Friday, June 24, 2011
USA Today: Is Social Security an investment Ponzi scheme?
A: The Social Security system is under intense pressure as its method of taking current workers' contributions to pay for current retirees is under strain. And it's that method, which often draws criticism for resembling a Ponzi scheme.
Before we can decide if Social Security's structure qualifies it as a Ponzi scheme, a quick definition is in order. A Ponzi scheme "is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors," according to the Securities and Exchange Commission.
Some investors think that the fact that Social Security pays existing investors with cash collected by new investors makes it a Ponzi scheme. But that's not true, says Jack Coffee, professor of law and securities law expert at Columbia Law School. "This is less a question and more an aggressive assertion," he says.
Social Security is not a Ponzi scheme because it wasn't an intentional fraud, he says. In fact, the system has worked as expected since its creation in the 1930s. What's happening now is that, like many corporate pension plans, Social Security is running the risk of being underfunded as obligations grow faster than contributions. But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he says.
Changes are certainly needed to keep Social Security working to reach the goals it was established to meet, he says. Either benefits will need to be curtailed or the government will need to kick in funding, he says. But again, it's not a Ponzi scheme, but a retirement system where the demographics have changed, he says. "It's a system where almost everyone agrees needs reform." ' - Matt Krantz, USA Today (1)
What about this depiction of Social Security? Is it accurate?
Regarding the Ponzi scheme portion of the article it tries to delineate between intentional fraud and good intentions. Let us revisit Coffee's statement:
'Social Security is not a Ponzi scheme because it wasn't an intentional fraud, he says. In fact, the system has worked as expected since its creation in the 1930s. What's happening now is that, like many corporate pension plans, Social Security is running the risk of being underfunded as obligations grow faster than contributions. But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he says.'
Examine this statement: "...it wasn't an intentional fraud". Is the statement including an implicit assumption that fraud existed but it wasn't intentional?
Examine this statement: 'But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he says.'
Are those statements accurate? Regarding "...Social Security wasn't created with this aim" one needs to revisit the 1930's and the arguments put forth by the politicos through the mechanism of government for the enactment of Social Security. Yes, there was no populous movement for Social Security creation. That is, Social Security was a politico creation not a voter movement for the creation of a government sponsored retirement scheme. Hence the creation and aim were clearly politico driven. (2) The "....adequate for a long time" assertion is questionable because the arguments clearly included congressional hearings in which discussions of "inadequacy" occurred by Travelers Insurance Company Actuary W.R. Williamson (3)
Coffee's "wasn't an intentional fraud" and "wasn't created with this aim" are questionable statements. That is, arguments regarding funding with one generation paying for the next generation were clearly given and debated by politicos in the 1930's regarding Social Security. (4)
Upon Further Review
Coffee also states "....government will need to kick in funding". Government produces nothing that the private sector would not have produced if a transfer payment had never been made from the private sector to establish the public sector. Hence how does the entity "government" kick in funds? The answer is: it doesn't. Only the transfer payment from the private sector can increase funding with government merely acting the part of transfer agent.
Coffee goes onto say "But again, it's not a Ponzi scheme, but a retirement system where the demographics have changed....". This statement appears to assume that changed demographics were an unknown-unknown. Once again one must visit the 1930's and examine the politico arguments surrounding social security. In point of fact, demographic changes were in fact discussed and warnings were given regarding the changing demographics in the future.(5)
Finally Coffee states the obvious or does he misstate the obvious when he says "....Social Security is running the risk of being underfunded". The term underfunded carries with it the implicit assumption that a fund exists and that that fund may not be adequate. What fund exists that is underfunded? No fund exists. (6)
(2) Carolyn L. Weaver, The Crisis in Social Security: Economic and Political Origins, Durham, NC: Duke Press Policy Studies, 1982, p.63.
(3) Jim Powell, FDR's Folly, Chapter Thirteen, How Did Social Security Contribute to Higher Unemployment, pages 173 - 186.
(6) Dr. Donald Boudreaux, George Mason University, More on the ‘Trust-Fund’ Fraud, 03/16/2011, http://cafehayek.com/2011/03/more-on-the-trust-fund-fraud.html