"A wise and frugal government which shall restrain men
from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government."
(Thomas Jefferson)

Monday, September 12, 2011

Cafe Hayek: Is Social Security a Ponzi Scheme?

More and more writers are getting fed up with the mantra "Social Security is not a Ponzi Scheme" when you know better.  Would you prefer to be on the side of  Paul Krugman, Milton Friedman and Paul Samuelson or on the side of Romney, Bachmann and the George Soros funded Center for American Progress?  We will take the side of Krugman, Friedman, and Samuelson any day over the other side.  There is no doubt who has the most credibility.  Hint it is not Romney, Bachmann, or the Center for American Progress.

Like so many others of the baby boom generation, we were taught in high school that social security was nothing more than a ponzi scheme.  My Civics teacher declared if we saw any social security in the out years it would be a miracle because the Federal Government was putting the money workers paid into social security was considered revenue to the Federal Government to be spent on their whims not in a lock box with your name on it.  Looks like he was right, but always figured he was.  Have talked to several others who learned the same thing in high school.  Do you think we had a better education before the Federal Government decided to stick their nose into education?  I sure do!

FYI the scheme is named after Charles Ponzi who became notorious for using the technique in early 1920.  This goes back to 1920 for the scam which was named after its originator of the fraud in the United States whose last name was Ponzi.  It goes back centuries in Europe under different names.

This was perfect day for this article to appear from Cafe Hayek which goes into more detail with his letter to USA Today.  Looks like Romney and Bachmann are definitely on the wrong side of this one!

This should be required reading but then Romney, Bachmann,  and George Soros funded Center for American Progress would have to admit that Rick Perry is right -- Social Security is a Ponzi Scheme or worse.  You know you are in bad company when you are on the side of George Soros and the liberal progressives.
Is Social Security a Ponzi Scheme?
by Don Boudreaux on September 12, 2011 
in Other People's Money, Social Security 
Here’s a letter to USA Today:
Arguing that Social Security isn’t a Ponzi scheme, you write: “Ponzi schemes have two salient features. First, they are criminal enterprises, which Social Security is not. Second, they work only until people get wind of what is going on, at which point they inevitably collapse. Social Security’s finances are plainly visible for all to see. (“Social Security far from a ‘Ponzi scheme’,” Sept. 12). 
Your first point fails: a government declaration of legality no more renders a Ponzi scheme a legitimate mode of investment than it renders slavery a legitimate mode of employment. 
As for Social Security’s finances being “plainly visible,” the Social Security trust fund – for which Uncle Sam writes IOUs to himself and then assures the public that Social Security’s liabilities are fully backed by marketable assets – comes awfully close to being a fraud meant to hide the true state of Social Security’s fiscal woes
And as for people catching on to Social Security’s unsustainability, consider the following 1996 analysis by a Nobel-laureate economist who, after noting that Social Security is designed to look like an ordinary pension plan, observes that “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.” That is, as with all Ponzi schemes, reality is obliging people to catch on. 
Oh, the Nobel economist quoted above is Paul Krugman. 
Donald J. Boudreaux
And as my friend Dimitri Vassilaros points out to me by e-mail, “Social Security is worse than a Ponzi scheme, because it is not voluntary, and everyone suffers, not just Ponzi’s greedy participants.” 
(HT to Alex Tabarrok for alerting the world to the above-linked Krugman essay. Alex points out that other Nobel economists who’ve described Social Security as a Ponzi scheme include Milton Friedman and Paul Samuelson.) 
UPDATE: This cartoon, posted over at Division of Labour by Frank Stephenson captures a genuine difference between a run-of-the-mill Ponzi scheme and Social Security.

How better to demonstrate a point then this political cartoon from Mike Lester's in the Sept. 4 Rome News-Tribune.  This is a perfect illustratration of the difference -- one you get involved in willingly and the other you have 'zero' choice.

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