A comment on my recent post made me realize that I’ve been wrong about Social Security this whole time. It isn’t quite a giant Ponzi scheme, but if we’re being flexible with our definition of Ponzi scheme it may still be the biggest.
Many people are happy to pay into Social Security thinking they’ll get a reasonable return on their “investment”. To the extent that that’s true, and that return is financed by other people paying in (rather than on actual investments) it’s a Ponzi scheme. But others don’t pay in voluntarily. To the extent that that’s true, it’s like theft but with the robber systematically dropping some of the money. Quasi-Ponzi scheme might be a better term. Social Security paid out $615B in 2008. Let’s guess $650B for 2012. If that was all happy money, it’s one big Ponzi scheme.
But the U.S. government has another project that more closely resembles a Ponzi scheme: Treasury bonds. Here people voluntarily fork over money for a return that is financed in part by later “investors” buying Treasury bonds. Of a $3.5T budget with a $1T deficit, 6% went to paying interest last year (that’s $223B). So 29% of the budget was deficit, and we might conclude that approximately $65B of interest (0.29*$223B) is “Ponzi-financed”.
So now the question is how much of Social Security is “happy money”? Anything more than 10% makes it the bigger Ponzi-scheme. But even if Social Security is heavily financed with “happy money” it is still taken at gun point while purchasers of bonds are there voluntarily. If the government were looking to save $223B and only Social Security benefits and interest payments were on the table, the more ethical choice is to default (if not repudiate). As I recall, I’m ripping off this point from Jeff Hummel.