"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Wednesday, September 21, 2011

"Ponzi" Scheme Revisited

Rick Perry has taken heat for calling Social Security a "Ponzi" scheme.   I don't see why.   A Ponzi scheme, by definition, is an investment scheme in which the first generation of investors is promised high returns that will be paid by funds paid in by later generations, with the understanding (albeit unstated and immoral) that the later generations will eventually get stiffed.  I don't see how any rational person doesn't view Social Security as a similar scheme.   People who've retired in the past have gotten high returns on what they paid in for the most part, while younger generations will get much less than they paid in, and the youngest (people 40 and under) are right to expect to get nothing.   The money's not there.   If it were a private investment scheme run by, say, Bernie Madoff, someone would have been frog-marched in cuffs out of an office building with the cameras rolling by now.

Don't believe me?   Then take the word of Thomas Sowell, writing today in NRO:
Good enough for Dr. Sowell, it's good enough for me.
Social Security worked fine when the small generation from the 1930s received pensions from the money being paid in by the larger and more prosperous “baby boom” generation that followed. It worked fine when the average life expectancy of the first generation was not long enough for most of them to collect Social Security checks for more than a few years — if at all.

Declining birth rates and greatly increasing lifespans have created havoc with Social Security’s finances, which are based on having the first generation’s pensions paid with money collected from the second generation — and the second generation’s pensions paid by the next generation, etc.

Any private financial scheme set up in a similar way would be illegal. That is why Charles Ponzi went to prison.

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