The Social Security Ponzi Scheme Paradox
Erik Chavez
Issue date: 10/14/04 Section: Perspectives
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Faced with the inevitable financial failure of social security, one would expect Presidential candidate John Kerry and President George Bush to address this topic with more emphasis than they have done to date. Most economists, including Alan Greenspan, argue for major reform for the program before it becomes unsustainable. Greenspan has said, "If we have promised more than our economy has the ability to deliver, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels. If we delay, the adjustments could be abrupt and painful."
It is possible to push back the inevitable failure with adjustments to the current system. The two adjustments most often discussed are increasing the age of retirement and reducing the annual inflation adjustments, which are tied to the CPI. However, both of these actions are analogous to a finger in the hole of a dike. Social security is not facing financial ruin because the baby boomers are coming of retirement age. It is failing because the structure of the plan more closely resembles a ponzi game than it does insurance. That is, it relies on the payments of young workers, new to the system, to pay for the benefits of retired workers. As birth rates decline, the value of payments surpasses the amount collected through taxes - the perfect recipe for ruin, which many countries with similar pension plans will face in the not so distant future.
The major reason social security will fail is that it attempts to provide a free lunch and as all the Chicago thinkers know, "there is no free lunch." This program is F.U.B.A.R. It is time that we turn off the power and begin to dismantle the third rail because the perverse incentives and mismanagement of wealth that it creates does a huge disservice to society. It is time we demand that our President and our Congress address this issue. The only possibility of ever dismantling this program is to have a lame duck president with a majority Congress of the same party.
It is possible to push back the inevitable failure with adjustments to the current system. The two adjustments most often discussed are increasing the age of retirement and reducing the annual inflation adjustments, which are tied to the CPI. However, both of these actions are analogous to a finger in the hole of a dike. Social security is not facing financial ruin because the baby boomers are coming of retirement age. It is failing because the structure of the plan more closely resembles a ponzi game than it does insurance. That is, it relies on the payments of young workers, new to the system, to pay for the benefits of retired workers. As birth rates decline, the value of payments surpasses the amount collected through taxes - the perfect recipe for ruin, which many countries with similar pension plans will face in the not so distant future.
The major reason social security will fail is that it attempts to provide a free lunch and as all the Chicago thinkers know, "there is no free lunch." This program is F.U.B.A.R. It is time that we turn off the power and begin to dismantle the third rail because the perverse incentives and mismanagement of wealth that it creates does a huge disservice to society. It is time we demand that our President and our Congress address this issue. The only possibility of ever dismantling this program is to have a lame duck president with a majority Congress of the same party.