Monday, June 16, 2008

"Who said Social Security is a Ponzi game?" 

"No real economist ever called Social Security a Ponzi game", I heard in a discussion over the weekend. I remembered seeing the same claim made in the sci.econ usenet newsgroup years ago (back when economics actually was discussed there), Googled it up and yup, there it was.

Some arguments just run on and on. But as old and predictable as this one is, nobody ever seems to have an answer for it. Has any "real economist" ever called Social Security a Ponzi game? Hmmm, well, for the record...

Paul Samuelson, Nobel winner, back in 1967, the early glory days of Social Security, famously actually praised it as such in his Newsweek article, "Social Security, A Ponzi Scheme That Works" ...
"The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times...!

"Social Security is squarely based on what has been called the eight wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived."
Paul Krugman, Clark Medal winner, thirty years later -- after the 1983 reform had preserved Social Security benefits for then-seniors at the cost of the then-young -- expressed some concerns about that Ponzi game aspect...
Social Security ... 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 (and today's young may well get less)..."
And Milton Friedman, Nobelist, when considering the future of Social Security had no problem at all calling it "The Greatest Ponzi Game on Earth" -- only he didn't mean it as a compliment like Samuelson did.

So has any "real economist" ever called Social Security a Ponzi game? Yup, there are three for starters.

Samuelson writing in the early days of the Ponzi game when it was providing participants with $13.6 trillion more in benefits than they paid in through contributions.

Krugman considering the middle part of the game when participants would about break even.

Friedman looking forward to the end of the game when participants must receive -- by the iron laws of arithmetic that apply equally to paygo benefit schemes and Ponzi games -- $13.6 trillion less from Social Security than they pay into it through taxes.

And note that this end is not in a distant future -- it is our future, that of today's living payors of Social Security tax. To quote the U.S. Treasury on this...
The Trustees Report indicates that Social Security’s unfunded obligation for only past and current workers equals $14.4 trillion, which is actually slightly greater than the infinite-horizon shortfall [of $13.6 trillion -- emphasis in original].
So there you have it. And personally, when three such great economists coming from such different points of view all use the words "Ponzi game" to describe Social Security, I think, who am I to argue?