If Social Security is not a Ponzi scheme, what is it?
Some might claim that Social Security is essentially an insurance program, but they must answer this question: Is Social Security a financially sound business model based on rational principles that allow private sector insurance companies to make a profit? The answer is of course a resounding and scornful: "Hell No!"
Insurance companies generate profits in two ways, through underwriting―receiving more money in premiums than they pay out in claims―and through investment income. The difficulty inherent in underwriting is simply that while it is easy to estimate income derived through premium payments, it is very difficult to predict expenses paid out as claims. Insurance companies are essentially casinos. They make predictions of estimated loss through claims based on actuarial science, and these predictions in general have proven reasonably accurate over the years. I.E. in general the house wins.
In contrast, Social Security―including Medicare―is not based on actuarial science. Its premiums are not based on the actuarial science of risk, but on populist notions of the public welfare and the common good. All the Social Security income generated over the years has already been spent and there is not enough revenue coming in to pay the claims going out. If this program were a private sector company, it would have already had to file bankruptcy. Right now it is propped up solely by borrowing money from an entire world of starry-eyed investors foolishly enchanted by the full faith and credit of this ancient and decaying Republic.
If Social Security is not an insurance program, what is it?
Some might claim that Social Security is essentially a pension fund. Those who do would be hard pressed to answer this question: If Social Security is a pension fund, then where is the fund? A pension fund typically uses member payments to invest in a wide variety of income generating investment vehicles in order to ensure against market downturns. In contrast, Social Security has already spent all the investment capital it ever received, so there is nothing left to invest with. This is a fund without a fund, also known as nothing at all.
If Social Security is not a pension fund, then what is it?
Rick Perry is not the only one claiming that Social Security is a Ponzi scheme, just the most famous. To those who are outraged at this appellation I must ask this question: What is a Ponzi scheme?
A Ponzi scheme is a fraudulent investment operation because it pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going. The system is destined to collapse because the earnings, if any, are less than the payments to investors.
- Pays Social Security recipients with the money of subsequent workers and their employers...check
- Forces workers and their employers to invest and promises returns that are unusually consistent...check
- Requires an ever-increasing flow of money from workers and their employers to keep the scheme going...check
- The system is destined to collapse because the earnings, if any, are less than the payments to retirees...check