The claim that Social Security is a Ponzi scheme has been around for a long time. For decades, economists of all stripes have recognized that the Ponzi-like aspects of the system would eventually lead to trouble. Sooner or later (and later is almost upon us, my friends) there would not be enough young workers paying into the system to cover all the benefits “owed” to retirees. Here’s an excerpt from Rick Perry’s op-ed in USA Today:
Social Security’s unfunded liability is calculated in the trillions of dollars. Last year, annual Social Security outlays exceeded annual
revenues for the first time since 1983. The Congressional Budget Office projects that outlays will be roughly 5% greater than revenues over the next five years, worsening as more and more Baby Boomers retire.
By 2037, retirees will only get roughly 76 cents back for every dollar that is put into Social Security unless reforms are implemented. Imagine how long a traditional retirement or investment plan could survive if it projected investors would lose 24% of their money?
I am going to be honest with the American people. Our elected leaders must have the strength to speak frankly about entitlement reform if we are to right our nation’s financial course and get the USA working again.
Alex Tabarrok writes at Marginal Revolution about how you’d be surprised at the folks who have said Social Security is a Ponzi (or at least Ponzi-like) scheme (my bold emphasis):
Milton Friedman and Paul Samuelson rarely agreed on much but Friedman also called social security a Ponzi scheme. In fact, he called it The Biggest Ponzi Scheme on Earth but perhaps Yglesias puts Friedman in the nut category so let’s go for a third Nobel prize winner who recognizes the Ponzi like nature of social security, none other than…..Paul Krugman (writing in 1996):
Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it 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 than they put in). (ital added, AT)
Of these, I agree the most with Krugman. Social Security is not necessarily a Ponzi scheme but it only generated massive returns in the past because of its Ponzi-like aspects. The Ponzi-like aspects are now over and social security is turning into what is essentially a forced savings/welfare program with, as Krugman recognizes, crummy returns for average workers. Social security is thus a Ponzi scheme which has not gone bust but it has gone flat.
Regardless of how you label it, it’s a “scheme” that is in need of adjustment. In the early years, 14 people were paying into the benefits pool with their taxes for each person who received benefits. Recently, that ratio has dropped to 3 to 1. Before too much longer, with Baby Boomers reaching retirement age, that ratio will go inverse, and the whole thing blows up. You can almost guarantee that some pool of citizens, somewhere, isn’t going to be happy with a reform of the system. That shouldn’t stop us, though, from taking action. To do nothing is to court fiscal disaster.
via Is Social Security a Ponzi Scheme? — Marginal Revolution.
