There’s plenty to like about Charles Krauthammer‘s recent collection of three decades worth of newspaper columns, magazine articles, and extended speeches/essays. Read enough of Things That Matter, and you’ll realize that Krauthammer is not afraid to deviate from conventional conservative wisdom — as on issues such as the death penalty. Krauthammer is also willing to give opponents credit when their views are intellectually coherent, even if he disagrees with their conclusions.
But Krauthammer is a stickler for pointing out disingenuous and poorly reasoned arguments, which likely explains why he emerged as President Obama’s most forceful critic within the world of political punditry. Krauthammer also excels in dissecting the essential elements of an issue, as in a September 2011 column responding to the furor over Republican comments that Social Security represents a form of Ponzi scheme. As the headline of Krauthammer’s article says, “Of course it’s a Ponzi scheme.”
In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants.
This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new to old. The merry-go-round stops, the scheme collapses and the remaining investors lose everything.
Now, Social Security is a pay-as-you-go program. A current beneficiary isn’t receiving the money she paid in years ago. That money is gone. It went to her parents’ Social Security check. The money in her check is coming from her son’s FICA tax today — i.e., her “investment” was paid out years ago to earlier entrants in the system and her current benefits are coming from the “investment” of the new entrants into the system. Pay-as-you-go is the definition of a Ponzi scheme. …
… Proposition 2: The crucial distinction between a Ponzi scheme and Social Security is that Social Security is mandatory.
That’s why Ponzi schemes always collapse and Social Security has not. When it’s mandatory, you’ve ensured an endless supply of new participants. Indeed, if Charles Ponzi had had the benefit of the law forcing people into his scheme, he’d still be going strong — and a perfect candidate for commissioner of the Social Security Administration.
But there’s a catch. Compulsion allows sustainability; it does not guarantee it. Hence . . .
Proposition 3: Even a mandatory Ponzi scheme such as Social Security can fail if it cannot rustle up enough new entrants.
You can force young people into Social Security, but if there just aren’t enough young people in existence to support current beneficiaries, the system will collapse anyway.