Explaining Ponzi Schemes to Ezra Klein

The always informative Ezra Klein decided to enlighten everyone today about the supposed ridiculousness of Rick Perry’s comparison between Social Security and Ponzi Schemes.  Klein explains that there are several key differences between the two that make them unmistakably different.  The post is meant to marginalize Rick Perry as an uninformed candidate who made a horrible error by comparing Social Security and Ponzi schemes.  What Klein fails to realize is that most individuals have the comprehension to realize that the distinctions he references are essentially meaningless.

The chart that Klein cites the following differences between Social Security and Ponzi Schemes:

1)      Government runs Social Security and can print money to pay it out, while those who run Ponzi Schemes cannot print money. What this fails to acknowledge is that printing money has serious consequences such as inflation and devaluation of currency.  This means that while government might always technically be able to pay out the amounts owed, that money could become worthless through its actions.  What good is getting a check for a thousand dollars if that can only buy 100 dollars worth of product after the government prints too much money?

2)      Participants are informed where their benefits come from and the fraud is unintentional with Social Security. Both these points are irrelevant because the problem with both Ponzi schemes and Social Security is that the money will run out eventually, not that it comes from a different source.  When we cannot afford to send seniors their checks in a few decades, I doubt it will be a huge comfort to them that the fraud was not intentional.

3)      The chart points out that only those participating in a Ponzi scheme pay into it, while Social Security is taken from “every American that works”. Those are the same exact thing because Social Security is a Ponzi scheme on a larger scale, one that includes most Americans.

4)      Social Security is “supervised” by an administrator making $200,000, while Ponzi schemes are supervised by someone who steals millions. First, there is a lot more than one administrator associated with Social Security.  Second, the administrator’s job in recent years has been focused on the technical aspects of Social Security, not ensuring its future viability.  The people who run Ponzi Schemes, like Bernie Maddoff, have an interest in keeping it going for as long as possible, therefore their actions are rarely purposely intended to destroy the scheme.  No matter how much the supervisor of both makes, the problem with both is that those paying in will eventually not see a return.

5)      The rates of return for Ponzi schemes tend to be large, while Social Security promises modest returns. This is no longer necessarily true because as average life spans grow, Social Security is forced to pay out more money for longer periods.  Furthermore, Ponzi schemes usually have no problem paying out their promised rates until there is a downturn or lack of new investors.   The growth of people being paid in comparison to those contributing is the problem with both Social Security and other Ponzi schemes.

6)      Social Security is invested in treasury bonds, while many other Ponzi schemes do not invest in anything. The reason most Ponzi schemes do not invest in similar safe investments is they need their capital to be liquid to make payments.  Social Security operates at a larger scale and the government can move funds from other places to cover, but this does not affect the similar structure in both.

7)      The chart next points out that congress can adjust Social Security, while only the schemer can adjust a Ponzi scheme. What Klein and the person producing the chart fail to realize is that in the case of Social Security, Congress and the government ARE the schemers.  Congress was the one who created a failing system and made the impossible promises in the first place so they are unlikely to want to make the necessary changes.

8)      Social Security has been around since 1935, while the original Ponzi scheme lasted 200 days. This is hardly a real distinction as I have already acknowledged that Social Security is on a much larger scale than the average Ponzi Scheme, although there have been others that lasted for years.  Essentially this is just a testament to the fact that government is much better at creating schemes than most criminals.


Ezra Klein makes one last distinction of his own by claiming that Ponzi schemes tend to be unreliable, while Social Security has been sending out checks for 70 years.  Klein fails to realize that until the scheme runs out of money, almost all Ponzi schemes are reliable and profitable for the early investors.  Those investors consistently get paid the returns they are promised for long periods before the scheme is discovered.  The real difference is that Social Security has already been exposed early on.  We know that in the current form, it will run out of money and become unaffordable; it is just a question of when.  Ezra Klein thought he was embarrassing Rick Perry by ridiculing Perry’s comparison, but as usual he embarrassed himself.

Also check out two other excellent posts about the subject:

From @Jimmiebjrhttp://www.sundriesshack.com/2011/08/29/venn-youve-got-it-ezra-klein-youve-got-it/

& From @Diggrbiiihttp://www.therightsphere.com/2011/08/no-really-social-security-is-a-ponzi-scheme/


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