of Ponzi scheme. Neither camp will be convinced by the other camp.
    It is far more useful and productive to look at “Pay as you go” vs “Save as you go” systems in social securities.
    It seems to me we need to increasingly introduce more elements of “save as you go” into the system, given the coming demographic changes in many countries.

  51. I apologize if this has already been mentioned in the comments –

    The employee payroll tax was reduced this year by 2 percentage points. The President has proposed a further reduction next year. The argument, of course, is that we need the stimulus of a tax cut. A political argument is that the President wanted a tax cut for lower incomes when he agreed last December to extend the tax cuts on higher incomes. But the relevant questions here are will the tax cut be permanent and what does a cut in payroll taxes do to the sustainability of the program.

    Re the cap on wages subject to payroll taxes, the cap on taxes is tied to the cap on benefits. Income above the limit is not counted in calculating the benefit. Raising the cap means raising the benefit for higher-income workers. Also, the benefit formula is weighted towards low income while the payroll tax is uniform. That is, high income is taxed the same as low income but the benefit at higher income is lower in percentage terms. Means testing would further increase the subsidy paid by higher-income workers.

    I am not arguing against the progressive benefit formula. Just trying to present what seem to be little-known features of the program.

  52. For the record, I am the author of the last comment credited to Anonymous. Comment was submitted before I completed the identifying information.

  53. @ Fred, good points everywhere in your post, especially the part re: means testing. But, I argue, these are costs the need to be incurred and paid by richer wage-earners, because taking care of old, disabled, poor people is in all our interests.

    From my vantage point, reducing by 2% the FICA tax as some form of stimulus, will only erode the fiscal position of the “trust” fund, and make a stronger argument for right wing reactionaries and Wall Street Democrats, that SS is unsustainable, meaning, it must be cut, eliminated, privatized, whatever.

    President Obama is a really bright guy, I can’t see where he didn’t see this is the score for that rollback?

    I know the major concern of the reactionaries is everyone should be capable of taking care of themselves, but this altogether impossible, and a rationalization for cruel-hearted, insensitive world-views.

  54. @woop – “I know the major concern of the reactionaries is everyone should be capable of taking care of themselves, but this altogether impossible, and a rationalization for cruel-hearted, insensitive world-views.”

    At this point in time, We the People definitely want Nihilists to stop “taking care” of us, that is a FACT you can take to the bank :-)

    They are PREVENTING people from taking care of themselves – aren’t they? You cannot make your life less miserable through HONEST WORK!

    Alert the few manufacturers of whistles left in USA – they’re gonna get a big order :-))

    Compartmentalization’s worst nightmare – EDUCATION.

  55. @ Annie, Well, that’s right, Since compartmentalization is used in the commission of CRIME, what could be more anathema than education to those commissioning said crime?

    It’s everything the Wrecking Crew is making such strenuous efforts to silence and quash.

    Here’s the thing: there isn’t a plan to stop, the only point worth discussing, is how to make it.

  56. @Woop

    That’s the part that makes me the MOST twitchy :-)

    It was a DECADE of criminal intent – why are they still on TV acting like they have ANY RIGHTS to walk away as *patriots*

    after emptying out every retirement fund and SS funds and municiple fund and child’s piggybank?

    And now we’re getting history lessons from these people who are so sociopathic that they can stand in front of a million human faces and LIE beautifully

    about how the economy has *changed* and people got *displaced*?

    FRAUD is the new *economy*? Build houses, put people in, steal all their money via fees, then throw them out?

    Then they say you allowed yourself to be taken – but what did they do to those who DID SAY SOMETHING? Who read the fine print? Had the girlfriend drug him, make a 911 call, then shoved him outside the front door swaggering with a gun in hand so the SWAT Team had an excuse to use him for target practice?

    The *new* information age economy, indeed…such shiny happy BEAUTY all around us, no?

    I think that is the realization We the People need to face – and I know it is really really hard to face it – I get it….911 was a pre-emptive strike against American citizens BY American citizens – it was an INSIDE JOB – the last pieces of the puzzle aren’t even needed to see the final picture of TRUTH.

    Just War criteria fulfilled. THEY attacked us. They really ARE a Wrecking Crew! All of D.C….

    30 years ago when they stood up this militant, hostile, nihilistic economy fueled by an OIL FETISH

    even THEY launched it with a soothing LIE saying that it would take them 20 years to build the SUSTAINABLE energy based economy that everyone knew was possible BACK THEN…

    So now what? Dig a hole from here to China, hit oil on the way, suck it all up…isn’t that how a controlled demolition happens – you hollow out the bottom floors…? We’re NOT hollowing out underneath the mantle crust for 7 billion SUV drivers…?

    An army to keep filing the court cases – and NO DEALS – don’t even care if the case sees a day in court – it’s JUST WAR EVIDENCE for the crimes we ALL can see all around us with our eyes (crumbling infrastructure, homeless, hungry, drugged out and drunk YOUTH)

    Economic disobedience – keep the basics flowing, note the cost, but don’t actually take $$$ for it – just note the cost of the transaction – we’ll figure out how much currency DAILY LIFE MAINTENANCE activity really needs to keep flowing LATER

    And finally, Nation Wide strike for a week or so to do Declaration of Independence 2.0 and set up the Energy Policy.

    Secure the peace in the ME…? EASY. Stop selling weapons to everyone, everywhere. The amount of racial and cultural and religious hatred rampant among 7 billion over-crowded people means everyone has to have NOTHING in the way of 20th – 21st century weaponry at their disposal.

    Let’s see who REALLY is the fittest – again – when we all start from scratch :-)

  57. @Woop – I’m *crushed* that they don’t *love* me…

    “….hear her laughter rising, rising from the deep…”

    Pre-emptive strike, Woop – I can’t fight back?

  58. @woop

    I’m all about science being the last bastion for truth to flourish, progress to unfold, and real, sustainable service rendered for LIFE. Besides, it’s how *God* does stuff :-)

    Let’s get it out there what, exactly, *they* don’t *like*.

    Oppenheimer at one point left a poisoned fruit on his teacher’s desk. When it comes to *science*, THEY can get even more jealous and psycho about “….who’s the smartest of them all….” than they do about being the richest of them all – $$$$ for ME ME ME…

    That IS so scary. High tech sadism at the helm of the future of the human species’ health and happiness….

    And their track record is, consistently, bowels-of-hell *dark* – from Tuskagee on to torture techniques….

    very bad juju – for da $$$$ and da *POWER*

  59. For Social Security, it’s print as you go
    Sep 23, 2011 12:24 EDT

    “Americans are more and more aware that Social Security contributions are not “invested” to finance future benefits; instead, they are used to disguise the true amount of borrowing necessary to fund the Administration’s unprecedented spending spree. As the General Accounting Office stated last September: ‘The present situation, in which trust fund surpluses are combined with and partially offset a deficit in the general fund, means that the payroll tax is being used, not to make provision for future retirement benefits, but to pay for today’s general operations of government.’”

    –R.C. Whalen
    “Mess With Social Security — Change It From Ponzi Scheme To Private Pension Fund”
    Barron’s, March 4, 1991

  60. @ Annie, old Oppenheimer left even a bigger poison apple for the entire planet, I guess it was warm-up with the teach.

  61. My appologies if this has already been said:

    Maybe the best thing to do is to fund Social Security out of the general tax revenues. Then there can be no surplus to “steal” by using it to balance the budget and people will know that they are actually saving the current group of senior from starvation and other slings and arrows of outrageous fortune. The insurance feature of SS is that of Social Contract. Every generation has always helped and supported their elders. The is a more equitable way of doing so because no longer are people unlucky enough to have elders that cannot help themselves solely responsible for them, while the “lucky” people, whose elders either saved up enough to pay for their unpredictably long retirement died early or continue to live prosperous, healthy lives get off scott free.

    And it also helps cushion recessions by providing a steady steam of consumption and other economic activity.

    What is missing from most conversations is this discussion of “Social Contract”.

    Societies should honor their elders and should not allow them to live or die in poverty, privation and dishonor.

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