The following excerpt comes from Mark Thoma’s post SSA Historical Research Note #25: Ponzi Schemes vs. Social Security:

The Logic of Pay-As-You-Go Systems In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called “pay-as-you-go” system. Some private pension systems, as well as Social Security, have used this design. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

So we could image that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants. (There does not have to be precisely the same number of workers and beneficiaries at a given time–there just needs to be a fairly stable relationship between the two.) As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme…

I originally saw the excerpt on Brad DeLong’s blog in the article Social Security as a Non-Ponzi Scheme.  It is hard to identify who is writing and who is editorializing on things that come from Brad DeLong’s blog, so I post the trail here for those readers to whom it might make a difference.

To me the hallmarks of a Ponzi scheme are:

1. Offering unbelievably high returns on an investment.
2. Requiring a clearly impossible, perpetual, geometric increase in the number of new investors to sustain the unbelievable payouts to the earlier investors.

Given the claims of the detractors of Social Security that the retiree could get a better return by investing privately than by putting money into Social Security, Social Security is not offering unbelievably high returns. It is actually offering lower returns.  If allowed by the politicians to be run like a private pension system (not individual accounts invested at retail by the beneficiary),  Social Security could pay higher returns than it does now.

The number of new investors compared to earlier investors is known to rise and fall over the lifetime of Social Security, but there is no perpetual geometric increase (I just said sometimes it decreases), and yet the system is able to maintain stability for the foreseeable future.

So neither of these two major hallmarks of Ponzi schemes is present in the Social Security system.  These facts are clear even to the people who claim that Social Security is a Ponzi scheme.  What does that tell you about the people who make such claims?

If the detractors were clear (I can’t say “honest”) about their claims, they would be saying,

“Social Security is not a Ponzi scheme because it offers a substandard return on your investment. If that doesn’t make you want to opt out of Social Security, then you should know that Social Security is a Ponzi scheme.”

Then the judgment on their veracity would be easier to make.

The Letter of Experts Opposed to Cuts in Social Security Benefits is fairly brief.

To see the lengthy signature list, click on the above link to the article.

As experts on Social Security, the federal budget or the economy, we write to correct a commonly held misconception – that Social Security somehow contributes to the federal government’s deficit. In fact, Social Security’s Old Age and Survivors Insurance Trust Fund and its Disability Insurance Trust Fund are prohibited from paying benefits unless those funds have sufficient income and assets to cover the cost, and they have no borrowing authority to acquire the requisite income and assets. Consequently, Social Security is prohibited by law from deficit-spending and thus contributing to the federal deficit.

We also write to point out that Social Security’s benefits are modest both compared to those of other industrialized countries and in absolute terms. Its administrative costs are also modest, amounting to less than a penny of every dollar expended. The modest size yet increasing importance of Social Security’s life insurance, disability insurance, and old age annuities, given the trends in private sector retirement arrangements, savings, home equity and stock values, leads us, as a policy matter, to recommend strongly that Social Security’s manageable shortfall, still decades away, should be eliminated without cutting benefits, including without raising the retirement age.

Thomas Geoghegan in his article Get Radical: Raise Social Security gives us the kind of thinking that we need in our politics.

Right now Social Security pays out 39 percent of the average worker’s preretirement earnings. While jaws may drop inside the Beltway, we could raise that to 50 percent. We’d still be near the bottom of the league of the world’s richest countries — but at least it would be a basement with some food and air. We have elderly people living on less than $10,000 a year. Is that what Democrats want to “save”?

…

A bigger pension — a raise in Social Security benefits — is the stimulus this demoralized country needs. Come on, Democrats: think of F.D.R., Robert Wagner, or heck, even Lyndon B. Johnson. Let’s ask ourselves: Who are we for?

At the very least, this is the kind of bargaining position from which the Democrats need to start.  Instead of conceding the point to the other side and then starting negotiations, progressives need to decide where they want to end up and start way to the left of that point.

As it is now, the radical right must be thrilled.  They start way to the right of where they think they can get and somehow end up pretty close to that starting point.  The other side just caves because of a lack of ideas and skill.

According to RawStory in the article Paul Ryan Already Benefited From The Social Security Fund He Now Wants To Gut,

Ryan’s congressional ascent, all the way to the top spot on the Budget Committee, began with his Social Security-funded college education.

I don’t know whether to file this story under “No good deed goes unpunished” or “I got mine, to heck with you.”

From www.strengthensocialsecurity.org/social-security-keep-it-working, I have learned the following:

On February 19, the U.S. House of Representatives, led by a strident Republican majority, voted 235-189 to pass a budget (H.R. 1) that proposes deep cuts to the Social Security Administration (SSA). The SSA ensures that seniors, disabled Americans and survivors of beneficiaries receive their hard-earned benefits.

The House-passed budget cuts would furlough SSA workers for as much as 1 month out of the next 7 months – and result in closed offices, unanswered phone calls, and significant delays in processing new claims.

The Senate must also pass a budget by March 4 and reconcile it with the House, or else the government could shut down. We need to be sure that the Senate does not cut Social Security. Join us in this critical effort!

There are two rallies in Massachusetts.

Social Security Keep It Working
Madison Place, 51 Myrtle St. Worcester MA 01608-2027
March 2 at 12:00 PM

Social Security Keep It Working
10 Causeway St Boston MA 02222
March 2 at 12:00 PM

Got an email from Democracy For America.

Steven –

Either House Majority Leader Eric Cantor doesn’t understand how Social Security works or he doesn’t care.

Just hours after President Obama said that Social Security cuts and privatization are off the table, Cantor said that Social Security had to be cut to balance the budget. But here’s the thing: Social Security does not and never has added a single dime to the federal deficit.

Let me try to explain this to Mr. Cantor. Social Security is paid for through the payroll tax. Currently, the payroll tax raises way more money than Social Security pays out and things are projected to keep going this way for another couple of decades.

The wars in Iraq and Afghanistan? They add to the deficit. Tax breaks for billionaires? They add to the deficit. Subsidies for big oil? They add to the deficit. Bailing out Mr. Cantor’s friends on Wall Street when they make a bunch of shady deals, cause a financial crisis and almost ruin the world economy? That adds a lot to the deficit.

Simply put, Social Security will run a surplus for decades. The rest of the budget runs a deficit. So, why are we even talking about Social Security?

Here’s why: Eric Cantor and his right-wing friends want to destroy the program. That’s the only reason we’re having this conversation. Join me now and let’s send Eric Cantor and other members of Congress a message — Keep Social Security safe, stable and secure.

Please sign the petition now.

Eric Cantor’s comments aren’t anything new. Right-wing Republicans have been trying to tear down Social Security for generations. It’s the holy grail of the right-wing.

Now Republicans are playing with fire — they’re threatening to shut down the government. They’re holding the debt ceiling hostage. They’ll do whatever it takes to put cutting Social Security on the table.

But America is a community. We stand up for one another — including our seniors. That’s why DFA has launched it’s biggest campaign ever to push back against the right-wing lies and spin and to push a real solution to keep Social Security safe, stable and secure forever.

See, right now people like Mitch McConnell and Sarah Palin don’t pay the same percentage of their income into Social Security that most Americans do — and big surprise — neither does Eric Cantor. That’s because the tax is capped at $106,800, but most Americans don’t know it. All we need to do is scrap the cap and make the payroll tax fair and equal for everyone to keep Social Security safe, stable and secure.

Join the movement to beat back the right-wing and keep Social Security safe, stable and secure.

When we stand up for our values of community, security and liberty, America wins.

-Arshad

Arshad Hasan, Executive Director
Democracy for America

Democracy for America relies on you and the people-power of more than one million members to fund the grassroots organizing and training that delivers progressive change on the issues that matter. Please Contribute Today and support our mission.

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Republicans’ Deficit Ceiling Bluff an Attack on Social Security is the title of an interview on The Real News Network with William Black, author of The Best Way To Rob A Bank Is To Own One. Below are some excerpts from the transcript of the interview.

.JAY: So what do you make of the latest insanity?

BLACK: Well, it’s right out of the movie Blazing Saddles. And, of course, the famous case is the sheriff is surrounded by the angry townspeople about to lynch him, so he takes out his pistol, points it at his head, and says, don’t move or I’ll shoot–

JAY: So then it’s kind of a silly bluff, because there’s no way that the Republicans, as far as we can understand it, would ever allow such a thing to happen, you–one would think an easy bluff for the Democrats to call.

BLACK: Well, but it’s not silly if you’re playing with people that don’t understand how to deal with bullies, and it doesn’t appear that the Democrats have figured–or at least key Democrats in the White House, have figured out that this is a standard ploy in game theory. And it was of course pulled on President Clinton. Remember, after the Democrats lost control of the House and legislature, the Republicans shut down the federal government, and expecting that Clinton would cave rather than have that happen. Well, instead, Clinton told the American people the Republicans were irresponsible and endangering the nation, and the Republicans lasted exactly one day. And once you call their bluff–then, of course, when they threatened it again, Clinton just smiled, and the Republicans went away and had to play nice.

JAY: The main argument that Graham and his colleagues are making is less about short-term deficit and more about long-term debt. You’ve seen these graphs where they show within 20, 30 years the debt ratio becomes unsustainable and you–. And so that’s why they’re going after retirement issues, ’cause in theory it affects long-term debt more while still allowing some short-term stimulus. You see this in Europe as well. They’re–the big austerity measures in Europe are mostly focusing on age people receive pensions. What do you make of this long-term debt issue?

BLACK: This is silly math that doesn’t make any sense, to take these curves and extrapolate them. And everybody knows that, by the way.

JAY: Bill, you say, well, everybody knows this about, you know, the fact that once growth begins, assuming it does, that these numbers start to change.

I found the article How the White House is Putting Social Security at Risk by Heidi Hartmann.  It was posted on the New Deal 2.0 web site.

As they came under increasing pressure from Social Security advocates, the White House released a letter on Friday from Social Security’s chief actuary confirming that the Trust Fund would lose no money.

But the Trust Fund is not actually the advocates’ main concern. They’re more worried about being able to get the payroll tax up again in 2012 after the emergency situation of a tanking economy has hopefully passed. The central problem is a political one. Already some Republican members of Congress have said that a move back to 6.2 percent will be seen as a tax increase (in fact, close to a 50 percent increase), always unpopular, especially in an election year.

In Bill Clinton’s defense of the tax capitulation, he claimed that all the economists (at least the ones he chose to listen to) said that the economics of the proposal was not so bad.  Even if we grant him that the short term economics of the proposal aren’t catastrophic, the politics of the deal is horrible.  The long term economics of the proposal may be quite horrible because of the bad politics.  The Heidi Hartmann article is but one example of why Clinton has a long track record of making policy choices that aren’t so bad economically in the short run, but what they do to the political situation has dire long term consequences.