Calling John Galt

If I am locked in a room with cobra, calling it a caterpiller isn’t going to dissolve the danger.

If there is any good to come from the Bernie Madoff swindle, it’s that it made enough of a splash to bring the word ‘Ponzi’ back into common use. Once you get people thinking about the elements of a Ponzi, you can get them to see the potential for abuse by a government entitlement that cannot ever equate. I’m not the only one calling out Social Security as being nothing more than a government-sanctioned Ponzi – I just didn’t expect there to be people who would rush to defend Social Security by tweaking the definition:

To begin with, if the fund runs short, the federal government covers the shortfall. How? By raising taxes on those who are current and future participants. Since “government” is us, there is no third party.

Attorney Algonquin J. Calhoun would explain it this way, “You see, Kingfish, we, the people, is the Ponzeyes and we is also the Ponzees.”

In contrast, Ponzi schemes have no way to balance the books because the guy who’s “Ponzi” has no intention of covering his clients’ losses, and every intent of convincing them that they are making a profit while they are contemporaneously losing their Palm Beach high rises and Harry Winston diamonds. 

Who says there must be a “third party?” And more importantly, Bill Cherry ignores the “third party” that is aggreived: tjhe incoming generation that will pay but not cash any checks from SSI – my kids, and his grandkids. The Social Security equation of entitlement is not sustainable.

Others have played with the definition as well, including – big surprise here – the Social Security Administration. If you scour the Social Security Administration site today, you’ll find only four references to the word “ponzi.” One is a transcript from a hearing in the 1980s, which clearly defines that at some point, there was recognition we’d have a problem:

PROFESSOR ROSEN: I did not mean to imply there is deception. I think the question that Dutch and I second is the control of political pressures. So it’s an agency problem; that’s what we’re really talking about. How does the public transfer its votes to politicians?

MR. BURTLESS: Well, you’re the one who mentioned the word Ponzi. There’s some sense in which one generation or one group is left holding the bag and that is not –

PROFESSOR ROSEN: It’s this generation; it’s this young generation.

PROFESSOR LEONARD: No, but Jerry I mean, I agree with everything you said what people understand about this system. They understand that the money goes in now and that it isn’t waiting there for them. That doesn’t change their perception that there is a set of benefits that also ought to be waiting for them, as a result of the fact that they’ve paid into that system. I am not talking about a feeling of righteous entitlement at the age of 28. I’m talking about the feeling of righteous entitlement at the age of 65.

They’re right. Okay, they did pay into the system over a long period of time. They did support it and it is — they are deserving of having some of it — something come back to them. I know it’s a problem of politics about a fraud. I am looking at the politics of that and saying “boy that is a locomotive that I wouldn’t want to try to stand in front of!”

MR. BURTLESS: But the political support among 28 year-olds for the system cannot arise on the fact that they believe that they’re going to get benefits, because if you ask them, they don’t think they will.

Language got a little more nuanced in 1998, a year which will live in liguistic parsing infamy. This from findings of the White House Conference on Social Security (p 43):

For those public employers that have elected to have their employees covered by Social Security, a key area of concern is the seemingly never ending confidence crisis being faced. As we encourage our participants to plan for their financial futures through personal savings, employer sponsored pension plans, and Social Security, we frequently hear from those participants (particularly the younger ones) that Social Security is nothing other than a 1930’s ponzi scheme that for them will be a financial burden rather than a financial blessing. To a certain extent, this is understandable in light of the frequency with which the rules seem to change and the continual bombardment of negative press. Rule changes in such areas as eligibility age, benefit levels, COLA’s and contribution amounts make it virtually impossible for even the strongest advocates of financial planning to develop viable long term arrangements.

So there’s an “understanding” that we might have a perception problem. But that’s not the one they’re worried about! Look at the very next sentence: 

With regard to negative press, there are those who believe that the dire predictions of failure simply set the stage for the demise of the Social Security system to be a self fulfilling prophesy.

Wow. Who knew that Social Security was going to be brought down by all of the poor young people who sent it bogus downer Karma, and not by the fact that such a system could never work in perpetuity. Apparently, this was admitted just a couple of years earlier, by the Social Security Advisory Council:

…we believe the proposal to increase the payroll tax rate by 1.60 percent—employee and employer rates combined—in 2045 is grossly unfair to a whole generation of citizens who cannot possibly defend their own political interests. This proposal amounts to nothing more than imposing a tax that we are not willing to pay ourselves on our grandchildren who have not yet been born. While we do not agree with many of the characterizations of Social Security as nothing more than a Ponzi scheme, we can understand why some citizens might resort to such characterizations when they see proposals of this sort.

You can understand that? Really?

Apparently, it was understood well enough that the SSA website had a nice page explaining just why it is not running a government-sanctioned Ponzi scheme. At some point it was taken down, but here is an internet archive page from 2001 that makes for interesting reading. It tries to define away the difference, calling Social Security a “pay-as-you-go” mechanism. After you’ve read that, you might come to the same conclusions I did below.

SSA Fallacy #1: We’re not a Ponzi because we don’t require a “doubling” of participants to continue. (Um, yes you do. You sustain rates and payments and eligibility age only when the demographics were in your favor. Now the tide is shifting, and so is your definition.)

SSA Fallacy #2: We’re not a Pyramid, so we’re not a Ponzi (after spending paragraphs explaining the difference between the two.)

SSA Fallacy #3: We’re a pay-as-you-go “pipeline” (ask Bernie Madoff how lucrative it can be to act as the conduit between the new investors and the old ones.)

SSA Fallacy #4: SSA defines Ponzi as “perpetrator tries to skedaddle before anyone can collect.” (That might be the case, but since the organism known as the Federal Government has the power to force citizens into participating, there’s no need to skip town. Why isn’t this classified as violence against the unborn?)

There are too many labyrinthine twists of logic required to duck the definition of a Ponzi. Like it or not, we’re stuck in the room with that cobra. And sadly, too many of us are giddy with joy, waiting for the moment that cobra will spin himself into a cocoon and transform into a majestic butterfly.