In the ongoing public discussion of Social Security, some critics on the political right have taken to calling the program a “Ponzi scheme.” That, of course, refers to the brainchild of the con artist Charles Ponzi, who in 1919 invented the “swindle in which a quick return, made up with money from new investors, on an initial investment lures the victim into much bigger risks.”
Social Security clearly does not conform to that dictionary definition of a Ponzi scheme. There is no luring of victims into bigger risks. But current Social Security recipients are paid with taxes paid by current workers, who in turn will have their eventual payments funded by another generation. Is this Ponzi-like?
No, unless life itself is a Ponzi swindle. The funding for Social Security simply mimics the “real economy,” in which goods and services for those who are too old and too young to work always must be produced by those of working age. These critics are simply confusing the “monetary economy” with the “real economy.”
In the real economy, no one eats a Social Security check, keeps out the winter cold with greenbacks or protects their body from the rain and wind with paychecks. People eat food, live in houses and wear clothes. Similarly, workers do not produce money with their work. They produce physical goods or useful services.
Money is merely a human invention that facilitates the distribution of such goods and services. Only those who work produce goods and services. If those who are unable to work, such as children, the disabled or the elderly, are to have goods and services to meet their needs, they must have some claim, moral or legal, on some of what is produced.
The most basic claim is the innately human one of family. Parents have taken care of their children from time immemorial. Children have taken care of their elderly parents. In traditional societies, cultural expectations, in the form of village or tribal norms, are the motivating force.
Since the invention of property, ownership of wealth-producing assets has also given the elderly income to claim the goods and services that those still working produce. In the last five centuries, financial instruments such as stocks, bonds or simple bank deposits have become common tools to generate income for the retired. But the income from these assets still must be used to buy goods and services produced by those of working age.
Beginning in the late 1800s, some governments began to give people a legal claim on output in the form of public retirement plans. The United States did not introduce such a Social Security plan until 1935. In the six decades since benefits were first paid, most people have come to think of the program as highly desirable, if not as a basic right.
Regardless of other wealth, people who have paid into Social Security for a specified length of time have a legal right to receive payments in old age, as survivors or as the disabled. That legal right depends on the continuing willingness of the citizens to maintain the system.
Social Security is merely another type of claim that the elderly have on goods and services produced by generations still working. Most of the program’s prospective difficulties stem from the fact that all age cohorts are not the same size.
The baby boom cohort born between 1946 and 1964 is substantially larger that the cohorts that came before and after. As the baby boomers retire, the number of nonworkers to workers will rise substantially.
That will happen with or without Social Security and whether any of the competing plans to “save Social Security” are implemented. Over the next four decades, each worker will have to meet the needs of more people than now.
The only way that can be done, without cutting the quantity of goods and services available to either workers or nonworkers, is for workers to become more productive. For productivity to rise, we have to invest more in capital equipment or in education. To invest more, we need to save more.
Any plan to “save Social Security” that does not increase the U.S. national savings rate does nothing to increase the production of goods and services, which is what is really needed.
Shifting FICA remittances into private financial instruments instead of government “trust funds” will earn higher visible returns. But unless the government spends less, the shift of FICA money into private markets will force the Treasury to borrow an equal and offsetting amount in the same financial markets. There will be no net increase of real goods or services for our society as a whole.
Charging that there is something Ponzi-like about Social Security because current workers pay for the currently retired reveals a misunderstanding of the underlying real economy. Moreover, focusing on some supposed deception in how Social Security was structured diverts attention from the more relevant issue of increasing productivity as the labor force grows smaller relative to the total population.
As you hear various and sundry presidential and congressional candidates explain how their plans will solve all problems, keep these questions in mind: How will this plan affect the “real economy?” How will it increase national savings and productivity? If there is no clear way in which the plan accomplishes these ends, it likely will do nothing to remedy the problems it purports to solve.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.