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The Great Ponzi Debacle

Over the past weekend, my county seat paper, the Marion, Indiana Chronicle-Tribune, posted a syndicated column from the Washington Post about the current Social Security debate that is framed in four premises.

Social Security is a Ponzi scheme.

Ponzi schemes are scams where the first ones who pay in get their money out with dividends. These dividends come from the money paid in by subsequent payers. Sooner or later, the payers run out because the truth about the scheme gets out. The scheme collapses, and those still in the scam lose everything. It is called a Ponzi scheme after the man who ran one in its modern form in the late 1910's. Ponzi schemes always blossom, whether in good times or bad, for the same reason gambling is so popular: There are always suckers out there looking for some way to get rich quickly and without effort.

Oh, and the phrase pay-as-you-go is just another way to describe a Ponzi scam.

At least the columnist is honest enough to admit it. Most people would never think to equate any old-age pension to whatever Charles Ponzi (or Bernie Madoff or a host of con artists in between) were pushing.

The big difference between Social Security and a Ponzi scheme is that Social Security is compulsory.

The problem here is that this big difference is no difference at all. It does not occur to the columnist that the State can be evil, even if it does not mean to be. And, one day some generation is going to lose, indeed, will be forced to lose. I figure those losers will be my generation and those younger than mine.

A compulsory Ponzi scheme can fail if it cannot round up enough new participants.

Here is where we come to the greatest failing of the Boomers, that generation born from 1947 through the early 1960's: The Boomers did not bear enough children (although they certainly screwed enough) to sustain them in their old age through the scheme. Even the children of their children are not enough to sustain it. Worse, there are inadequate fallbacks: Traditional pensions are in decline; and with the long-term decay and instability of the stock and bond markets, IRAs are not enough for most Boomers' retirements, no matter how much is saved.

The columnist states Demography is destiny, but he has no idea that this is worse than he can ever know.

This is one Ponzi scheme that can be saved by adapting to the new demography.

The columnist is deluded if he thinks tweaks and frobs to the scheme will save it.

At this point, I will quote from one of my seminal books, from 1983:

Accompanying the mining of the capital stock, and the consequent economic decline, are demographic events that are altering the profile of the population. The social security system, already enfeebled by the twin impulses to buy votes by granting benefits while defering tax increases, will be incapable of support by an aging population. In 1935, when the system was begun, there were eleven people in the labor force for every one that was more than sixty-five years of age. Now the figure is three to one. In forty years [from 1983] it will be two to one. It is inconceivable that people trained to regard themselves as the center of the universe will each agree to provide half the support needed by a retired person. In 1980 the Joint Economic Committee of the Congress warned: This potential time bomb could explode.

The bomb is worse than the committee realized because it did not consider the intersection of demography and ideology. When there are too many people for the resources, an obvious solution is to reduce the number of people.

— Herbert Scholssburg, Idols for Destruction, 1983, p. 288-9.

Most of the debates against Social Security being a Ponzi scheme do not take into account the decay of the American economy as it tries to an ever larger State and the demands and stresses put on it by its immoral politicians. Whether it is Clinton's treacherous NAFTA or Bush the Younger's two wars or the bailouts of incompetent finance capitalists or Obama's health care folly, the weight of the State sops up capital that small and mid-sized businesses could use to invest in themselves and hire more workers. A prodigal citizenry only now is beginning to save their money again — despite the whines of economists that they are destroying the economy, when they are in fact disconcerting multinational firms by not buying their imported goods — but it is too little, too late. None of this will help in providing funds for Social Security as it begins to accept the first Boomer retirees the year after next (when those born in 1947 reach age 66).

I have no economic answer to the coming Social Security debacle. I know that my social security taxes are paying for my mother's retirement (and I am willing to do so). I know that there will be nothing for me when I reach age 67, when I am entitled to draw benefits — assuming they do not move the retirement age to, say, 70. But then, the centers of the universe described above may well decide to reduce the number of retirees. This is not at all far-fetched: Some of the Republicans last week proved ready and roaring to do the reducing, from the way they cheered when, during the Republican presidental candidate debates of 12 September 2011, Ron Paul was asked whether it was okay to let a comatose youth with no health insurance die.

Yes, the coming generation may well give to the Boomers the lethal injection that is their just reward for a lifetime of selfist decadence.

Written by Andy West on 19 September 2011.