We Are All Ponzi Schemers Now

| Thu Sep. 8, 2011 6:01 PM EDT

I know I should ignore this. Ignore, ignore, ignore. You can do it, Kevin!

But no. I'm hopeless. Here is Reason's Shikha Dalmia on why Social Security isn't a Ponzi scheme, it's worse than a Ponzi scheme:

A Ponzi scheme collects money from new investors and uses it to pay previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

Forget the business about the surplus. I happen to agree with Dalmia about that, but it doesn't matter much at this point. Social Security is only generating a small surplus these days, and within a few years it won't be generating a surplus at all. It's not worth worrying about anymore.

No, the real problem with Dalmia's description is the notion that Social Security collects money from new investors and uses it to pay off previous investors. It's easy enough to see why people believe this: it was, basically, the way the program was initially sold. And politicians ever since have found it convenient to continue this fiction. Seniors today are all convinced that the money they paid into the program during their working years was somehow saved up for them and now they're getting it back.

But that's always been a lie. Social Security is actually a much simpler program than that. I'm going to put the rest of this paragraph in bold so you can't possibly miss it. Here's how Social Security works: every month we take in taxes from working people and every month we turn around and distribute those taxes to retirees. That's it. That's how it works, and everyone who actually knows anything about the program knows that's how it works. Taxes come in, benefits go out. And the key to solvency is simple: making sure that those taxes and benefits are in balance.

This is, of course, the way every government program works. Taxes come in, payments to soldiers go out. Taxes come in, payments to NASA rocket scientists go out. Easy!

Now, morally speaking, we certainly have an obligation to keep Social Security running. After all, today's seniors did their bit back in the day and provided benefits to yesterday's seniors. But again, that's true of every government program. For example: we have an obligation to today's seniors to fund the Pentagon and keep them safe from al-Qaeda. After all, they did their bit and funded the Pentagon back when we needed to kick Hitler's butt and stop the commies from taking over the world. We also have an obligation to fund highways for our seniors. After all, they did their bit and paid for the original interstate highway system back in the 50s. Etc. etc. That's just how government works. If Social Security is a "monstrous lie," as Rick Perry says, then the entire federal government is a monstrous lie.1

Social Security is nothing special. It's just another tax-funded program. Taxes come in, benefits go out. As the chart on the right shows — and this is really the only thing you need to know about Social Security — the program costs about 4.5% of GDP today and will eventually top out at about 6% of GDP in 2030 and beyond. You can bring that into balance forever with tiny tweaks phased in over the next two decades. Not only is it not a Ponzi scheme, it's not even a major problem.

1Of course, Rick Perry might very well think that the entire federal government is a monstrous lie. But that's a different discussion.

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