Turtles All the Way Down
Join Date: Jan 2003
Location: Twixt Hell & Highwater
Originally Posted by orinjkrush
all ponzi schemes must eventually explode. believing anything banksters and economists say has been shown, historically, to be a fool's faith.
Meanwhile, another favorite piece of political propaganda farts and falls:
What makes a Ponzi scheme a Ponzi scheme is that it’s a giant fraud. People think they’re investing in postal stamps. Their money is actually being invested in nothing. In Social Security, conversely, it’s perfectly clear what is going on. Every year, Social Security’s actuaries release an insanely detailed report on the system’s finances, its balance of payments, the potential problems it could face, and so on. You can read their report here. In a Ponzi scheme, the finances are a secret, and that’s central to the enterprise. In Social Security, they are, as a matter of law, public.
Indeed, Social Security has a much more obvious financing structure than, well, almost anything else in the government. Consider how the Pentagon gets funded. It has no dedicated funding of its own. No one knows exactly how it will be paid for, or at what level, 20 years from now. Instead, every year, there’s a budget. Every year -- at least recently -- that budget calls for more spending than the government is taking in in taxes. So we just borrow the extra money.
Social Security, by contrast, has its own dedicated funding source. It is currently running surpluses, though it won’t be doing so for very much longer. Those surpluses are invested in U.S. Treasuries, which are widely considered the world’s safest investment. As I’ll explain in a moment, it needs adjustments to remain actuarially sound in the future. But compared to almost everything else in the federal government, its path to financial stability is clear.
The other characteristic of Ponzi schemes is that they tend to require huge increases in the number of participants in order to stay afloat. As the Social Security Administration explains, “to pay a 100% profit to the first 1,000 investors you need the money from 1,000 new investors. Now there are 2000 ‘investors’ in the scheme, and in the second round of payouts to pay the same return to these 2,000 investors in the next round, you need the money from 2,000 new investors--bringing the number of participants to 4,000. And to pay these 4,000, you will end up with 8,000 ‘investors,’ then 16,000--and so on.” This type of geometric explosion looks like a pyramid, which is why Ponzi schemes are often called “pyramid schemes.”
Social Security doesn’t look like a pyramid. Quite the opposite, actually. Its current funding shortfall is a product of the baby boomers retiring and birth rates declining. That means more beneficiaries and fewer workers than there were when, say, the boomers were working and their parents were retiring. So Social Security has a funding gap equal to 0.7 percent of GDP over the next 75 years. We could wipe that gap out by lifting the payroll tax cap (right now, payroll taxes only apply to the first $107,000 of income) or by adjusting benefits downwards. Once it’s done, however, it’s done. Stable. Again, quite unlike a Ponzi scheme.
That essential stability is, perhaps, the most obvious refutation of the Ponzi scheme argument. The Social Security Administration puts it well on its Web site. “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.