Tuesday, September 21, 2010

Ron Johnson Subscribes to the Social Security as a Ponzi Scheme Meme

In addition to the commercial that I viewed on TV last night, there's this article in today's Appleton Post-Crescent. ("Officials say voter response to reports of Senate candidate Ron Johnson's inconsistency hard to predict".)

Link to December 28, 2008, Blomberg Businessweek EconoChat, "Is Social Security a Ponzi Scheme?" by Michael Mandel.

In the aftermath of the Madoff implosion, quite a few people have pointed out the parallels between a Ponzi scheme and Social Security. Arnold Kling, whom I respect, has written:
I’ve been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)—in other words, a Ponzi scheme.
Other people have gone farther. Paul Mulshine of the New Jersey Star Ledger wrote a column entitled “The Ponzi scheme that Baby Boomers are waiting to cash in on.” And Jim Cramer has called Social Security the biggest Ponzi scheme in history.

Superficially, these critics have a point, and there is a parallel between Social Security and a Ponzi scheme. But on a fundamental level, they are very wrong, and it’s worth explaining why.

As you might expect, the commenters take Mandel to task in a variety of ineloquent ways.

Fortune also addressed the myth on January 7, 2009.  ("Social Security a Ponzi scheme? No way".

Excerpt:   Essentially, here's their pitch: a Ponzi scheme is a fraud in which money from one group of people is used to pay promised returns to another group of people. The money isn't invested, it's just transferred, and at some point the scheme collapses because there's not enough income to satisfy withdrawals. (Madoff reportedly confessed to one of his sons that his $50 billion investment business fit that description.) Social Security's critics say it's a multitrillion-dollar Ponzi scheme because although individuals have "accounts," in fact the government uses income from current workers to pay benefits. When benefits exceed income, they say, the system will crumble, just like Madoff's.

It's hard to knock down such a persistent and seemingly elegant analogy. But since it creates a false impression of Social Security, and since I for one consider real Ponzi schemes too important and interesting to obfuscate, it's worth rebutting this myth.

Check out this Cato Insitute post from May 11, 1999.

I suppose this give us a general idea of where Johnson is getting his talking points.

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