I’ve seen some chatter over whether or not Social Security is a Ponzi Scheme. I think this is mostly a debate over nothing.
What is at issue is that the term “Ponzi Scheme” sounds bad and has poor affect. Some people wish to attach this to the Social Security system and some people wish to divorce it from the Social Security system.
However, is there really any disagreement over the actual mechanics of the systems? What the thing itself is apart from how you feel about the words used to describe it?
I don’t think there is.
However, one thing that does seem to be missing from the conversation is the importance of the concept of claim.
What makes investing in stocks or or bonds or participating in Social Security different from chain letters is that with the chain letter you have no claim. You are hoping that people will continue this process and give you back the money you put in.
With the other vehicles you can use the force of the state to compel people to give you back the money you put it. This is what I am calling “claim.”
Absent state intervention there is nothing stopping me from selling you stock in a company and then skipping town and spending all of your money. There is nothing stopping me from selling you a bond and then using the money to buy hookers and cocaine. Indeed, more than a little of this has been known to happen.
However, under a system of financial rules and regulation the state steps in to (1) attempt to prevent me from doing that in the first place. (2) Seize my assets if I do (3) attempt to repay claimants any monies they are owed.
Now, schemes like the one Bernie Madoff started are particularly hard to deal with because he is telling investors that their claims are growing when indeed they are not. So even though the state can come and try to get your money back from Bernie, it can’t get the claim you thought you had because it never existed in the first place.
Bernie just wrote down on a sheet a paper: you earned 20% return last year. But, nothing actually happened. It was just a sheet a paper. This is known as a lie.
In contrast the companies which comply with SEC regulations have existing claims, so there is a much better chance of getting your claim fulfilled.
Social Security likewise has an existing claim. Now because the claim both comes from the state and is enforced by the state you run into the problem of the state simply deciding that it does not want to enforce your claim. This is known as a benefit cut.
However, so long as the state wants to enforce your claim it clearly has the means to do so. It can forcibly extract resources from its citizenry to make good on its promises. This is called taxes.
Since the United States has not and is not close to exhausting its power of taxation there is no threat to the claim of Social Security besides the state deciding that it no longer wants to enforce it.
The thing to remember, however, is that, that is the fundamental issue: does the state want to enforce this claim or not. If it wants to it clearly can. If it doesn’t want to, then no one can make it do so.
So to the extent there is something to argue about, what you want to argue about is “do we want to continue to enforce this claim.”
Now, being all politically determinist and whatnot, I am going to tell you that no such choice actually exists. You will enforce this claim. Attempts to avoid it are futile. However, I understand that, that perspective is no fun.
Nonetheless, if we are going to argue we should at least be arguing about the core issue and not semantics and affect.