Ron Johnson Understands Social Security All Too Well

The urgency of portraying Ron Johnson as clueless leads smart people to make silly claims. Last week, local blogger Jay Bullock said that Johnson's reference to social security as a "ponzi scheme" means that he doesn't understand it.

If that's so, then Johnson has a lot of company. Referring to social security as a
"ponzi scheme" is quite common.

To do so is, of course, an analogy and analogies point to one thing that is like another in some significant ways even if they may differ in others. Social security is not a ponzi scheme in the sense that, unlike Charles Ponzi, the government promises nothing to those who pay into social security. You aren't supposed to get a return on your money and you have no right to a dime in benefits. The government will, in any event, probably be good for whatever it decides to pay out - perhaps even for what it currently says it will pay out - because, unlike Charles Ponzi, it has the right to take money from others.

But there is a way in which social security is very much like a Ponzi scheme. Social security has not, strictly, speaking been, as its defenders lole to say, a "pay as you go" system for a very long time. Back when Baby Boomers were young, it was absolutely predictable that paying benefits upon our retirement was going to be extremely difficult because of the absolutely predictable diminishment in the ratio of workers to retirees. In other words, there are a lot of us and less of those born after us. Demography is, in a very real sense, destiny. It is a future that has already occurred.

So, in 1986, it was decided to raise social security taxes beyond that required to pay current benefits and create a trust fund. The problem, of course, is that the money was not invested in a way that represented a claim on anything other than the government's promise to pay. It was invested in special government bonds and, essentially, used to fund current government spending. It's as if you saved for your own retirement by placing money in a piggy bank and then replacing it with IOUs to yourself so that you could spend the money.

Thus taxpayers have been paying in more than a "pay as you go" system would require in order to create a trust fund consists of nothing more than IOUs. That sounds an awful lot like a Ponzi scheme.

People like Jay who defend the system like to say that the government won't or can't default on those bonds. It certainly can. Congress could repudiate the bonds, although it likely won't. The problem - the one that Jay elides by saying that the trust fund "can pay" out benefits for a number of years - is what it would take to pay those benefits.

The trust fund can't just write a check. It must redeem those bonds, i.e., call in the government's IOU to itself. The government can't just write a check to honor the bonds because it doesn't have the money. It must either raise taxes or borrow more money. To the extent that this cannot be done, benefits must be reduced. Thus taxpayers who have paid "extra" as "we went" really have nothing to draw on. They must either forego benefits or impose even higher taxes on younger people. That sounds an awful lot like a Ponzi scheme.

Jay wants to argue that this happened because we have been "undertaxed." Johnson would presumably argue that it happened because we have "overspent." Those are value judgments about how the problem that Johnson describes could have been avoided. But the problem that he described is very real and "Ponzi Scheme" is not a bad way to describe it.