Bill Lear wrote: > I'm continuing to try to understand how to articulate the difference > between a Ponzi scheme and Social Security. My basic conclusion is > that a Ponzi scheme has a criminal who steals money, whereas Social > Security does not.
Since the Greenspan "reforms," Social Security (OASI) usually runs a surplus, which is deposited in the trust fund, which in turn is invested in US government bonds, which are backed by the power of that government and will not be repudiated until the US becomes a full-scale third world country and/or some nut takes over and "reforms" OASI in order to kill it. In the pay-as-you-go part of the program, the beneficiaries of OASI (the retired, etc.) are paid out of the "contributions" made (taxes paid) by most of the currently-working population. If tax revenues fall below benefits, it's possible to pay them from the interest on the trust fund[*] -- or (in a worse situation) to sell some of the trust fund's assets. If this problem happens, it is likely to occur a few decades in the future. Minor reforms would delay this for even more decades. > Secondarily, Ponzi schemes are supposed to depend > on a geometrically increasing progression of victims, whereas Social > Security does not. Right. Assuming that the share price equals 1 and assuming that the Madoff character takes X percent of all revenues from selling shares for himself, a Ponzi scheme has total dividend payments = (1-X)*(total sale of new shares) or (dividend payment per share)*(number of shares) = (1 - X) (absolute increase in the number of shares) or dividend payment per share = (1 - X)(percentage increase in the number of shares) if X is constant, this means that to have a constant dividend payment per share, the percentage growth in the number of shares must also be constant. That is, there must be a geometric growth in the number of shares. This cannot persist forever, though it's hard to say when it will end. In contrast, examining only the pay-as-you-go component of OASI, the total benefits of the retired and other beneficiaries are proportional to the total wages of the (taxed) working population. That is, ignoring administration costs (which are very low, especially when compared to those for a 401k plan), (# of beneficiaries)(benefits per person) = (tax rate)(wage rate)(# in taxed population). or (# of beneficiaries)/(# of taxed population) = (tax rate)(wage rate)/(benefits per person) With benefits per person, the tax rate, and the wage rate constant, a rising number of beneficiaries requires a growing number of people in the taxed population. Unlike a Ponzi scheme, it does not require a geometrically-increasing tax-paying population. Rather, the two populations must grow in proportion to each other. If the number of beneficiaries grows more quickly than the number of tax-paying people, then either the benefits per person must be cut, the tax rate must rise, or the wage rate must rise. One easy (;-)) solution to the supposed OASI "crisis" that neoliberals tell us will happen would be to increase wages, for example, allowing workers to capture more of the increases in their productivity growth. Somehow the neoliberals never propose this. > Typical Ponzi schemes blow up rather quickly, and this short time span > is often said to be the hallmark of a Ponzi scheme. See, for example, > this: http://www.socialsecurity.gov/history/ponzi.htm, where the > author states that the problem with such schemes "is that it is > difficult to sustain this game very long because to continue paying > the promised profits to early investors you need an ever-larger pool > of later investors. The idea behind this type of swindle is that the > con-man collects his money from his second or third round of investors > and then beats it out of town before anyone else comes around to > collect. These schemes typically only last weeks, or months at most." > > However, Madoff's scheme went on for decades --- the government thinks > it went on for perhaps 30 years or more --- and by Madoff's admission, > it started in the early 1990s. How did he achieve this if he was > running a Ponzi scheme? I realize that the power of a geometrical > progression can certainly alter things, but I haven't found anybody > who has yet commented on this seeming contradiction. Was Madoff simply > very "conservative" in his desire or ability to add new victims? Did he > siphon very little from their accounts? One factor is that a lot of people -- including those in the SEC -- ignored the existence of his scam. More importantly, suppose Madoff skimmed off a small percentage (a low X). Then, with a constant dividend rate, a lower percentage growth rate of shares is required than when X is higher. So the geometric growth gets Madoff into trouble later rather than earlier. This suggests that Madoff decided not to be "too greedy" so that he could stretch the benefits of his scam over a large number of years. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. [*] Just as with the payments to bond-holders outside of this trust fund, these interest payments must be made from taxes or by replacing other government outlays. That is, the potential financial problems arising from these interest payments (e.g., a rising government deficit as a percentage of GDP) are exactly the same as from those arising from any other government debt. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
