Ponzi Encore

Michael Stephens | October 3, 2011

“It may come as a surprise to some, but the original scheme by Charles Ponzi did not make its money by providing seven decades of benefits to retirees before folding up shop and leaving town with a suitcase full of cash,” writes Benjy Sarlin.  In a new One-Pager Greg Hannsgen and Dimitri Papadimitriou display just how loopy it really is to compare Social Security to a Ponzi scheme.  The authors produce a graph tracing the long history of new taxpayers (“investors”), new beneficiaries, and those leaving the program (and this mortal plane); the picture that emerges is not one of a fraudulent money-making venture that is about to sneak out the back door with your savings.

But let’s leave Charles Ponzi alone for the moment.  What about the looming shortfall in the program, you ask?  Citing testimony delivered last year by their Levy Institute colleague James Galbraith, the authors suggest that there are reasons to be skeptical of these projections.  To see why, have a look at this critique by Galbraith, Wray, and Mosler of the intergenerational accounting methods used to forecast fiscal doom in programs like Social Security (highlights here).

I can tell by that glazed look in your eye that you’re still not convinced.  Alright:  even if the official projections pan out (and there is, as the authors point out, reason enough to be distrustful of them), Social Security would supposedly see a difference between what it takes in and what it puts out that amounts to about 0.6 percent of GDP.  That’s not nothing, but it’s manageable enough that no one should have any doubts that “investors” will be paid off.  Put aside trust funds and lock boxes.  The key point is this:  the solvency of Social Security is ultimately dependent on the solvency of the US government.  And as long as Social Security benefits are owed in US dollars, there is no reason to believe that the US government must default on its commitments to future beneficiaries.

Whether it will is, of course, another question.  Ultimately, in what is something of a depressing trend these days, the real problem, the real source of uncertainty, lies not in the fundamentals of the program, but with the potential decisions of political authorities.  As Papadimitriou and Hannsgen conclude:  “Looking at the figure, one begins to draw the conclusion that it would take an act of legislation—and a very foolish one indeed—to create a “Ponzi” generation of ordinary elderly people with virtually no retirement income.”  You can read the One-Pager here.


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