Ponzi on the Potomac

Published September 23, 2011

Ida May Fuller worked as a schoolteacher and secretary during her long life – a life without marriage, children, political power or business influence yet a life that achieved one of the greatest returns on investment in American history.

The woman who came to be known to family and friends in Brattleboro, Vt., as “Aunt Ida” turned less than $25 into nearly $23,000.

On Jan. 31, 1940, Ida May became the first person to receive a Social Security check. By the time she died on Jan. 31, 1975 – exactly 35 years after receiving her first check – she had collected $22,888 in benefits. She had paid just $24.75 into the Social Security system.

Defenders of Social Security declare it’s not a Ponzi scheme, as Texas Gov. Rick Perry described it in a recent Republican Party presidential debate. One hallmark of a Ponzi scheme is that the first ones in make out like bandits and those who get in late get robbed.

Baby boomers and later generations – we’re in late. None of us can expect to receive nearly 1,000 times more from Social Security than we pay in. But are we in a Ponzi scheme?

Yes, says economist Paul Krugman, winner of the Nobel Prize in economics and leftist columnist for the New York Times: “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.”

Yes, said leftist Nobel Prize-winning economist Paul Samuelson. In 1967, before the changing demographics noted by Mr. Krugman were understood, Samuelson defended Social Security by writing that “the beauty of social insurance is that it is actuarially unsound.” He added, “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.”

The Nobel Prize-winning free-market economist Milton Friedman in 1999 wrote a column on Social Security for the New York Times headlined “The Biggest Ponzi Scheme on Earth.”

When left-leaning and right-leaning winners of the Nobel Prize in economics agree Social Security is a Ponzi scheme, surely there is something to the charge.

Friedman’s “Biggest Ponzi Scheme on Earth” column highlighted another hallmark of Ponzi schemes: The “investments” are no such thing.

“Taxes paid by today’s workers are used to pay today’s retirees. If money is left over, it finances other government spending – though, to maintain the insurance fiction, paper entries are created in a ‘trust fund’ that is simultaneously an asset and a liability of the government,” he wrote. “When the benefits that are due exceed the proceeds from payroll taxes, as they will in the not very distant future, the difference will have to be financed by raising taxes, borrowing, creating money, or reducing other government spending. And that is true no matter how large the ‘trust fund.’ “

Then there’s the Social Security Administration itself, which sends regular statements to workers. Look closely, and you’ll read, “Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law covering benefit amounts may change because, by 2037, the payroll taxes collected will be enough only to pay about 76 percent of scheduled benefits.”

Would you voluntarily invest in something if you knew there would be just 76 percent of the money needed for the promised payout?

At least Ponzi’s victims were not forced to participate in his money-losing schemes.

Steve Stanek is a research fellow at the Heartland Institute in Chicago.