More on Social Security and Ponzi
By David Henderson
In his comment on my previous post on Paul Krugman and whether Social Security is a Ponzi scheme, “wintercow20” writes:
Would it not have made sense from the outset to argue something like, “Professor Krugman also recognizes the problems with Social Security?”
Good point. What Krugman did not disown was this part of his article 15 years ago:
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 than they put in).
In other words, Krugman does recognize a key problem with Social Security.
In his comment on my post, Bob Murphy highlights the item linked to by Krugman in which the Social Security Administration thought it important to clarify what Ponzi’s scheme was vs. what the Social Security system is. The whole thing is worth reading. The Social Security historian, Larry DeWitt, ends with this:
The first modern social insurance program began in Germany in 1889 and has been in continuous operation for more than 100 years. The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi’s scheme lasted barely 200 days.
In about 2000, when I was writing my chapter on Social Security in The Joy of Freedom: An Economist’s Odyssey, I was in touch with Mr. DeWitt on the phone. He told me that he had written the Ponzi analysis for the Social Security Administration’s web site and that it had been up for a while but then the higher-ups decided to take it down. He and I were both disappointed. I’m glad they have relented and put it back up.
I’ve had feedback off-line from someone suggesting that I clarify whether Social Security is a Ponzi scheme. Here’s what I wrote in The Joy of Freedom:
There are two main differences between Ponzi’s original scam and the Social Security system. The first difference is that Social Security is run by government and, whatever its constitutionality and its questionable ethics, is legal. The second difference follows from the first: Whereas Ponzi had to rely on suckers, the government can and does use force. It’s true that the government refers to the Social Security payroll taxes–a hefty 10.6 percent (an extra 1.8 percent is for disability insurance and a further 2.9 percent, levied on all income from work, is for Medicare) of every worker’s earnings up to $80,400 in 2001–as “contributions.” But just try not “contributing.” That’s what Valentine Byler, an Amish farmer in New Wilmington, Pennsylvania, did in 1961. His religion taught that its members should care for each other and he tried to act on his religious beliefs by not paying Social Security taxes. The Internal Revenue Service responded by seizing three of his horses and selling them to collect $308.96 in unpaid taxes.
The use of force is the key to why Social Security has lasted so much longer than Ponzi’s scheme.