Evening, loyal readers!
I would like to put out a follow-up post to yesterday's article on Social Security. A guest blogger over at ThinkProgress.org recently published an article discussing the merits of Social Security (you can access the article here: http://thinkprogress.org/2011/04/16/jeb-hensarling-ponzi-scheme/). In his analysis, Kevin Donovan asserted that Social Security is not a Ponzi scheme because "no one is being mislead" and it is "not automatically doomed to fail".
I have a few issues with his analysis. Before we get to those, let's remind ourselves of the SEC's definition of a Ponzi scheme:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. http://www.sec.gov/answers/ponzi.htm
The first problem I have with the Mr. Donovan's analysis is his belief that the persons who run Social Security (our government officials) are not misleading anyone. The Social Security Administration was initially created to take in payroll taxes, save them in accounts where they would grow and gain interest, and pay the principal and earnings back to the individual. In other words, when someone paid into the system, he or she will get paid back (and then some) when he or she retires. However, as I have shown previously (see: http://eaynuf.blogspot.com/2011/04/young-and-screwed-americas-youths.html), Social Security will collapse by 2039. That means, unlike before, many persons currently paying into the system (as it is now constructed) will NOT get paid back. There is a large discrepancy between what is currently happening with retirees and what will happen when today's young people try to retire: in essence, today's youths won't get paid while current retirees will get full benefits. These results are unequal for different generations of people (despite both generations having the same legal right to these funds), and, that is fraudulent and unjust.
And, to make this worse, the Social Security Administration is not exactly open about how badly this program is screwing youths. That to me smells a little bit like deception and fraud (after all, you cannot blatantly tell youths that they're screwed: they will freak out, rebel, and ruin everybody else's fun).
The second issue I have with the author's article is his implicit assertion that Ponzi schemes are doomed to fail while the SS is not. He's right about the first part: normal Ponzi schemes are doomed to fail because the schemer will eventually run out of new funds to pay earlier investors. However, that argument can also be used to describe SS's issues today. The SSA is currently running out of workers (new investors) to pay into the system in order to fund older people's (earlier investors') retirements. Eventually, the SSA will be bankrupt because of this problem, just like any normal Ponzi scheme.
Finally, the biggest problem I have with Mr. Donovan's article is that he ignores one problem (besides size) that makes SS worse than any other Ponzi scheme: choice. In normal (private) Ponzi schemes, investors have the options of refusing to join the scheme, and, pulling their money out at will if they decided to make an investment. (Importantly, this principle applies to late investors: the late investor, if he or she wanted to, could pull his or her money out of the Ponzi scheme before earlier investors did).
There are no such options with SS. Our contributions are taken without any say in the matter. And, we later contributors have virtually no chance of pulling our money out before older people do (unless we get seriously injured or something to that effect).
I believe Mr. Donovan and I can agree, however, that the way the SSA is being run right now is a huge travesty. The SSA's money was supposed to be used to help people in need and fund retirements. Unfortunately, past surpluses have been frittered away by careless politicians on unknown (but probably senseless) projects and expenses.
And, for the record, I do not have a problem with the SSA existing; it has a legitimate purpose. I do have a problem with how it is currently run, and I hope Americans everywhere do, too.
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