Saturday, May 26, 2012

Explaining WHY is Social Security NOT a Ponzi scheme

When a business is suspected to be a Ponzi scheme, there are two general lines of defense, which goes like this:

Approach 1

A: Biz X is a Ponzi because of X, Y, and Z.
B: BizX is not a Ponzi because of R, S, and T.

Approach 2

A: Biz X is a Ponzi because of ____, ____, and ____.
B: Ponzi you say? No big deal. Social security is a Ponzi scheme. It's still here.

The problem with Approach 2 is it's an application of "so is everything else" defense, which is a variant of the "Tu Quoque" fallacy (which is a red herring).

However, I am going to address this specific fallacy, that Social Security is a Ponzi scheme. Actually, I am not. I am going to let a famous author, who basically wrote *the* book on Ponzi schemes, to bust this myth.

Cover of "Ponzi's Scheme: The True Story ...
Cover via Amazon
Mitchell Zuckoff, professional of Journalism, wrote the book "Ponzi's Scheme: the true story of a financial legend", and he wrote an article for Fortune magazine busting this myth.

According to Mr. Zuckoff, there are three differences between Ponzi schemes and Social Security

1) Social Security is completely transparent, Ponzi schemes are not. Ponzi schemes RELY on secrecy, a blackbox where you don't see the money trail

2) Social security is NOT doomed to fail, Ponzi schemes are. Social security can be revised, increase participation, decrease payout, and such, to achieve a balance. Ponzi schemes are doomed unless reformed, then it won't be a Ponzi scheme any more.

3) Social security is founded to be a social safety net, to PROVIDE money in case of problems. It *is* wealth transfer, but it is done openly and under auspices of government. Ponzi scheme has no such high morals. Ponzi himself realized his scheme is bogus. So did Madoff.

Therefore, when someone tries to defend a potential Ponzi scheme by mentioning "so is Social Security", he's trying to pull wool over your eye. Suspect he is doing so for some nefarious purposes.

EDIT: Thanks to reader Jabroni for pointing out the intro was a bit confusing.
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  1. Hi again,

    I don't think your example is a Tu quoque, a variation or a fallacy at all. You should change it to

    1 BizX is a ponzi scheme
    2 Social security is a ponzi scheme and it's still here.
    So what if BizX is a ponzi, jabroni!

  2. Me again,

    Read your other examples. So 1 and 2 are 2 people, one citing that it's a scam and two defending it. Now I get it. Haha.

    1. Uh, I need to rewrite that section. I meant it as two separate lines of defense.

  3. Try tellling young people today that they will get out say 60% of what they pay in as contributions during their working years, on top of having to pay say 50% of their gross wage into ss AND tell with straight face that ss is not doomed to fail.

    Had the world been limited to premises you carefully handpicked, sure, SS would be honest and sustainable.

    But the world is not like your premises. It is altogether different, not in the least bc the earlier generations knew that there's smth fishy in paying so little in and getting so much out, but money was so good they never questioned it.

    Now that it has changed -- rate of return on contributions is negative now -- the bottom will fall out of ss in POLITICAL sense. Nobody in general population will agree to get less than $1 out for $1 paid in. People PERCEIVE ss as govt-backed savings vehicle. Go to people and say "well we have to take away 40% of your savings" - if you were a politician, what do you think your chances for reelection would be after smth like this?

    *Pretending* that ss is insurance does not make it insurance. Insurance is against smth uncertain: you may have a car crash, or house getting on fire, but don't have to. Ss has been perceived and supported as *retirement saving* scheme, all the safer bc backed by govt. And frankly, this is more factual and closer to reality than trying to paint it in colors of insurance.

    SS is doomed already.

  4. see here for more actual data instead of thin, preselected assumptions:


  6. I think we're arguing different things.

    I have no doubt that without reform, Social Security is going bankrupt.

    But it is not FRAUDULENT transfer of wealth. It is transfer of wealth.

    Ponzi scheme, on the other hand, is FRAUDULENT transfer of wealth.

    One is fraud, the other is not.