“And that is why Social Security is a Ponzi Scheme even without an element of fraud.”

September 8th, 2011

Read: The World According to Nick – Is Fraud Required to Make Social Security a Ponzi Scheme?.

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11 Comments Add your own

  • 1. Nick  |  September 8th, 2011 at 11:21 am

    Thanks for the bump :)

  • 2. Debunked  |  September 8th, 2011 at 11:53 am

    So, are Treasury Bonds a Ponzi Scheme? Because Social Security invests in those.

    Also, you also forgot to expand upon the fact that Ponzi Schemes tend to promise substantial rates of return in very small periods of time while
    Social Security only offers modest rates of return over very large periods of time.

    Social Security is not meant to be a long term high yield investment. It’s meant to be exactly what it’s name suggests – a safety net for society as a whole.

    Basically, if you take the definition that a Ponzi Scheme is anything that only works because it pays previous investors via subsequent investors, then I make the argument that capitalism itself is a Ponzi scheme.

    People don’t “create” money. Investments don’t “create” money. Money, in it raw liquid form, can only created in one of two ways.

    1. Government prints more of it (which reduces the value of each dollar out there, and is NOT indicative of a Ponzi Scheme).

    OR… (And this is where things get interesting)

    2. Somebody takes out a loan for more money than the bank they are loaning from actually possesses. They pay that loan back over many years using money they have earned over time. This, in essence, increases the amount of available funds for everybody. But those funds they paid back the loan with must have originated from somewhere. Did government print more money or did somebody else lose money in the process? If the government didn’t print more money AND the raw amount of money everybody has increased in that period, then the answer is simple. The money they earned over time comes from other people who have money that, at some point, originated at some other loan. Thus, previous loans are only able to be paid for by subsequent loans.

    But then, what happens when people stop taking out loans? The exact same thing happens that would cause the collapse of a Ponzi Scheme! The subsequent investors (“loanees”) cause the total available capital to stop increasing and the entire system collapses. And thus, by your definition, capitalism is a Ponzi Scheme.

  • 3. John Foust  |  September 8th, 2011 at 12:04 pm

    Nick’s argument is no different than the standard Libertarian argument against the involuntary nature of taxation. Why not go whole hog and suggest that all government is a Ponzi scheme, and/or taken at the point of a gun? Why not suggest that there should be no public prosecutions of fraud in actual short-term Ponzi schemes, because we’re using other people’s tax money to shore up the voluntary risks taken by a few?

    (Be sure to leave out the anti-religion parts of Rand, though, the other two legs of the tripos don’t like that sort of talk.)

  • 4. Nick  |  September 8th, 2011 at 12:27 pm

    Debunked – Your view that I have said that Capitalism is also a Ponzi Scheme is incorrect. My post said that a system is a Ponzi Scheme if early investors are paid by later investors AND if one of the following two conditions are met:

    1. There is a choice about whether to invest AND fraud is occurring.

    2. There is no choice to invest, whether or not and fraud is occurring.

    In your argument regarding capitalism, no Ponzi scheme exists because it is a voluntary system where no fraud exists. If the payout rules regarding the investment are made fraudulently, then it is a Ponzi Scheme (see Bernie Madoff).

    Also, I don’t believe your statements regarding the fact that capitalism doesn’t create wealth are correct… but thats a much larger discussion.

  • 5. Nick  |  September 8th, 2011 at 12:29 pm

    Foust – With regards to taxation being theft… well… there is a good argument to be made there… but I don’t generally believe that it is fully correct, nor one that should be made.

    I believe that taxation that goes to pay for certain appropriate things is fully appropriate, and is not theft. What those things are, and what makes it qualify as a valid use of tax money is once again, a much larger discussion.

  • 6. Debunked  |  September 8th, 2011 at 1:36 pm

    In your argument regarding capitalism, no Ponzi scheme exists because it is a voluntary system where no fraud exists. If the payout rules regarding the investment are made fraudulently, then it is a Ponzi Scheme (see Bernie Madoff).

    There is the flaw in your rebuttal. Is capitalism really a voluntary system in our society?

    I do not have a choice whether or not to live within a capitalistic society any more than you have a choice whether or not to pay into Social Security.

    Meaning, either one of us could move to a remote location stationed “off the grid” and live our lives out in isolation, move to another country which does not have Social Security / a rigid capitalistic society, or we can choose to live here. If we choose the latter, we are simply forced to live within the capitalist society just as much as we are forced to participate in Social Security.

    Thus, your argument that Social Security is less voluntary than capitalism seems to be flawed.

    Further, I did not claim capitalism does not create wealth. I claimed there are only two ways in which money can actually be created. And one of those two ways, based on your original definition of a Ponzi Scheme, could also be considered a Ponzi Scheme.

  • 7. John Foust  |  September 8th, 2011 at 1:44 pm

    “Where no fraud exists”? Is that an article of faith? What magical power of capitalism prevents fraud? It brings about magical foresight, streaming from the fingertips of its invisible hands?

    Why do you want to use a gun to take my property to preemptively prevent others from investing in Bernie Madoff’s business?

    He didn’t defraud the first investors. He simply didn’t pay the last investors enough. Is that much different from me selling a product with a warranty that I won’t honor because I went out of business?

    Didn’t Marx suggest, rightly or wrongly, suggest that capitalism was a Ponzi scheme that would crumble on its own?

  • 8. Dan  |  September 11th, 2011 at 4:59 pm

    “I do not have a choice whether or not to live within a capitalistic society any more than you have a choice whether or not to pay into Social Security.”
    Actually, there are many, many public employees who do not pay into Social Security. Of course, they don’t get anything in return, unless, maybe they are disabled.
    So, your statement is not exactly true.

  • 9. Debunked  |  September 11th, 2011 at 7:24 pm

    So you’re saying I have more choice as to whether or not to participate in Social Security (e.g. find employment that doesn’t require participation in Social Security) while living in the United States versus my choice over whether or not to participate in capitalism?

    I’m not sure that hurts my above argument; so, uh, cool!

  • 10. Dan  |  September 13th, 2011 at 8:22 am

    Umm, debunked, I wasn’t making any kind of argument. i was just stating a fact that you did not know about.
    Stop arguing and playing with yourself.

  • 11. Debunked  |  September 13th, 2011 at 9:44 am

    I was actually aware that there did exist some groups who did not partake in Social Security. A subset of public sector employees who, instead, contribute to an employer controlled alternative to Social Security are simply one of these groups. Also, Amish are exempted from Social Security and, probably, other religious organizations as well.

    But, that point was, for the most part, irrelevant to point I was making above in reference to Nick’s original claim; thus, I did not see fit to mention it.

    Now, I’m not sure why you should want or care if I stop playing with myself. I mean, it’s such a good way to relieve stress and all. Maybe your religion, if you are a part of such a thing, looks down upon such activities, but you really should try it sometime.

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