Social Security is Essential, Efficient (Gasp!), and Definitely NOT a Ponzi Scheme: Part One of Two

Regardless of Donald Trump’s repeated claims that he wouldn’t contact Social Safety, Medicare, or Medicaid, the truth is that every one three of these essential packages are actually underneath assault from Trump’s workforce. Relating to Social Safety, a information report earlier this week (“Lengthy waits, waves of calls, web site crashes: Social Safety is breaking down”) describes how the nation’s indispensable public pension system is in peril of falling aside due to Trump administration cuts.

It’s troublesome to learn such information with out concluding that that is deliberate sabotage by the White Home to kill an immensely well-liked program that Republicans have lengthy wished to destroy however have been unwilling to assault by way of aboveboard democratic means. In any case, why take the political warmth from voting to dismantle one thing that individuals love and on which their lives in lots of instances actually rely, particularly when it’s potential to destroy it from inside—after which to assert that it was damaged all alongside?

That is horrifying to ponder, for 4 causes: Social Safety is probably the most profitable social program in historical past; it serves an important function; it’s amazingly cheap to run; and it’s a sustainable long-term monetary association. I’ll deal with the primary three of these claims tomorrow, however in right now’s Half One among this two-part column, I’ll concentrate on that final reality about Social Safety: it’s sustainable.

Why begin there? Republicans have for many years tried to misrepresent the funds of Social Safety by saying that it’s going to inevitably disintegrate. That has at all times been fallacious, however Elon Musk apparently in some unspecified time in the future got here throughout the once-fringe declare that Social Safety is a Ponzi scheme. When Musk will get a superficial declare in his head, he doesn’t let it go. And Trump then follows.

However Social Safety most assuredly just isn’t a Ponzi scheme. In reality, if it have been a Ponzi scheme, that might essentially imply that each privatized system of retirement would even be a Ponzi scheme. Certainly, banking itself can be a Ponzi scheme.

That’s all nonsense, however sadly, as a result of Musk has now dedicated to the false Ponzi propaganda, Republicans would possibly lastly achieve ending Social Safety for each present and future generations. That might be a tragedy, a tragedy made even worse as a result of it might be a totally unforced error that might spoil the lives of tens of thousands and thousands of People.

Not a Ponzi Scheme—Not Even a Little Bit

Because it occurs, a lot of my writing through the years right here on Verdict and in my tutorial work has targeted on Social Safety’s funds. Over the past 20 years or so, I’ve discovered myself writing variations on what in some methods quantities to the identical column almost each Spring, which is when the Trustees of the Social Safety and Medicare methods difficulty their annual studies. The discharge of these studies is adopted like clockwork by panicky information articles claiming that Social Safety will quickly be “broke” or is going through “chapter.”

All such characterizations are based mostly on a elementary misunderstanding of how the Social Safety belief fund works, which signifies that my writings have largely targeted on beating again that one particular false declare. As two amongst many examples, I wrote “Good Information About Social Safety” in 2018 and “Social Safety’s Good Information is Good Information” in 2022. Sure, it did really feel repetitive, as a result of it was. Irrespective of what number of instances that declare was debunked, opportunistic Republicans would repeat it advert nauseam, requiring one more refutation.

Against this, the false declare that Social Safety is a Ponzi scheme was nowhere close to the mainstream till now, and the one time that I felt the necessity to take any time to reply to that declare was in a Verdict column in 2015. Even there, nevertheless, the Ponzi accusation was solely considered one of many myths that I used to be attempting to bust, as a result of nobody able of duty had brazenly endorsed that lunatic assertion. Clearly, issues have modified.

What’s a Ponzi scheme? It’s a variation on a traditional pyramid scheme, which signifies that it’s a promise of future wealth that may solely be fulfilled by persevering with to recruit new suckers who pour new cash into the scheme. When there aren’t any new suckers left to dupe, the scheme falls aside.

How may anybody declare that Social Safety is in any respect like that traditional fraud? It’s a very simpleminded comparability: A Ponzi scheme entails bringing in new members, and Social Safety additionally entails bringing in new members. Obtained it? So as a result of some group monetary preparations that usher in new members are unsustainably fraudulent, all such preparations have to be unsustainably fraudulent. Sensible. (To be clear, there isn’t any motive to consider that Musk really is aware of what a Ponzi scheme is and even how Social Safety might be dishonestly described as one. Extra seemingly, he’s mindlessly repeating what he hears in the dead of night recesses of social media. Maybe he heard that calling one thing a Ponzi scheme is “un-woke,” and possibly even “based mostly.”)

The important thing, nevertheless, is that Social Safety may be (and has been) designed to be sustainable, which signifies that it want by no means collapse—and can solely accomplish that if political ideologues destroy it. In my 2015 column, I used a simplified instance to point out why Social Safety is sustainable:

Think about that two individuals are working, one youthful and one older, and there’s additionally one baby and one retiree of their little neighborhood. The employees have a mixed revenue of $100,000. They agree that they may spend $25,000 on the kid, $25,000 on the retiree, and devour $25,000 every whereas they’re working. In addition they agree that this may proceed ceaselessly. Later, when the kid begins to work (and is changed by one other baby), and the retiree has died (changed by the older employee), there are nonetheless two staff and two non-workers, and everybody can nonetheless devour $25,000 every.

The purpose is that this technique is sustainable. It doesn’t require discovering new individuals to affix the system, and it makes no false claims about how the cash is getting used, or the place the profit funds are coming from. It’s a pay-as-you-go system, and it’s clearly not a Ponzi scheme.

In different phrases, the brand new members who be a part of Social Safety every year by coming into the U.S. labor drive usually are not new suckers however are merely members in a system that enables them to construct up credit that the system will (except Trump and Musk have their manner) be honored sooner or later. The true-world computations grow to be extra difficult due to wage progress and altering demographics, however the reality is that even probably the most pessimistic forecasts of Social Safety’s future have mentioned that at worst the long run payouts may not be as massive as we hoped. That doesn’t, nevertheless, in any manner make the system a Ponzi scheme. It merely signifies that accountable monetary managers know the way to make changes alongside the best way in response to modifications in reality-based forecasts.

Is the Total Banking System a Ponzi Scheme?

However Social Safety’s detractors would possibly now say: Aha! So that you’ve admitted that Social Safety advantages may not match what has been forecast. That signifies that individuals ought to be capable of make investments their very own cash to arrange for their very own retirement—that’s, we want privatization!

As an preliminary matter, observe that this fully shifts the argument. Social Safety just isn’t a Ponzi scheme, so its detractors rapidly change the topic by claiming that it’s nonetheless supposedly dangerous in another manner, like probably offering decrease charges of return than some idealized kind of privatization. Even setting apart the upper charges and far scarier market threat that might be concerned in shifting to a system with non-public retirement accounts, nevertheless, there’s a elementary contradiction at work in that argument.

How do non-public retirement financial savings accounts work? Folks take among the cash that their employers pay them throughout their working years, setting these {dollars} apart and placing them right into a financial institution (or different monetary establishment) to be withdrawn later, with curiosity. However this entails precisely the identical “new members” requirement that those that falsely decry Social Safety’s (nonexistent) Ponzi-like construction concentrate on, in two methods.

First, banks don’t put our retirement financial savings into vaults after which open the vaults once we retire. Banks take almost all of our deposits and instantly lend them to debtors (who then purchase homes, begin companies, and so forth). These debtors, by the best way, can pay larger rates of interest than the banks promise to pay their depositors. Why do we all know this? As a result of that’s the enterprise mannequin of banking in a nutshell: absorb cash with the promise to pay curiosity to depositors, lend out cash with the requirement to obtain bigger curiosity funds from debtors, and pocket the distinction. The banks haven’t any selection however to lend out depositors’ cash, as a result of in any other case they may earn no earnings.

That signifies that when new retirees arrive on the financial institution to withdraw cash from their retirement financial savings for the primary time, the financial institution doesn’t “give them again their cash,” as a result of the financial institution loaned out that cash way back. The financial institution can solely honor withdrawal requests by drawing from new funds which can be arriving from debtors who repay their loans. And if the debtors don’t repay (that’s, in the event that they default), the financial institution will probably be bancrupt. Furthermore, when the financial institution loses deposits as retirees begin to attract down their balances, it tries to convey new staff into the financial institution to begin their very own new retirement accounts, beginning the cycle once more.

The second manner that non-public retirement accounts essentially depend on “new members” goes to the very function of saving for retirement: individuals need to cease working however to proceed consuming (housing, restaurant meals, medicines, and so forth), and somebody should produce all of these items that retirees need to devour. That may solely occur if new staff are introduced into the work drive, which signifies that the whole financial system is just sustainable with fixed turnover and new members becoming a member of the system in perpetuity.

That’s, if I retire and say that “I’m supporting myself with my very own financial savings,” that may solely be true if the cash that I’m withdrawing from my retirement financial savings account should purchase issues. If there aren’t any youthful individuals producing what I would like to purchase, I can say “However I’ve cash!” till I’m blue within the face, however I can not eat cash.

Briefly, if the individuals who assault Social Safety need to say that it’s a Ponzi scheme as a result of it solely works if new members are introduced in on an ongoing foundation, then that’s true of any retirement system, regardless of how it’s financed. Certainly, it’s true of the whole monetary system, as a result of the returns that we earn on any cash that we put into our financial institution accounts can finally solely be paid due to the manufacturing of actual items and providers within the nonfinancial economic system.

In Half Two of this column tomorrow, I’ll focus on how the Social Safety system is an irreplaceable and surprisingly cheap strategy to assist People of their retirements. For now, nevertheless, the massive takeaway right now is that the facile comparability between Ponzi schemes and Social Safety fully misunderstands how each methods work—and the way basically completely different they’re.