A lengthy snippet from a very long read that is well worth your time if you want to be able to effectively deflect this criticism:
here is a cartoon curtsey of the Mercatus Center
Now this is supposed to offend/embarrass proponents of Social Security. Its supposed to allow opponents an opportunity to snicker. However, lets take it seriously and look at the points its making.
I’ll just note a couple of important things about the two pictures first and then we can discuss.
- Payer in the Ponzi picture is rich, while the payer in the social security picture is poor
- The payer in the Ponzi picture is handing over his money voluntarily while the payer in the Social Security picture is doing so at gun point
- The person receiving the money in the Ponzi picture is a private citizen, were the person receiving it in the Social Security picture is the federal government
So, I think that point (1) is not particularly relevant to this analysis. Its relevant to the potentially regressive nature of the payroll tax but that is somewhat orthogonal to the point about “Ponzi schemes.”
What we really want to focus on are points (2) and (3). They are important.
First, point (2) is important because one has to ask why the investor is voluntarily handing over money. In the SS picture it is clear that he has no choice. He is being forced to.
However, in the (2) he is choosing to.
Why?
Well, in general because the Ponzi scheme architect has mislead him. He has caused him to believe that the money will be used to create enforceable claims on real resources. This claims will be worth more in the future than the cash is to today. Thus the Ponzi is a good investment.
Indeed, however there are no enforceable claims. Either there is outright deceit as in the case of Madoff and Stanford or there is trickery as in the case of chain letter. The Madoff case takes advantage of the principle of lying.
Lying works by telling someone something that is not true. If they believe you then you can get them to operate on the basis of a state of nature which is not in accordance with the actual state of nature.
Trickery works by taking advantage of someone innate confusion over the state of nature. The victim in this case does not understand the difference between a “hope” and a “legally enforceable claim” and you use that to sell hope as if it were legally enforceable claims.
This misdirection is the key problem with Ponzi like schemes. The problem is not that they are unsustainable and will come crashing down, as I will address later. Indeed, a Ponzi scheme need not crash. Indeed, legalized gambling is effectively an open Ponzi scheme structured so that it will never crash.
Click through the link to read the entire article. In sum: the problem with a Ponzi scheme is the fact that is essentially a Fraudulent action based on a theoretically unsustainable premise. Social Security, on the other hand, is not fraudulent (recipients of SS benefits have a legally enforceable claim to those benefits), and is sustainable in as much as we adjust its outlays, whether through reductions in benefits or increases in revenues. Somebody always loses once a Ponzi scheme comes to an end. But we could theoretically end Social Security in such a way that the last entitled benefit recipient receives every dollar of benefits they are entitled to.
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