I was reading over a couple of my own older posts, and I noticed that I had done something that got Texas Governor (and briefly, Presidential candidate) Rick Perry, otherwise known as Governor Haircut, roundly mocked by the media: I called Social Security a Ponzi scheme.
It occurred to me, reading that, that some few of you might not understand why Social Security IS a Ponzi scheme, because you may not know what, precisely, a Ponzi scheme actually is, other than "illegal and therefore obviously not like Social Security."
So, since I am in a mood, I will take it upon myself to educate you in the sordid history of good ol' Carlo Pietro, and why (for once) Governor Haircut was entirely, absolutely, unadulteratedly correct.
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was an Italian immigrant. (Charles Ponzi being the Americanization of his lengthy real name.) He was born in 1882, and gained his reputation as a con man in the 1920s.
The now eponymous scheme was very simple, and very effective. Ponzi found investors, and promised them fabulous profits - 50% profits on the initial investment in 45 days, or 100% profits in 90 days - using a perfectly legal method of earning money called arbitrage, in which you buy a discounted or cheap product or security in one market and immediately sell it in a market in which it has a higher valuation.
In this case, he was using international reply coupons - a postal trick, in which basically he bought IRCs in Europe at dirt-cheap wartime profits, used them in the US to buy stamps, and then sold the stamps for significant profits.
Note that doing this is perfectly legal. Unless there's some sort of seller's contract preventing immediate sale, arbitrage of commodities is exactly what every single merchant who's ever lived seeks to do - make a profit on every transaction.
The problem was that he wasn't making ENOUGH perfectly legal money to actually pay the outlandish profit margins he promised his investors.
But he had a fantastic idea, which worked immediately; as he got new investors, he used their funds to pay off the original investors, at the profit levels he promised.
They told their friends, who invested, and were in turn paid off by later waves of investors. Many of the investors turned their profits around and reinvested them, which allowed him to keep this chain going for quite a long time, and turn over staggering sums of money.
At the high point of his run, Ponzi was making $250,000 a day; in 2008 dollars, that's roughly $2.7 million a day.
But here's the thing. Reporters figured out that in order for his business to actually have the capacity to generate that much income through legitimate means, there would need to be over 16 million postal reply coupons in circulation - and at the time, there were only about 27,000 actually in circulation. Based on that, his business was impossible.
Breaking that news caused the collapse of the scheme, as thousands of investors immediately demanded the withdrawal of their funds.
But the important factor there is that even had that news not broken, even had there not been a run on his funds, the scheme would still have ultimately collapsed - as soon as a generation of investors signed up that was too small to pay off successfully for the previous, larger generation of investors.
So.
Some news was made a couple of years ago about the fact that the revenue paying into Social Security had, finally and officially, become smaller than the benefits from it.
The reason that's important is the same reason that it was important to Carlo Pietro.
There's a myth in the media that s "trust fund" exists for Social Security, sort of a Scrooge McDuck-style vault somewhere filled with the massive funds needed for Social Security benefits to keep getting paid.
It's not true. No such thing exists. There's a legal fiction, but in fact the funds for Social Security benefits are authorized and paid, every year, by Congress, as part of the annual budget.
Remember not too long ago when the debt ceiling brouhaha threatened us with a government shutdown, and Obama immediately claimed that a shutdown could stop Social Security benefit payments?
But... How could that happen, if there's a trust fund? Wouldn't the funds in the trust remain intact, and unaffected by the shutdown?
Yes they would, if there WAS a trust fund, but there isn't. And because there isn't, a government shutdown COULD jeopardize Social Security benefit payments, because the government wouldn't have any funds to pay them with.
See, the way Social Security is structured, the government takes funds from the paycheck of every working American...
...And immediately uses them to pay the benefits for every retired American.
There's no trust fund, because the rest of those funds are immediately folded into the federal budget as revenue, and spent on projects like Solyndra.
So, now that the number of working Americans - new investors - is smaller than the number of retired Americans - dividend recipients - the government goes a bit further into debt every year, to continue to pay benefits to those retired Americans.
*CoughcoughHRM* Ponzi scheme.
At some point, the government will be so far in debt that it either is unable to borrow more money, in which case Social Security collapses, or the government itself will collapse, in which case we have bigger worries on our collective plate than ongoing transfer payments to the retirees.
But either way, the sole, solitary difference between Social Security on the one hand and a Ponzi scheme on the other...
...Is that as a government program, Social Security is perfectly legal, while Ponzi schemes are not.
They are structured in identical ways, they are inherently doomed to bring financial ruin to those investing in it, they are identical in every way but that one; one is run by the government, and the other was run by an Italian immigrant.
You know what my dad always used to tell me?
"Son, if it quacks like a duck, looks like a duck, and swims like a duck, it's a fucking duck."
And Social Security IS a Ponzi scheme.
