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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

September 13, 2011 at 9:30 AM

Is Social Security a Ponzi scheme

No. The classic Ponzi scheme is always a private phenomenon, where returns are offered that can’t actually be met; early investors are paid by the money from newer investors, until the fraud unravels. And the originator of the scheme is enriched until, or if, he is caught. Named after Charles Ponzi, a fraudster from the Roaring ’20s, it was on display in our time with Bernie Madoff. If one wants to stretch the definition, the housing bubble was a sort of public-private Ponzi scheme, with easy Federal Reserve money setting off a mania that enriched a few banksters while socializing the losses and leaving millions foreclosed or underwater on mortgages when it collapsed.

Whether Social Security in its present form is sustainable is a valid question. The program traces its roots to that famous bleeding heart, Otto von Bismarck. The Iron Chancellor began the program to undercut the appeal of socialists and communists. It was heavy lifting to achieve Social Security in this country during the New Deal, even with FDR and heavy Democratic majorities in Congress. Since then, it has kept tens of millions of older Americans out of poverty (without Social Security, at least 45 percent of senior citizens would be below the poverty line today). It is a social insurance program, an inter-generational compact, where working people pay taxes to support the retired. Many now worry that longer-living baby boomers will bankrupt the program.

Thanks in no small part to the Irishmen’s deal between President Ronald Reagan and House Speaker Tip O’Neill, Social Security is in much better shape than many Americans realize. According to the Congressional Budget Office, Social Security’s shortfall over the next 75 years is equal to about 0.6 percent of gross domestic product.

Still, as the Washington Post’s Ezra Klein wrote:

Most opinion elites — (deficit commission co-chair Alan) Simpson being one good example, and the U.S. Senate being another — show a very strong preference for working as long as possible. Most Americans show a very strong preference for retiring as early as possible. Elites who enjoy their jobs need to be very careful about generalizing their experience to people who don’t enjoy their jobs. More bluntly: Raising the retirement age is the worst of all possible options for reforming Social Security. It’s not only regressive, but it also falls most heavily on those with the worst jobs. Means-testing would be much better.

Medicare and especially Medicare Part D are a different matter. They face huge shortfalls because of America’s for-profit medical system, and because pharmaceutical companies don’t have to bid to offer the lowest prices on drugs. But Social Security is not a Ponzi scheme and it is sustainable. Its shortfall is manageable. So whether America keeps it is not an economic question. It’s a question of values and a “we” society vs. a “me” society.

When Social Security began it was intended as supplemental income. But more and more Americans were benefiting from pensions and rising incomes. Now we’re in a retrograde move and most workers can, at best, depend on 401(k) programs that are the toys of the Wall Street boyz. And there Ponzi schemes do happen.

Comments | More in Deficit, Social Security, Working America

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