This post appeared earlier under the title “Ponzi Schemes and the Ponzi Schemers.” I’m republishing it because our just confirmed Office of Management and Budget (OMB) Director is one of those still spreading that myth among the American public, and there is a good possibility that if Trump decides to push the line that the austerity hawks are selling, then he, too, will begin to call Social Security “a ponzi scheme” too.

And then he will use that meme as a rationale for delivering the $2.8 Trillion in its special Treasury bond accounts to the private sector. Now, here is my previous post on the “ponzi scheme” fairy tale.

 

Rick Perry’s loose talk about Social Security being a ponzi scheme, is generating a lot of contrary ink, or electronic bits as the case may be. Cullen Roche has provided an excellent analysis, accompanied by a great discussion which begins this way.

First of all, let’s get the definition of a ponzi scheme right. According to the SEC, a ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” Quite simply, a ponzi scheme involves the promise of future payments that current returns do not justify.

So, a ponzi scheme is:
— an investment opportunity
— whose promoters mislead prospective investors or “marks.”
— whose investment organization makes payments to existing investors from funds paid into the investment pool by new investors
— whose promoters promise future payments that current returns on investment do not justify.

However:

— Social Security is neither an investment opportunity; nor an investment. “investments” are private sector voluntary business transactions involving risk to the investor and offering the possibility of returns on one’s investment, while SS is a public sector program requiring payments from members of a specified proportion of their income. In return, they become participants in the program and are promised a particular level of benefits, correlated loosely to the amount of their payments, when they retire at a specified eligibility age. The level of benefits they are due is cost-of-living adjusted throughout the period of their participation in the program. There is no economic risk involved in any of this; though there is political risk, since politicians may welsh on their promises and commitments to participants.

— In addition, SS is different from a ponzi scheme in that its “promoters” don’t intentionally mislead participants in the program. The details about SS are very transparent, and are recorded in great detail on its web site. Lies about the program and fraudulent claims about its benefits are wholly absent from its web site.

— Next, SS payments are not made to recipients from new funds paid into the program. There is no such operational connection between payments and FICA collections.

Payments go to retirees from the Treasury General Account (TGA). FICA collections end up in Treasury Tax and Loan (TT&L) Accounts, and are not directly connected to “funding” SS payments, since reserves in the TT & L accounts are destroyed by the Federal Reserve before they get to the TGA (see below).

The Treasury keeps an accounting record of the payments from FICA collections and periodically adds the results of an interest calculation to the sum resulting from FICA collections. This is the total of what is owed to the Social Security program by the Treasury. But that total is not something the SSA has any control over. Nor does it determine Social Security payments of benefits. The only thing that does is Congressional Appropriations mandating SS payments.

— Lastly, unlike ponzi schemes, SS “promoters” do not “promise future payments that current returns on investment do not justify.” This is true first, because there are no “returns on investment” for SS, since it’s not an investment in the first place. But second, even if one chooses to erroneously consider current SS benefit payments as “returns on investment,” it’s very clear that the history of SS benefit payments since the inception of the program under FDR does fully “justify” expectations that future payments will occur as projected by the SSA and the Federal Government. Since the program’s inception, every participant has received the benefits due to them in consequence of their participation in the program. The history of this performance is now more than 70 years. This is not the pattern of a ponzi scheme; but one of a Government entitlement program whose benefits are guaranteed by the full faith and credit of the monopoly currency issuer in the United States.

Some will look at what I’ve said, brush aside the logic and the very important contextual framing and will remark. as a commenter did in reply to Warren Mosler’s fine analysis of why SS is not “in ponzi.” The commenter said:

You are splitting hairs. What will happen when the the money being paid into the SS system is depleted by the money being paid out to people who have previously paid in but now are recipients? The exact same thing that happened to the participants of a Madoff style ponzi scheme. The system will tank. That’s close enough.

 

Comments like this assume that SS is a fund that can be depleted, that the Government requires USD in “the fund” to make its payments, and that the fund can only be augmented by FICA receipts. This assumption is wrong, but it leads to claims that SS must be “reformed” by raising the Salary Cap for FICA payments, or by raising the full benefits retirement age, lest SS is rendered unable to meet its obligations.

This is a false problem however, because it ignores the capability of the US currency issuer, the Government to create the currency necessary to pay its obligations at will. Professor Stephanie Kelton has put the real issue very well.

Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.

I think this really underlines how arbitrary the projections of financial doom from the Peterson crowd, CBO, other Government agencies, and people like Rick Perry, Paul Ryan, and Mitt Romney are. Apart from the silly and unreliable SS projections as far out as 25-65 years from now, the predictions of doom are really based on provisions in law that Congress can change at any time, in an afternoon. Which means that just like the fake national debt crisis, the fake Social Security solvency crisis is Congress’s fault.

But this brings us to an even more central issue. Assuming for the sake of argument that SS is a ponzi scheme, then who are the “ponzi schemers,” — the managers who want to structure things so that the promised returns are eventually not paid to “the marks” — the retirees in the program, and who also want to use the bonds issued to the program to enrich private sector managers, rather than the retirees?

I think the answer to this last question is plain. The very people who are questioning the sustainability of SS, and other entitlements, and, in particular, Rick Perry, Mitt Romney and the deficit hawks who are making claims of insolvency, are the people proposing “reforms,” that will break SS’s promises to retirees and future retirees, while failing to ensure that SS can always make its payments, and can never be “in ponzi.”

They are the “managers” who are scheming to put SS “in ponzi” so that they can enrich their campaign contributors and the financial elites and deliver the financial outcomes to those elites that they think they are entitled to. These elites complain that working people and regular Americans aren’t entitled to social safety net benefits, and they speak scornfully about the right of the rest of us to a decent life free from want and fear.

But it is they whose entitlements to get richer at any cost to the rest of us need to be denied and rejected. They are not entitled to sacrifice the rest of us on the altar of their greed, and we must not allow them to swindle us out of Social Security and other safety net benefits.

Let us now join the battle. It is the second New Deal or serfdom for us. Let us fight the good fight and put the plutocrats and the ponzi schemers in their place. Let us take our democracy back, and this time see to it that we never come close to losing it again!