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CHARLES KRAUTHAMMER: A Ponzi scheme that should be fixed – The Washington Post

September 15, 2011

A Ponzi scheme that should be fixed

By Charles Krauthammer, Thursday, September 15, 5:01 PM

The Great Social Security Debate, Proposition 1: Of course it’s a Ponzi scheme.

In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants.

This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new to old. The merry-go-round stops, the scheme collapses and the remaining investors lose everything.

Now, Social Security is a pay-as-you-go program. A current beneficiary isn’t receiving the money she paid in years ago. That money is gone. It went to her parents’ Social Security check. The money in her check is coming from her son’s FICA tax today — i.e., her “investment” was paid out years ago to earlier entrants in the system and her current benefits are coming from the “investment” of the new entrants into the system. Pay-as-you-go is the definition of a Ponzi scheme.

So what’s the difference? Ponzi schemes are illegal, suggested one of my colleagues on “Inside Washington.”

But this is perfectly irrelevant. Imagine that Charles Ponzi had lived not in Boston but in the lesser parts of Papua New Guinea where the securities and fraud laws were, shall we say, less developed. He runs his same scheme among the locals — give me (“invest”) one goat today, I’ll give (“return”) you two after six full moons — but escapes any legal sanction. Is his legal enterprise any less a Ponzi scheme? Of course not.

via A Ponzi scheme that should be fixed – The Washington Post.

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2 Comments
  1. September 15, 2011 9:45 PM

    Perhaps you can call Social Security a Ponzi scheme. It’s not what you call it. It what it does that matters. Just yesterday there was a report on the news that the average family income in America is less than $50,000 a year. How much can you save on that amount of money? Little or nothing. We are supposed to provide for an average family of four, save money for retirement, and put money aside for our children’s college education.

    There just is not enough money to do all those things even if you shop at Sears and Walmart. That is the reason we have Social Security. At least we know that there will be some money to pay the basic bills after we retire. Our children will most likely be faced with the same issue.

    So call it a Ponzi scheme if you must but I know that the program has to be saved. Without a retirement program our nation will look more like India and Mexico. This is the richest nation in the world. Other developed nations provide their citizens with retirement plans and we must do the same.

  2. Frank Figliola permalink
    September 17, 2011 8:52 AM

    The employer and the employee each pay the Fica tax amounting to 15% of the employee’s wages. Over time, perhaps 40 years, this ends up being a large amount of money. Who benefits? The employee? Or government. Most certainly the government.
    When President Johnson forced Fica taxes to be placed into the general fund to help pay for the Vietnam war we took a first step toward Social Security insolvency. Why didn’t he invest that money into Treasuries at the very least. It would have increased the fund while self financing the deficit.

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