Social Security is not a Ponzi scheme.
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It's hard to knock down such a persistent and seemingly elegant analogy. But since it creates a false impression of Social Security, and since I for one consider real Ponzi schemes too important and interesting to obfuscate, it's worth rebutting this myth.
First, in the case of Social Security, no one is being misled. Madoff allegedly falsely claimed to have discovered a "black box" method of earning impressive results, and by doing so enticed individuals and organizations to invest with him. Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed on their incomes to pay benefits, with no promises of huge returns. (Of course, it's true that if Madoff had the power to require participation, he would have had an easier time keeping his alleged scheme rolling.)
Second, Social Security isn't automatically doomed to fail. Played out to its logical conclusion, a Ponzi scheme is unsustainable because the number of potential investors is eventually exhausted. That's when the last people to participate are out of luck; the music stops and there's nowhere to sit.
It's true that Social Security faces a huge burden -- and a significant, long-term financing problem -- in light of retiring Baby Boomers. (The latest projections anticipate Social Security tax revenues to fall below costs in 2017 and the Social Security Trust Funds to be exhausted in 2041.) But Social Security can be, and has been, tweaked and modified to reflect changes in the size of the taxpaying workforce and the number of beneficiaries. It would take great political will, but the government could change benefit formulas or take other steps, like increasing taxes, to keep the system from failing.
Third, Social Security is morally the polar opposite of a Ponzi scheme and fundamentally different from what Madoff allegedly did. At the height of the Great Depression, our society (see "Social") resolved to create a safety net (see "Security") in the form of a social insurance policy that would pay modest benefits to retirees, the disabled and the survivors of deceased workers. By design, that means a certain amount of wealth transfer, with richer workers subsidizing poorer ones. That might rankle, but it's not fraud.
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First, in the case of Social Security , everyone is being misinformed (to say the least). Social Security taxes are not put in a 'lock box' and are routinely used for non social security related expenditures. Instead of politicians periodically screaming about how Social Security will 'go broke' and implying that this is due to too little money flowing into the system and too much flowing out to social security recipients (which fools the majority of people into believing something which is not at all true), politicians need to be more honest and openly state how much social security money is diverted to non social security expenditures and that additonal social security taxes are needed to fund those other expenditures. Social Security was never created with the intention of being a general revenue fund and yet this is exactly what has happened.
The above statement " Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed on their incomes to pay benefits, with no promises of huge returns." is therefore rendered false as social security taxes fund much more then social security benefits and much of this is indeed hidden from the public.
Second, Social Security CAN be a Ponzi type of scheme if the exponential growth of human population is somehow brought under control, thereby limiting the growth of future payers into the system and the amount of social security taxes are limited. The reason that Social Security is routinely compared to a pyramid type of scheme is because it has been assumed that an enormous number of payers (who form the base of the pyramid) pay into a system that pays out to a much smaller number of recepients (the apex of the pyramid).
Third, Social Security is not at all what this author states as social security funds are not limited to social security purposes. What the author suggests is a theoretical description of social security but the reality of how funds are used is entirely different. The author neglects too may important facts.
Shrinking Surplus Revives Lock Box Debate
August 31, 2001
Revised budget estimates showing a shrinking federal budget surplus have revived the debate over the Social Security "lock box" and the nature of the Social Security Trust Fund. The new projections, released by the White House Office of Management and Budget (OMB) projects a budget surplus of nearly $157.5 billion this year. However, roughly $157 billion of this results from surplus Social Security taxes. Outside of the Social Security system, the federal surplus could be as little as $600 million.
Democrats immediately charged that the administration was close to "raiding" the Social Security surplus. The administration countered by declaring their continued support for a Social Security lock box, saying that under no circumstances would they dip into Social Security funds. In fact, however, the administration would indeed have tapped the Social Security surplus if it had not changed the procedures by which the government accounts for Social Security revenues.
All the huffing and puffing about lock boxes and Social Security Trust funds obscures a basic point. All the revenue received by the federal government--from whatever source--is simply federal revenue, to be spent by the government in whatever way it chooses. Lock boxes or Trust Funds are simply accounting gimmicks that have no meaning in the real world.
A rare voice of reason was provided in an editorial by The Washington Post (http://www.washingtonpost.com/wp-dyn/articles/A54706-2001Aug23.html), which pointed out:
Whenever there is a Social Security--or Medicare--surplus, the government "taps" it in the sense that the money is used for other purposes and IOUs are put in the Trust Funds. The question is, which purposes. Will the money be used to pay down debt�or will some of it be used in the year collected to help pay for defense, law enforcement, the parks, etc? The Trust Funds are in the same shape either way; they have the IOUs. Social Security and Medicare are in that sense unaffected.
This latest budget contretemps should make one thing perfectly clear: if tax money--including Social Security taxes--stays in Washington, the politicians will spend it. The only true lock box is an individual account that workers own and control.
http://www.socialsecurity.org/daily/08-31-01.html
Has anything really changed since this article was written?