Ponzi Scheme Pedigree

Given that pundits as diverse as Thomas Friedman and Karl Rove have their conventional wisdom knickers in a twist over Rick Perry doubling down on his position that Social Security is a Ponzi scheme, it is instructive to look at where that term has been used before to describe the American Social Security system and by whom.

Consider these two statements.

"The beauty of Social Insurance is that it is actuarially unsound"(italics in original)"

"A growing nation is the greatest Ponzi scheme ever devised. And that is a fact, not a paradox."

They were written by economist Paul A. Samuelson, a proponent of Keynes, in his February 13, 1967 Newsweek column which carried the subhead Something for Nothing?   Samuelson, a Nobel Prize winner, wrote an Introduction to economics textbook that has been in print since 1948.  Indeed, every Baby Boomer who had to take Econ 101 and 102 probably used Samuelson as his text was ubiquitous from the 1960s until economic events of the 1970s challenged his Keynesian biases.   Samuelson's column was actually a defense of the system at a time when the first fault lines were just beginning to emerge.  The full quotes can be found here.  The rosy scenario mentality is illuminating in its arrogant and unrealistic assumptions, and how badly Samuelson missed the boat on the future shape of America.  

When Samuelson wrote these words the first Baby Boomers were about to graduate college and the economy was growing nicely.  The prevailing assumption seemed to be that like their parents the Boomers would marry, have large families and that the economy would continue the Post WWII prosperity unfettered by the inflation and oil shocks that loomed just over the horizon.  In fact the twin results of the 1960s attempt to fight a costly war while expanding social programs were about to set off an extended cycle of stagflation.  In addition, life expectancy was already up considerably from when Social Security was first enacted in the 1930s, while birth rates were already dropping and the breakdown of the traditional family had begun.  The economic cost of the looming moral breakdown and the rise of political correctness was also something no one considered.  A culture in which no one is held responsible for bad behavior and everyone is collectivized into victim groups is a culture in which basic competence is soon in short supply. 

A further cold hard fact that Samuelson failed to consider when he wrote the above was that just two years earlier the amount of benefits to be paid out of the system had been greatly expanded via the adoption of Medicare. 

The strain on Samuelson's upbeat assumptions that a growing economy and  expanding population would give future retirees something for nothing in pereptuity were about to be increased past the breaking  point even by politicians who couldn't resist buying votes with ever more benefits to current seniors.   As John Attarian notes in his book
Social Security False Consciousness and Crisis

Reflecting this hubris, benefits were recklessly expanded, by 13 percent in 1968, 15 percent in 1969, 10 percent in 1971 and a staggering 20 percent, in a political bidding war between President Richard Nixon and congressional Democrats, in 1972, for a total benefit surge in 1967-972 of 71.5 percent.  Annual cost-of-live-adjustments (COLAs) insulating benefits from inflation, also enacted in 1972, began in 1975.

The result was a fourfold assault on the system.  Higher benefits and longer lives for those already collecting, lower births and fewer economic prospects for those paying in. 

Like all Ponzi schemes, the winners in Social Security were those who came in early.  The first retirees did get something for nothing.  The so called Greatest Generation made out even better.  They were the first generation relieved of the age old need to support their own parents and they came in early enough to fully collect fully on their own contributions.  Many of the boomers are not going to be as lucky for three reasons.  Not only is the system running out of money, but many of them failed to save or are over invested in illiquid real estate.  Add in those who made decisions in their own personal lives that frayed social ties.   Many didn't have children who can help them as they age.  Others don't have good relationships with their children and grandchildren because of issues of abandonment and divorce. As a result, for many boomers the retirement years are looking far from secure.  Things are also grim for those under 50, as they will certainly not get out what they paid in; but they are in peak earning years and have time to adjust.  As for anyone under age 30, many of them  have inherited the worst of all possible worlds: chaotic personal lives, the need to have to save for their own retirement, a terrible job market, student loans for degrees in fields that aren't economically viable, and a government that will compel them to bail out their elders.  
Samuelson's incredibly optimistiic assumptions must read like a fairy tale to them.  

HT  Ed Driscoll