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...

During last week’s GOP presidential candidate debate, Texas Governor Rick Perry grabbed headlines by reaffirming his position that Social Security is a “Ponzi scheme.” Pundits were quick to jump on the comment, apparently believing that such rhetoric will “spook” the electorate (specifically older and independent voters) and ultimately make Perry unelectable, while purists were quick to point out the distinctions between the operation and intent of the two approaches, apparently believing that the technical distinction would matter (to anyone besides purists). True, a Ponzi scheme, such as the one Bernie Madoff ran, as well as Charles Ponzi’s original design, is positioned as an investment. Investors hand over money to someone, believing that their money will be invested and grow. Instead, the scheme “runner” generally pays off longer-term participants with money invested by newer investors. Sooner or later, there are not enough new investors to fulfill those expectations and the wh...