Is Social Security a Ponzi Scheme?

Thanks to the Republican debates, the idea the Social Security is a Ponzi scheme is back in the news! I thought I would repost a comment I published on this notion the last time it turned up, during the furor about the Madoff case. Also see my comment on the complexities of this idea here.

Carlo Ponzi had a brilliant idea -- brilliant at any rate by the standards appropriate to judging the intelligence of criminals: Invite people to invest their money in your scheme, and pay them surprisingly large returns. But these payments are merely taken out of the deposits of new customers, who will be payed from deposits of still newer customers. But there really are no investments involved, and they rest of the money isn't going anywhere but into the conman's pockets.

Now that the economic downturn has exposed Bernie Madoff's truly despicable crime, the largest Ponzi in history, such schemes are in the news again, and some libertarians are making the familiar claim that the Social Security Administration is itself a Ponzi pyramid, far larger even than Madoff's . If so, the notion that Madoff's is the biggest such scam ever are in fact wrong. His is merely the largest private one. No one does it like the state.

Is it true that Social Security is a Ponzi scheme? I don't think it is (nor is the related idea true that SS is "insolvent"). I think the comparison does bring out features of the SSA that are ethically problematic, but the ethical problems are rather different from those that consigned Mr. Ponzi to prison (and, were there only such a place, to Hell).

The SSA pays Grampa Jones with money extracted from Jones Jr., who will eventually be paid with money extracted from Jones III. There is that much resemblance to a Ponzi.* The difference of course is that everyone knows from the outset that this is what Social Security is like.

As Nat pointed out to me recently, one of the important features of a Ponzi scheme, very often, is that the swindler sometimes avoids making payments to his victims. "Wow that's a huge dividend! Why don't you just reinvest it for me? I'll make even more!" Why sure, I'll reinvest it for ya. Heh heh. With SS, no beneficiary would ever do that because no one is under the illusion that this is an investment plan.

Social Security is nothing but a conduit by which wealth is extracted from those who produced it and transferred to those who did not. Of course, that is also true of a Ponzi scheme. But the difference is that Pozis do it with fraud, while SS does it with force. Social Security is to a Ponzi scheme as coercion is to deceit.

That is not a morally trivial difference. The people who received dividends from Madoff were benefiting from acts that violated the rights of others. But they were unwitting and innocent beneficiaries. What is Grampa Jones? He may be innocent, but not because he is unwitting. The ethics of his position are more complex and murky than those of Madoff's victims.

There is a particularly vicious sort of coercion involved in the SS system that many others have noticed. Suppose that we the people decide that we want to liquidate the system. What do we do with Grampa? All his working life he has been paying money into this growing, spreading system. Can we abandon him? And where will the money to support him come from? And how will we refund the money that the still-productive who have paid, usually enormous amounts,** into the system? They would have put part of that money into private retirement accounts, but now they can't do so, because the SSA took it from them.

That is why the economic sterility of the system is ethically problematic: not because it is fraudulent, but because it makes it all the more coercive. There is no fund of capital that might have enabled us to liquidate it. The generation that voted SS into being were handcuffing us to a monster. In this way, what they did was profoundly anti-democratic.

Update: Also, see this.
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* Interestingly enough, when Junior pays more that Gramps needs, a trust fund accumulates, but by law this money must be spent on government bonds. In other words, it goes into the pockets of the perpetrator of the scheme. Again, like a Ponzi snow job.

** In 77% of cases, the employee's contribution plus that of the employer (which ultimately comes out of the employee's hide as well) is greater than the entire federal income tax paid by the worker.

Crying Wolf

As a number of people have pointed out, Hurricane Irene is the Apocalypse that wasn't. Indeed, this article suggests that a substantial number of people simply didn't believe the shrill warnings we got from the politicians and the press in the first place.

It puts one in mind, does it not, of a certain Aesop's fable, known to scholars as number 210 in Curry's catalog. (Okay, I'm a pedant. It's my job. So shoot me.) Here it is:

There was a boy tending the sheep who would continually go up to the embankment and shout, 'Help, there's a wolf!' The farmers would all come running only to find out that what the boy said was not true. Then one day there really was a wolf but when the boy shouted, they didn't believe him and no one came to his aid. The whole flock was eaten by the wolf. [Aesop's Fables. A new translation by Laura Gibbs. Oxford University Press (World's Classics): Oxford, 2002.]

Fear seems to be an abundant and inevitable product of the democratic state. I have commented earlier that this means that, if its leaders have their way, its citizens will live in a permanent state of being more or less scared out of their wits.

I now realize that there is also a down side if they don't have their way, and people just stop believing what they are told. There is a legitimate role for alarms and warnings, if they are overused they will cease to work.

Update: On the crying wolf theme, see the last paragraph of this.

But maybe the best comment is this.

On the Road Again

Deborah and I are on a camping trip in the Sylvania Wilderness Area, so I won't be posting for several about a week.

Sylvania is an interesting place from the point of view of welfare economics, as I point out here. I posted some pictures from an earlier visit here.

To the left here you see the view from our camp site. We have an entire bay to ourselves!

Our house is being guarded by our son Nat and a pack of attack-trained Shiba Inus.

Jon Stewart on Media Coverage of Ron Paul

Very funny -- and literally true. Except for the part where he says that Fox ought to like this guy. Nuh-uh. They know what they are doing. They're just bigger fans of perpetual war than you think.

Live-Blogging the Republican Debate

Well, I expect to hear a lot of Obama-bashing tonight, and it was there already in the first two answers (Bachman and Romney).

Sad to see Gary Johnson again not allowed to participate. I've been following him on Twitter, and I noticed that he seemed depressed. "People will start to notice us," he said. That's not exactly rallying the troops.

Romney, asked if he would have vetoed the budget bill, seemed to dodge the question.

Ron Paul is talking too fast, as usual.

Pawlenty repeated his charge that Bachman's "record of accomplishment in Congress is non-existent." Apparently this means she hasn't written legislation that passed both houses. Isn't that an unfair criticism? The last five years have been bad ones for someone with her ideology to pass legislation. Her answer was that she has been leading the resistance, which seems like the right answer to me.

Chris Wallace asks Gingrich about his staff quitting on him and Gingrich, and Newt gets all huffy. The crowd seems to like it, but I didn't.

Cain: I am learning. Well, good, but Presidential OJT hasn't worked that well for us.

Panel member Byron York: He has 19th-century hair.

Someone once described Rick Santorum as having "a punchable face."

Romney just came out as a tenther! The feds only get to do what the Constitution says they can do. That's his main defense of Romneycare: this ought to be done by the states.

Pawlenty is taking swings at Romney and Bachman, both in the top three. Someone has been telling him to become Macho Man.

Ron Paul says that under the federal Constitution, the states have a right to do bad things (like force people to buy health insurance). True. Then Santorium goes berserk, saying that this means that they have the right to legalize polygamy and impose enforced sterilization. What a complete moron.

Gingrich keeps objecting to tough questions as "gotcha questions." Oh, just answer them, dang it!

Quite a heated exchange between Santorum and Ron Paul on Iran policy! I'm with Paul on this one, as you may know.

Paul points out that Bachman's "no miranda rights for terrorists" involves convicting someone of being a terrorist without due process.

She also would do "anything" to prevent Iran from getting a nuke.

If you thought Afghanistan and Iraq were quagmires, just wait until we invad Iran, Michelle!

I could swear I just heard Santorum say Iran will destroy civilization as we know it. And people used to say the Ronster is the crazy one.

The audience keeps booing tough questions. Bachman has quoted the Bible saying wives should be subissive. Would she be submissive as pres? Her answer is that she interprets the Biblical notion of submissiveness as "respect."

Romney says marriage should be a federal issues. With a constitutional amendment banning gay marriage.

Paul takes a laissez-faire position on what marriage is. Good!

Now they're fighting about who is the most pro-life. So far, two are in favor of criminal sentences for doctors who perform abortions. Why not the woman? I've never understood that. If it's murder, isn't she at least as guilty as the doctor? The pro-life Weltanschauung is an impenetrable mystery to me.

Gingrich just took a more or less Paulian position on the Federal Reserve. Amazing how much more mainstream Paul is than he was four years ago. And he hasn't moved an inch!

I thought they were going to spend the who evening attacking Obama. No, they mixed it up with each other, plenty.

They are summarizing now. The last event I live-blogged was an hr. long Obama speech. It was excruciatingly boring. This 2-hr. event was much more interesting. Frightening at times, but interesting.

How this debate affected my opinion of the candidates:

Romney: About the same.
Bachman: Lower (on the issues).
Paul: Higher.
Pawlenty: Lower (as a person).
Cain: Higher. Fixed some earlier mistakes.
Santorum: Lower. Much lower. In every way.
Huntsman: Lower (on the issues).
Gingrich: Higher on the issues, lower as a person. At this moment he's being interviewed on TV, and he's still bitching about Chris Wallace's questions.

Cris Wallace: Higher!

The Mystery of the English Riots

I've been struggling to understand the arson, looting, and senseless violence in England over that last four days. That sort of behavior is so alien to me that this is like understanding beings from another planet. This article, though tainted by the shortcomings of the author's Tory priorities, seemed helpful to me. He says, in effect, these people are not from another planet, they are from the future. The may or may or may not be from your future. For sure they are out of a futuristic novel and movie call A Clockwork Orange. Say hello to Alex and his droogies!

The idea is that the system, one of the wealthiest welfare states on Earth, has created a large underclass of young people with no marketable skills and little or no interest in being productively employed, kept in useless idleness on the dole.

The distinguished political philosopher John Rawls claimed that if we arrange social institutions so that inequalities are in the interest of the least well-off people this will boost their self-esteem because it will show that we care about and value then. He never went into just what institutions fill this bill (with commendable humility, he figured he is not qualified to do this, not being an economist) but it seems to me that for this particular point, he would have to accept as an example of such a system getting a monthly check in the mail of money taken from the most well-off people. The stuff the system gives them, just for being the worst-off brings a convincing message: you are good.

No it doesn't. The message it carries is more like: "So sorry you can't seem to fend for yourself! Well, here's some stuff produced by people who, unlike you, can fend for themselves. Hope things start lookin' up for you! Cheers!" How self-esteem-boosting is that?

Rawls was a brilliant man, but he was a rotten psychologist. Much better were Dostoyevsky (in Notes from the Underground), Nietzche, and Erich Hoffer. These people would tell you that people don't get a sense of dignity and self-worth by being paid for nothing. They get it from a sense of efficacy (that is, power), and this can only come from their own action. And if for some reason they can't or won't act constructively, then they will act destructively, if only to prove that they are still human beings and have to be taken seriously.
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Update: For an interpretation similar to the above-linked article (but in the leftist Guardian) see this.

On the Road

I'm driving to River Falls, WI to visit my good friend and fellow Nietzsche scholar Imtiaz Moosa, who teaches at the UW campus there.

Here is a web account of a recent trip Imtiaz (who happens to be blind) paddling 700 k. of the Yukon River with entrepreneur/adventurer Howard Fairbank. Imtiaz doesn't get internet in his house (one of several eccentricities) so I may not be posting for a while. See ya!