Pragmatic Capitalism

Capital for Living a More Practical Life


This evening’s Tea Party Debate in Tampa Bay is once again running into the whole “social security is a ponzi scheme” argument as Rick Perry and Mitt Romney go after one another on this hotly contested subject.  Perry has consistently referred to the program as a “ponzi scheme” – a term which has come under harsh criticism from many on the left and right who claim that the term is misleading and hyperbolic.  And they’re exactly right.

First of all, let’s get the definition of a ponzi scheme right.  According to the SEC, a ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”  Quite simply, a ponzi scheme involves the promise of future payments that current returns do not justify.

The confusion in the Social Security debate revolves around this idea that there is a “trust fund” that current workers pay into to fund those who are currently receiving the benefits.   Due to a  multitude of factors, the current beneficiaries are essentially receiving more than they themselves paid into the system.  So, this “trust fund” appears deficient.  It has the appearance of paying more out than it brings in.   But this is a misconception of the way government spending works.

This sort of debate gets right at the heart of the misconceptions regarding the U.S. monetary system and the many myths that persist.  This myth that the Social Security Trust Fund might “run out of money” is as silly as the whole debt ceiling debate and this idea that we can “run out of money” that we can literally create out of thin air.  Of course, there’s simply no such thing and the confusion stems from the public’s constant desire to compare a currency issuer to a currency user.  But this comparison is completely illogical.  A currency user is always constrained in his/her ability to spend.  The same cannot be said of a currency issuer, who has no traditional solvency constraint – as in, not being able to meet one’s obligations.   The USA can always create dollars to meet its obligations.  What the steward of these dollars needs to consider is their potential inflationary impact.

The USA always has the money to make its social security payments.  More importantly, what there is here, is a group of citizens who need to decide whether or not we, as a nation, want to provide these benefits for our elderly.  In doing so, we don’t need to measure whether or not we have the money to pay future beneficiaries.  What we need to decide is whether these benefits are consistent with the size of government and prosperity that we as a nation desire for ourselves.  This might sound like tautology to some, but it is most certainly not.  Our approach to government spending requires a dramatic overhaul in this nation.  One which tries to align the needs and desires of its citizens with the size of government we desire.  Hyperbolic terminology which implies that we “can’t pay” only misleads the voting public, generates unnecessary fear and misconstrues what the real debate should focus on.

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