Nevin's Data "Points"

   Every few years, somebody declares that Social Security is a Ponzi scheme. Indeed, I’ve been known to draw that inelegant comparison myself. The “scheme” that gave rise to the label was crafted by Charles Ponzi in the 1920s. He promised investors outsized returns — famously, doubling their money in 90 days. There actually was an arbitrage opportunity behind the pitch, [i] but demand quickly overwhelmed it. So Ponzi wound up using money from new investors to produce the “returns” promised to earlier ones. Social Security operates somewhat similarly: current payroll tax contributions are largely used to pay current beneficiaries. For decades, revenues exceeded benefit payments, with the surplus accumulating in the Social Security trust funds. But demographics, benefits and eligibility have changed — and the cushion between what comes in and what goes out has steadily eroded. Under current projections, within the next decade there won’t be enough incoming revenue and accumula...

In recent days—notably at the State of the Union address—Social Security is back in the headlines. Granted, its invocation seems largely intended as a political dividing rod, but it seems today that the vast majority (and despite the veiled insinuations, perhaps the entirety) of Congress and the President are committed to that system’s preservation, or at least rebutting its diminution. It appears that touching Social Security remains the “third rail” of American politics. That said, it’s going to take more than bold podium pontifications to fulfill that commitment. It’s been called a Ponzi scheme by its critics—and, while not technically correct, there is a familiar element at work—the notion that money being deposited to the system now is basically going to be paid out to other beneficiaries. Indeed, in most Ponzi structures the scheme “runner” generally pays off longer-term participants with money invested by newer investors. Sooner or later, there are not enough new...