Monday, September 12, 2011

Quotes of the Day: Paul Krugman, Paul Samuelson and Don Bourdreaux

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in).

~ Paul Krugman, 1996, from What Consensus?

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.

More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

~ Paul Samuelson, 1967, from The "Beauty" of Social Security

I submit the essence of a Ponzi scheme is

(1) its promise that contributions today to the scheme’s manager will pay off handsomely (that is, better than alternative investments) in the future to each contributor;

(2) that current contributions to the scheme are not invested but are spent – in particular, are spent to make good on promises made in the past to previous contributors who now expect their stream of pay-offs;

(3) that the manager of the scheme maintains his ability to pay the promised streams of pay-offs only by getting other contributors into the scheme, but

(4) the manager doesn’t let on to contributors (and would-be contributors) that the funds for paying off the promises come not from any profitable, productive investment of contributed funds – nor from any actuarially justified program for reallocating risks across persons or across time – but come, instead, simply from the hope that future contributors can be corralled into the system;

(5) that if future contributors do not arrive in sufficient numbers, the scheme has too little money on hand to pay off all promises;

(6) that the manager of the scheme, in short, successfully persuades his or her targets that the scheme is financially something that it really is not.

~ Don Bourdreaux, 2011, from Further Thoughts on Whether or Not Social Security is Ponzi Scheme

Grouch: When growth slows and demographics change, many of the assumptions made years ago in good times can look very foolish. The unfunded liabilities the nation now faces are truly staggering.


  1. And the alternative is..?

    The politician who called SS a Ponzi scheme gets unlimited healthcare coverage for life, pension for life and yet what he's put into the system is nowhere close. Irony at its finest.

  2. Politicians look after themselves first and foremost at taxpayer expense. Sooner or later the answer is going to have to be individual accounts where the government can't borrow and spend against the "trust fund" without an individuals consent by electing government bonds as an invest choice.

  3. I would like to see an analysis of what the fund would look like if the huge surpluses had been invested 50% S&P500 and 50% Aggregate Bond over the years, instead of spent by those screaming the loudest about the burden of entitlements.
    A point to take into account: people who have contributed to a 401k for 40 years will take out a heck of a lot more than they put in!