Is It Too Much to Ask That People Stop Talking So Crazy?

September 12th, 2011 at 6:57 pm

I’d like to impose a new fiscal measure.  Whenever you say either “America is Greece!” re our fiscal debt—or anything like that—or “Social Security is a Ponzi Scheme!” you have to send $10 to the US Treasury.

Today’s bond markets have the yield on the 10-year Greek bond at 23.54 and on the US ten-year note at 1.95.  So enough about that…OK?

Social Security is pay-as-you-go.  Ponzi’s scheme was not as it depended on continuous doubling the ratio of contributors to investors (read this wonderful treatment by Social Security’s historian).

As the above link concludes:

“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.”

Now, let’s just think for another minute about this pay-as-you-go process.

For much of its long and successful history, today’s workers have financed the benefits of yesterday’s workforce.  When demographic factors have led to a funding imbalance, as was recognized in the Reagan years (!!), adjustments had to be made to extend full solvency.

Such adjustments once again need to be made and they are not daunting.  In fact, the costs of the highend Bush tax cuts are about analogous to the shortfall in Social Security over 75 years, as both are about 0.8% of GDP.  And do not be misled by the insolvency arguments: full benefits can be paid through 2036, at which point trust fund is exhausted.  But at that point, courtesy of pay-as-you-go, the program can still pay 75% of scheduled benefits.

Now, forgive me if I get a little bit spiritual: as I’ve written before, Social Security was designed to “create a strong link between the aged and the working-age population–today’s workers create the capital, the technology, and the wealth that will support tomorrow’s generation. Embedded in its…formulas is the notion that those of us who came before, whether they were teachers, accountants, homemakers, mail carriers, barbers, cashiers, or lawyers, have built up the productive capacity of our nation.

When the children of these workers come of age (along with new immigrants), they will earn their living from this infrastructure while also making their own contributions. As they do so, we will peel off some portion of their earnings to provide pensions for their forebears, just as those forebears did for their own predecessors…Social Security is thus an elegant collaborative solution to a universal challenge.”

Maybe some people don’t want to accept the fact that we’re all in this together, but…we are.  So unless you want to be sending a crisp Alexander Hamilton into the Treasury, don’t be talkin’ any of this stuff anymore…capeesh!!??

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30 comments in reply to "Is It Too Much to Ask That People Stop Talking So Crazy?"

  1. Sandwichman says:

    Yeah? How about this one: “Markets Don’t Fail!” It’s the title of a book about market failure that argues backward from the foregone conclusion using false dichotomies and imaginary exaggerations. It’s the kind of thing ideologues with no commitment to objectivity and no grasp of the scholarly literature (but a PhD from George Mason University) crank out to the delight of the ditto-heads, who are thrilled to have their prejudices confirmed by a “scholar.”

    My frustration is that smart liberals spend so much time “arguing” with the crackpot laissez-faire signposts but so little time engaging with us “hippies” on the left (by which I mean more radical but informed and not dogmatic voices). Henry Sidgwick answered the “America is Greece” and “Social Security is a Ponzi Scheme” zealots over a century ago:

    “There is indeed a kind of political economy which flourishes in proud independence of facts; and undertakes to settle all practical problems of Governmental interference or private philanthropy by simple deduction from one or two general assumptions—of which the chief assumption of the universally beneficent and harmonious operation of self-interest well let alone. This kind of political economy is sometimes called ‘orthodox,’ though it has the characteristic unusual in orthodox doctrines of being repudiated by the majority of accredited teachers of the subject. But whether orthodox or not, I must be allowed to disclaim all connection with it; the more completely this survival of the a priori politics of the eighteenth century can be banished to the remotest available planet, the better it will be, in my opinion, for the progress of economic science.”

  2. tom says:

    When guys like Paul Ryan don’t just engage in crazy talk, but transcribe their crazy talk into legislation, I don’t think a $10 rule will stop it.

  3. Jim says:

    Then I’d suggest you tell your fellow democrats to quit talking of cutting social security! capeesh!!??

  4. Jeff says:


    I appreciate your common sense approach to the political-economic morass in which we now find ourselves. Thank you for your fact-based and clear explanations!

  5. Michael says:

    Yes! You get it! The fundamental problem is that people don’t want to accept that we’re all in this together!

    Now can we please start to talk about it?

  6. EMichael says:

    Can we include “US-Weimar Republic” comments on the list?

  7. Terrance Heath says:

    Sadly, the request in your title is probably too much to ask, considering the applause lines from the last few Republican debates.

    Many Americans have come to believe that no connections exist between us — that what happens to somebody else somewhere else has nothing to do with us.

    It’s why some of us are willing to see million go without health care. It’s why many of us are willing to see homes foreclosed upon and neighborhoods fall into blight, rather than bail out underwater homeowners. This is despite what it means for local economies: less revenue from property taxes means less funding for schools, police, etc.; less revenue means more public workers lose their jobs, which means they support fewer jobs with their income, resulting in (you guess it) more people losing their jobs, and you get the whole domino effect from there.

    I explained this to a woman I met standing outside the theater when Michael Moore’s “Capitalism: A Love Story,” premiered in DC. Her response? “Well, the good have to suffer along with the bad.”

    Someday, perhaps we will get that we are all in this together. I only hope we don’t realize it too late to make a difference.

  8. Ron E. says:

    Since the insolvency issue doesn’t happen until 25 years from now, it is inaccurate to say that we “need” to make adjustments to SS right now. There is no reason to do anything with SS right now. Congress and the President should leave SS alone and work on problems we are experiencing right now like lack of jobs and poor GDP growth.

  9. Ben says:

    While, in the technical sense, SS is not a Ponzi scheme, it shares similar characteristics, especially for the first generation of beneficiaries. Namely, early participants received exponentially more in benefits than they paid in. Also, Ponzi schemes fall victim to exponential math – they run out of suckers very quickly. Because SS seeks to match income with outlays (and it forces all workers into the system), it does not suffer the same quick demise, it is still subject to the demographic math, which, although not as frightening as a Ponzi, is still serious.

    That aside, your characterization of the solvency of Social Security is seriously misleading. There is no trust fund in any common sense understanding. It has been spent by our government which has, in return, provided the fund with Treasury IOUs. So, in addition to supporting current retirees with taxes on current workers, we are also indebting future taxpayers for current retirees who will be paying for these current benefits long into the future in addition to the taxes they will ALSO be paying to support the benefits for succeeding generations.

    This is not “pay as you go”.

  10. Mike says:

    The term “Ponzi Scheme” is a short cut to saying that the current system is unsustainable. It is not what was constructed in 1935. The worker support ratios are not the same either. It has had to be saved once and will need saving again. Arguing with the term “PS” and not addressing the underlying problems is simply whistling on the Titanic. The concern over a lifetime of investing with a group as irrespobsible as politicians is valid and real.Pandering to your support group is just a waste of time.

  11. TC says:

    Good piece, I am sick of that ponzi scheme crap that Anne Coulter and her ilk like to screech. Any candidate that utters it should be called out.

    We might not be Greece or Weimar, but we do have some issues that are making us look more like Brazil or Mexico. Our wealth distribution is worse than pre-revolutionary France…

  12. ed duval says:

    Social Security is a farce, the fact that it has gone on for so long doesn’t change what it is. Acting like it is something it isn’t won’t help either. Honestly, I think this article is missing the entire point. I realize you’re trying to be clever, but it comes off as smug. You’re a finance guy right? Explain to my mother why she’ll never get half of what she put into SS back, then explain to me how this is ‘an investment’ that makes sense for the average American. You’re too far removed from the average American.

    • Gepap says:

      Social Security was never meant to be an investment scheme. It is an old age pension. Your mother was provided every year with information on what her benefits will be. If she wants to have something other than Social Security income when she is old, she is currently and has always been free to invest her take home income elsewhere.

      The “average” American saves little, invests poorly, and without Social Security would have a very high chance of destitution once they retired, just like “average” Americans did before Social Security, which is why the program was instituted in the first place.

  13. BambiB says:

    A Ponzi scheme is one where the money paid by investors is returned to investors as returns on their investment. Early investors usually do well in such a scheme, because they receive returns for a longer period of time. Some will actually receive more returns than they paid in. However, later investors will not fare as well. At some point, the rate of increase in the pool of investors will stop growing fast enough to provide returns to all investors – and that’s where the scheme collapses.

    There is nothing about a Ponzi scheme that is limited by time, or the number of participants. It could be a few dozen people over a few weeks, it could be thousands over 200 days, or it could be tens of millions over a period of 76 years.

    How does this compare to social security?

    Frankly, it’s a 100% match. Early participants actually received more in payouts than they paid in contributions. The money collected from late contributors pays the returns of earlier contributors. As the rate of new contributors drops off, the scheme cannot continue to pay returns.

    The primary difference between traditional Ponzi schemes and the Social Security Ponzi Scheme is that in the former, investors are convinced to invest by wild claims of huge returns. In the latter, the government comples people to “invest” by threat of force.

    Social Security is worse than a traditional Ponzi scheme because investors are compelled to fork over their money under duress. With a traditional Ponzi scheme, investors have the opportunity to investigate the scheme’s claims and make a decision. With Social Security, the only decision allowed is whether to fork over the extorted money or go to prison.

    • Gepap says:

      Social Security is NOT an investment. It is a old age pension. That is it. Its ability to pay out is only politically, not economically restrained. if people like you wish to end the promise of Social Security, that is your choice, but put the blame where it belongs – on your own head.

  14. James Niermann says:

    No, it is not a Ponzi Scheme. I agree. There are elements that make it similar to a PS, and some that make it much worse. Your defense is time perpetrated? Really? Really?? Consider that in response to living longer, the retirement age is raised. Just because the average person gets older, does not mean their productive years MUST increase, in fact the expenses of those later years grow wildly. Forty years or more and our contribution add up, with only a hint of interest for those years of forced contribution. Dad collected two years, Mom collected less than a year. This was not a fair sharing of the pool. Your vapid expression of what SS is may satisfy the ‘intellectuals’ that lap fervently at the crumbs you drop before them with your ‘spiritual’ diatribe, but it does nothing for anyone with enough common sense to question the ‘elegance’ of the ‘solution to a universal challenge’.

    I declare this article a puff piece. Quit puffin’ the piece.

  15. Ron M. says:

    Pardon me, my post was over 1500 characters and has been broken into several posts.

    I’m having a little trouble following your thought process regarding how Social Security and it’s pay-as-you-go method (new workers paying in to support old workers) is different than using money from new investors (workers) to pay existing investors (workers) as in a Ponzi scheme. Both scenarios require a constant new stream of money to operate, both require a high ratio of new investors (workers) to support payouts to the old investors (workers).

    When the SS was founded in 1939 (76 years ago), the ratio of investors to recipients was (I’ll use 1940 as SSA.GOV does not list 1939) 159.4:1. Today, that same ratio is (as of 2010) 2.9:1. As of 2010 the SS fund began paying out more than it brought in in revenue through taxes (new investors). All of the “solutions” either further defraud people, i.e. extending retirement age or reducing benefits promised; or they further leverage the current working class.

    I’m sure SS sounded great to people like Ida May, who paid $24.75 into the system and ended up getting paid out $22,888.92 over her lifetime; but that’s not the honeymoon’s over. Especially with things like 401ks and IRAs, there’s no need for this forced tax/retirement system anymore.

  16. Ron M. says:

    I also find it very interesting how everyone talks about taxing the wealthy. As a disclaimer, I definitely don’t fall into that bracket, dream to some day. If you use the Bush tax cuts on the “wealthy” to pay for SS for the next 75 years, you’re going to have trouble using the same taxes to pay for the other array of items people expect the “wealthy” to pay for. Deficit spending, the deficit itself, other social programs, etc. Do you notice that Obama’s “business allies” such as GE, pay little (or in the case of GE, NO TAXES) taxes? Why don’t we throw George Soros into the mix as both are staunch advocates of increasing taxes on the rich. Both also heavily utilize offshore jurisdictions to report their taxes under and lower their tax rate.

    I by no means intend to exclude conservative organizations because I’d expect them to be as guilty as those mentioned previously. This is a pervasive issue (the failure of the tax code) which spans party lines. The hypocrisy is what I intended to focus on.

  17. BambiB says:

    In the “Social Security as a Ponzi Scheme” discussion, some hard numbers might help.

    In 1940, the ratio of workers to beneficiaries was 159.4. That means that if you wanted to pay benefits amounting to half of the retiree’s working wage, you would need to tax the workers about 0.3%.

    By 1950, the ratio was 16.5. Using the same criteria, SS taxes would have to be 3%.

    In like manner:
    Year Ratio Tax
    1940 159.4 0.31%
    1950 16.5 3.03%
    1960 5.1 9.80%
    1970 3.7 13.51%
    1980 3.2 15.63%
    1990 3.4 14.71%
    2000 3.4 14.71%
    2010 2.9 17.24%

    We are now entering a period where the “baby boomers” are retiring. This represents a huge surge in numbers moving from “contributor” to “benefits recipient”. Every retiree is not only one more person drawing out of the program, but one less person paying in.

    Of course, this is a simplistic analysis of the program. It doesn’t take into account the interest paid on Social Security holdings, or the decrease in the work force due to the weakened economy, or the fact that much of the money that is supposed to be in the social security “lockbox” has been replaced with “IOUs” from Congress. But it should give you and idea of where the Social Security Ponzi scheme is going.

    In one sense, the criminals have already taken their profit and word of the collapse just hasn’t yet reached the investors. When Congress raided the SS fund for general operations and left “IOUs”, they effectively forced all retirees to become part of an even BIGGER scheme – that of Federal Deficit Spending… which now exceeds $14.6 trillion.

    The only way to avoid complete collapse of the SSPS is to reduce benefits. This can be done by reducing the number of dollars paid out, by printing more dollars (inflation), by reducing the time over which beneficiaries will receive benefits and by excluding certain “classes” of beneficiaries. But the bottom line is, starting very soon, people will not receive the benefits they’ve been promised.

    • Dan Furlano says:

      People that call SS a ponzi scheme are the same nuts that say the US is like Greece and hyperinflation is around the corner.

      They add no real value except that the US is doomed and their is nothing we can do about.

      There was a time when people like this were just ignored. But unfortunately today we have the internet and anyone with a keyboard can type out the voices they hear in their heads as some sort of truth.

  18. comma1 says:

    Although we both agree that Rick Perry is obviously demagoging — could you please comment on the very real threat of SS not being viable because the next generation does not have the same earning capacity as the last.

    There has been an assumption in SS that each successive generation will be more successful than the last, but the last 30 years have shown that not to be true. (Further proof might be today’s released report that real median income has actually decreased to the lowest level since 1997). After all if you are 30 today, you’ve been in a jobless recession for near on a decade, your generation is the most indebted from school in the history of the country, you have more competitors than any generation past, transportation and housing is way more expensive than ever before, and technology is shipping work over seas and eliminating whole industries.

    My question is the following: is SS functional if future generations of Americans are poorer then your generation?

  19. perplexed says:

    Thanks for another good post Dr. Bernstein! Yes, we are all in this together and attempting to classify the demographic impacts of an aging society as some kind of government scheme is disingenuous at best and should be exposed as the red herring it really is.

    What raises my curiosity though, is how is it that Charles Ponzi is still getting credit as the penultimate schemer when he has been so thoroughly displaced and shown to be such a lightweight as fraudsters go? Both he and Bernie Madoff rank as mere pickpockets now that the mortgage finance industry and their banking accomplices have put the equity of all U.S. homeowners at risk in scheme to line their own pockets by repeatedly putting other peoples’ assets at risk until the whole scheme imploded causing more than $6 trillion in damage to American families. And Charles Ponzi still gets the credit? Charles Ponzi and Bernie Madoff never even imagined operating on scale like this. Both got caught, prosecuted, imprisoned, and separated from whatever was left of their ill gotten gains while the mortgage financiers & their accomplices got off without being prosecuted and got to keep all of their loot! There really is no contest, they’re not even in the same league.

    All of this & there are still people out there (including some who are running for the office of president of the country) claiming that the government is the problem? Maybe we should think through the implications of the fact that residential real estate is no longer a “suitable” investment for the average American family because it is now known that equity in a home is not protected from this kind of fraud. It dramatically changes the risk profile of a highly leveraged investment putting it far beyond what is reasonable for an average American family. Hopefully we can keep social security safe from these people who are still on the lose and always on the lookout for the next target!

  20. general c. san desist says:

    …seems that Roosevelt had a stroke of genius when he made Social Security a participatory experience. From Schlesinger, Coming of New Deal…

    I guess you’re right on the economics, Roosevelt conceded when told that the employee contributions were a mistake, but those taxes were never a problem of economics. They are politics all the way through. We put payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no camn politician can ever scrap my social security program.

  21. Robert says:

    For all you believers in the “Social Security is a Ponzi Scheme” fallacy, you may want to read Warren Mosler’s blog post on this subject. According to Warren SS is clearly not a ponzi scheme because the government is not dependent on borrowing to make payments. Warren also clearly explains the truths about how the US modern money system works in regards to government SS payments.

    While visiting Warren’s site you also may want to download a copy of his book “7 Deadly Innocent Frauds” which explodes other mainstream economic fallacies that are being pedaled unchallenged in the MSM. Rumor has it that the 7DIF is currently making the rounds at Treasury and the Fed.

  22. Lex Whatley says:

    Social Security is a Ponzi scheme taking funds from other investors to pay benefits. It only pays out a third of what beneficiaries put in, I will collect $615,000 if I live to 85 but would have earned $3 million in a private investment fund. SS should be set up as individual accounts owned by the worker and his heirs, protected by pension insurance.

    • perplexed says:

      What a great idea. You keep the payments and invest them in high risk assets. If it works out you and your broker are way ahead of the game. If you lose it all, the government has to take care of you for many years without you having contributed a dime! Moral hazard at its finest! Did you get this idea from Chase or GS?

  23. Tom O'Bedlam says:

    Of course social security is not a Ponzi scheme. In a Ponzi scheme, previous contributors are paid their benefits out of the payments of current contributors.

    By contrast, with social security, previous contributors are paid their benefits out of the payments of current contributors.

    That makes social security “pay as you go,” while a Ponzi scheme clearly is not.

    Further, as noted, Ponzi had to rely on a continuous doubling of contributors, because that’s the rate of return he promised. Social security prudently does not promise anywhere near that rate of return, and thus need not rely on continuous doubling.

    Could the difference be any more obvious?

  24. vigilantnow says:

    Mr. Bernstein’s article reveals his lack of understanding about the Constitution. Social Security was a result of President FDR’s attempt to insure that people would have some income in their later years of life to sustain themselves. While the motive was good the implementation was incorrect. He was operating under the assumption that the government should be responsible for this endeavor. Knowing full well that this violated the enumerated powers of the federal government, he charged forward anyway, ignorant of history that has never shown this type of a system to be sustainable. Our elected representatives have failed to honor the obligation of Social Security by using those funds for other purposes without the permission of the citizens whose money they spent. Irrespective of the fact that IOU’s were issued with a promise to pay one day, an agreement no citizen signed or agreed to, this is theft. Mr. Bernstein’s statement that “we are all in this together” is statism and eats away at self-reliance and rugged individualism which has been the stalwart of America. The Pilgrims tried the “we are all in this together” approach when they first landed in America and nearly starved to death. When they changed their governance to each individual working in his own self-interest (working to your highest potential voluntarily), the colony grew and flourished. One should not be forced to support someone else. This is destructive to a society. We are all responsible for ourselves and should carry our own weight an not burden others. America has grown to be great and prosperous because of individuals making their own choices freely and supporting themselves without reliance on others. At the same time, American’s have voluntarily helped others in need. This has been a hallmark of our country. We are the most generous nation in the world bar none. We need to reverse this trend of disregarding the Constitution. The federal government needs to be brought back within the confines of the Constitution. Let American citizens find the solutions they need that support their inalienable, God-given rights to life, liberty, and the pursuit of happiness without an overbearing federal government in the way.

    • perplexed says:

      You do know most libraries have a non-fiction section too right? You can read all about the actual history of the anarchists movement there and why so few ever considered it a serious way to organize a society – at least until the modern day U.S. republicans figured out you could get a lot of gullible people to vote against their own interests by selling the fictional version of the story.