Is Social Security a Ponzi Scheme?
By David Henderson
A couple of years ago, I claimed on this blog that Social Security is a Ponzi scheme. Various commenters objected but didn’t persuade me. This week, John Seater, an economist whom I respect a great deal, wrote that it is not a Ponzi scheme. He’s given the best argument I’ve seen yet for that view. I’m still not persuaded. Seater wrote:
Medicare is neither a chain letter nor a Ponzi scheme. Those are closed-loop circular arrangements in which the scheme eventually comes around to the same people who already have paid into it and asks for more money than those people got. Medicare and Social Security are open-loop intergenerational transfers in which the person receiving benefits now is never asked to pay in the future because he is dead by then.
Both Medicare and Social Security in principle could remain solvent, in contrast to chain letters and Ponzi schemes, which necessarily cannot. In practice, Medicare and Social Security were undone by two unrelated things. First, the politicians saw they had vote-buying goldmines in both programs and kept ramping up the benefits associated with each, necessarily ramping up the costs, too (but of course politicians never talk about the costs of anything). Second and more important, there was a major demographic shift in the form of a huge drop in the number of children born to fertile couples, leaving far fewer young people to pay for the benefits being received by old people. That was bad luck as far as financing Medicare and Social Security was concerned, but it was in no way a necessary outcome of either program.
It’s not necessarily the case that Ponzi schemes must circle around to the original people who invested in them. If the scheme offered modest enough returns and spread slowly, it could last forever in a country with a growing population. Therefore, Ponzi schemes, contra Seater, could remain solvent.
I’m back to the point I made in my original post, a point I quoted from my book, The Joy of Freedom: An Economist’s Odyssey:
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.