Bernard Madoff pleaded guilty last Thursday, March 12, to running a massive Ponzi scheme that swindled investors out of some $65 billion. He seems likely to spend the rest of his life in jail. Some have suggested the Ponzi scheme should be renamed “the Madoff scheme” in honor of his audacious crime. In fact, it should instead be renamed “the Roosevelt scheme” because compared to FDR, Madoff was an amateur.
Yes, the biggest Ponzi scheme of them all was started by the former American president, and it is perfectly legal. In fact, it is run by the Federal government. It is called Social Security.In a Ponzi scheme, “investors” are paid returns from their own money and from that of subsequent dupes. The money is not actually invested. There are no actual returns. Funds are simply transferred from one group of people to another, and the whole house of cards collapses when there is no longer enough income from newer dupes to meet promised outlays.
Within a few decades—a time frame relevant for current 20- and 30-somethings—all of these unfunded systems are headed for collapse.
Sixty-five billion dollars is a lot of money, but it is chump change compared with the hundreds of billions that pass through the Social Security washing machine every year. According to economist Walter Williams , Congress currently collects about $785 billion in Social Security “contributions” and pays out $585 billion to Social Security recipients. The surplus is officially placed in a so-called “trust fund” that is nothing of the kind. In reality, the government just spends the money, and writes itself an IOU. The money is gone. Nothing is invested. No profits are earned. Funds are simply transferred from one group of people to another.
Due to demographic change, there are fewer and fewer workers supporting each retiree. Due to advances in health care, those relatively more numerous retirees are also living ever longer lives. Neither of these trends shows any sign of letting up anytime soon. Within a decade, the Social Security “surplus” will have become a deficit unless Congress either raises payroll taxes, or reduces benefits paid out (either directly or by raising the age at which retirees can start collecting benefits). Most industrialized countries have similarly unfunded, “pay-as-you-go” pension systems, though some (Chile, Australia) have adopted compulsory savings schemes, which are funded but have their own problems. Reforms in countries like Sweden have been more minor, preserving their essentially unfunded nature. Within a few decades—a time frame relevant for current 20- and 30-somethings—all of these unfunded systems are headed for collapse.
Ending Social Security abruptly would be patently unfair to all of those who have paid into the system for decades expecting it to provide for them in their sunset years. Any plan to kill the government-run scheme would therefore have to be phased in over many years. Former President George W. Bush tried and failed to get Social Security reform going—perhaps as a partial corrective to his otherwise big-spending ways. President Obama, on the other hand, seems to like the current system just fine. He has vowed neither to raise the age at which benefits begin nor to lower those benefits, counting instead on tax increases on the wealthy to keep the system solvent.
Why is it so hard to see the problem clearly and fix it by ending Social Security? One reason is that we care about the elderly poor, who are unable adequately to provide for themselves in old age. Of course, many of them could provide for themselves if they were allowed to keep their money and invest it. The small minority truly unable to look after themselves could always rely on voluntary charity.
But wouldn’t this pure, undisguised charity make the poor feel undignified, having to ask for assistance instead of receiving it as an entitlement? Wouldn’t it make them feel undignified also to be singled out for assistance instead of participating in a universal system? These are some of the arguments made in the 1930s by FDR and others. They amount to an argument for ersatz dignity, a plea to help those who are dependent evade the reality of their situation. But if dependence, whether through bad luck or bad planning, makes people feel undignified, does this justify faking reality?
I am not the first person to call Social Security a Ponzi scheme, and the charge has prompted supporters of the system to come to its defense. Mitchell Zuckoff, author of a book on Charles Ponzi himself, offered up one such defense in a recent Fortune column . After sketching the similarities between Social Security and Ponzi schemes, Zuckoff notes some key differences. First, Social Security is not a scam because everyone already knows the money is not invested. Second, Social Security is not doomed to collapse because it can be “tweaked and modified” to reflect changing conditions. Indeed, it has been modified many times over the years. Third, Social Security is morally good, aiming to provide for the needy, whereas true Ponzi schemes aim to defraud people for personal gain.
Congress currently collects about $785 billion in Social Security “contributions” and pays out $585 billion to Social Security recipients.
The question we must ask is whether Zuckoff’s differences are essential, or whether they merely indicate that Social Security is a particular kind of Ponzi scheme, namely, the kind a government would run. As it turns out, these differences are nonessential, and in no way undermine the case for doing away with the whole twisted apparatus. First, it is true that many (but surely not all) do understand the fact that their “contributions” are not invested. The Federal government, however, doesn’t need to fool people when it can force them to participate. (Zuckoff, to his credit, acknowledges this.) Second, the government’s regular tweaks and modifications to keep the ship afloat—raising payroll taxes or lowering benefits—would amount to a breach of contract if carried out in the private sphere. Every new tweak, after all, unilaterally makes Social Security a worse deal than it was before.
Zuckoff’s third point contains the implicit assumption that service to others is by definition morally good, while personal gain is morally suspect, or at least less noble. In fact, traditional Ponzi schemers are reprehensible not because they seek personal gain, but because they seek it illegitimately, by defrauding people. Well-intentioned or not, the Federal government’s Ponzi scheme also harms people, both rich and poor. Even those who make only modest “contributions” to the system could receive higher benefits upon retirement if they invested those same modest amounts conservatively for themselves. In the midst of the current financial crisis, this might sound counterintuitive, but the long run view is clearly in favor of private investment. The only real argument against private savings is purely paternalistic: Yes, people could easily earn more, but they might choose not to invest enough if left to their own devices. Translation: We, the government, know what’s best for you.
People who justly recoil from the idea of outright slavery and who rightly cheer the end of the military draft—two institutions that abrogate basic human rights—have no problem with the idea of conscripting their fellow citizens to provide for the retirement of others. They see that security in old age is a good thing, and they imagine that this good end justifies the forced “contributions” of all.
Implicit in this view is the idea that you do not belong to yourself. Others have a claim on some portion of your life without you having voluntarily come to any agreement with them. This idea of an unchosen obligation, though, is the same notion behind slavery and the draft, though admittedly in a milder form. The simple truth is that no one has the right to initiate the use of force against you. You wouldn’t accept it as legitimate if a gang of your neighbors showed up with pitchforks in hand demanding a slice of your paycheck; it is no more legitimate if they launder their efforts through the legerdemain of government legislation.
The current Social Security system fakes reality by mimicking investment for retirement when no such investment is taking place. It fakes reality by disguising dependence under a veil of universality. And it fakes reality by encouraging people to abdicate responsibility for their own lives and livelihoods. The bridge is out up ahead. How much longer will we wait before demanding a change of course?
If we left retirement planning to private individuals and enterprises, the vast majority of people, who are perfectly capable of taking responsibility for their own lives, would be encouraged to do so. This would not only work far better than the current system; even more importantly, it would accord each individual human being the genuine respect and dignity we all deserve.