Social Security is NOT a Ponzi Scheme

One thing that's been driving me crazy over the last few weeks has been the characterization of Social Security as a Ponzi scheme. It's a popular meme among politicians on the right, and to some people it even sounds serious. People pay into the system as they work, the payouts go to those who are already retired, and so the system relies on current workers to pay the benefits of the elderly. In that narrow sense, it's like a Ponzi scheme-- those who benefit now are not those who pay now. But the resemblance ends there.

A Ponzi scheme is, to quote Wikipedia, "a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation." The first problem with the Social Security comparison is the term "fraudulent." Social security is a government insurance program, and it doesn't claim to be antyhing else-- there's nothing fraudulent about it. The second problem is characterizing it as an "investment scheme." Social security is NOT a savings vehicle-- it's social insurance. In essence, it works by paying out a fixed sum to those who reach a certain (retirement) age. That payout is funded by current taxes. If someone dies, they get nothing-- they don't have a "social security account" the way an investment fund does (and that's a crucial distinction; if George Soros has an investor who dies, Soros doesn't pocket the money invested with him and tell the guy "tough luck"; he has to return the principal to the dead person's beneficiary; the account itself is an asset, in a way that Social Security benefits aren't). A final distinction is that there's no risk of loss in Social Security: the only risk is that the program will be shut off or tweaked (which it can be at Congress's discretion).

All the talk about the disappearance of Social Security is, simply put, fearmongering. Social Security is like welfare, food stamps, or road maintenance-- Congress can choose, year over year, to fund it or not fund it. It can choose to expand benefits or cut benefits. It can raise the age at which people are eligible for it, or lower it. It's a "Ponzi scheme" in the same way that property taxes to pay for schools are a Ponzi scheme if the government decides to close pbulic schools before a family has raised school-age children: they've paid taxes, but haven't gotten benefits back.

So the right way to think about Social Security is as a combination of as a universal welfare program for the old, and a statutorily-mandated automatic social insurance policy. When state taxes fund food stamps for the extremely poor or disability benefits for the injured or unemployment insurance for the out of work, there's no assumption that someone has an "account" with the relevant organization. And there's no guarantee that someone who spends their whole life paying in will ever reap any benefits. And, like Social Security, those programs can be shut off if Congress makes the policy choice to do so.

So what's the upshot of this argument? Well, it's really simple. Social security is like any other program-- to keep it going, you need to raise enough revenue for it. If you think it's too generous, you can pare back its benefits. If you think it starts too early, you can push back the age at which it kicks in. If you think it distributes too much to some people who don't need it, you can create a means test for it. It's the same as any other program-- the rules are constantly in flux, and those rules can be changed to reflect policy preferences voiced by the general population. In short, if Social Security is a Ponzi scheme, then so is any other program paid for with taxes coming from those who don't necessarily enjoy the present benefits.