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Thursday, 23 September 2010
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Fact Checking the Fact Checkers

So unlike some of my conservative blogger friends, who have started something called "PolitiCrap"*, I generally approve of the PolitiFact series that the Journal has going. Are they always right on? Of course not. The problem with so many political ads today is that they take small things out of context, and blow them to their extremes so they can make the biggest impact in the 30 seconds allowed by most commercials.  While some people would argue that a 30 second ad forces politicians to do that in order to make proper use of the time... I don't believe that is an excuse.

While PolitiFact doesn't always get it right on the money, they do a fairly good job of adding the proper context to everyone's statements, and given a more well rounded version of events. Besides, when you see Liberal blogs cheering PolitiFact checks on the Conservative Candidates, but complaining about the checks on their guys... and the exact opposite from the other side... you know they've got to be pretty close.

With that said, I would like to take issue with the PolitiFact check on Ron Johnson's "Ponzi Scheme" claim regarding Social Security. PolitiFact rates it as "Barely True". While PolitiFact finds that the pay as you go nature of Social Security, whereby current workers pay for the Social Security outlays of today's retired people is true, and is similar to a Ponzi Scheme, they claim that because "there is no secret to how Social Security is run", it must not be a Ponzi Scheme:

"The important difference and the fundamental difference is that there is no secret to how Social Security is run," said Zuckoff, who researched the question for a 2009 article in Fortune Magazine. "No one is being misled, no one is taking the money and running, which are fundamental aspects of a true Ponzi schemes."

They also made the claim that because Social Security has been in continuous operation since 1935, while the original Ponzi Scheme by Charles Ponzi lasted only 200 days means that it's a bad comparison.  After all, if it were truly a Ponzi Scheme... it would have collapsed by now, right? Wrong.  The fundamental difference between Social Security, and most privately run Ponzi Schemes is deception.  This much is true.  But PolitiFact refuses to dig deeper into the issue.

Classic Ponzi Schemes require deception, because if everyone in the scheme knew how it worked, they would bolt and it would collapse... or never get started in the first place. In fact, the reason why Ponzi Schemes collapse in such a short time is because eventually the word leaks out, or a payment is missed, and the house of cards collapses. That's the nature of privately run Ponzi Schemes. People choose to invest because of the promised returns, and then once they find out that they won't get them, they choose to leave... often times after losing significant money, but cutting their losses.

My question to PolitiFact is... where is the choice with Social Security? Yes, Social Security doesn't deceive anyone... everyone does in fact know how it works... or at least should. But Social Security has one advantage that no privately run Ponzi Scheme has... there is no choice in whether or not you participate.  I belong to an entire generation of people who truly believe that we will not get anything from Social Security. I am planning my retirement on the idea that Social Security will not pay me one red cent. I have to. I know exactly how Social Security operates, and I can also see demographics and how population is changing. There simply won't be enough people to pay me once I rise to the top of the pyramid.

In a privately run Ponzi Scheme, I would have bolted by now. Actually, I would have never joined in the first place. But with Social Security, the government forces me to invest. There is no deception needed, because there is no reason to deceive. If I don't pay Social Security, the government can throw me in jail. That's not a reason to suggest that Social Security isn't a Ponzi Scheme... that only explains why this particular Ponzi Scheme hasn't collapsed... yet.

PolitiFact goes on further to say:

Unlike a Ponzi, Social Security is obligated to pay benefits, a commitment the shysters who run Ponzi schemes do not share. As for those IOUs, the government is required to make good on the money borrowed from the fund -- and to pay it back with interest.

The question is... how is that going to be done? As we all know, there is no trust fund. There are only IOU's which the government has given itself, because they've already spent the money. That means that future benefits have to paid for in one of two ways... increased Social Security taxes on workers for the benefit of those on top of the pyramid who have retired (just like a Ponzi Scheme), or increased borrowing which will have to paid for by the next generation (just like a Ponzi Scheme).  Rick Esenberg explains this very well:

People like Jay who defend the system like to say that the government won't or can't default on those bonds. It certainly can. Congress could repudiate the bonds, although it likely won't. The problem - the one that Jay elides by saying that the trust fund "can pay" out benefits for a number of years - is what it would take to pay those benefits.

The trust fund can't just write a check. It must redeem those bonds, i.e., call in the government's IOU to itself. The government can't just write a check to honor the bonds because it doesn't have the money. It must either raise taxes or borrow more money. To the extent that this cannot be done, benefits must be reduced. Thus taxpayers who have paid "extra" as "we went" really have nothing to draw on. They must either forego benefits or impose even higher taxes on younger people. That sounds an awful lot like a Ponzi scheme.

So really, the only thing that makes Social Security different from a classic Ponzi Scheme is that the manager of this particular scheme has more resources, and more guns, than Bernie Madoff. That doesn't make it less of a Ponzi Scheme, nor any more moral.  That only makes it last longer.

* For the record, while Charlie Sykes apparently asked many Conservative bloggers to partner with him in his PolitiCrap effort, I was not asked. And had I been asked, I would have declined.

# Posted at 09:50 by Nick  |  Comment Feed Link 3 Comments  |  No Trackbacks

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Thursday, 23 September 2010 14:40:10 (Central Daylight Time, UTC-05:00)
This is about as useful as saying the US military is "like" a terrorist organization because both use guns and go to training camps.

There's nothing fundamentally wrong with the concept of social insurance. In fact, there's very little wrong with the way we currently implement it. Going exactly the way we're going, it's fit to pay everything it owes to every beneficiary until the day I myself retire. After that, it can still pay the majority of what it is supposed to (I think 75% at least). And that's if we do absolutely nothing to it. And the magnitude of the changes necessary to make it solvent into infinity are pretty moderate.

The problem isn't the concept, nor is it our particular execution of it. The problem is ideology. Some people just don't believe this is something our government should do for us, period. But instead of making that ideological argument, they make nonsense arguments about how it can't possibly work or that it's some kind of sham.
Thursday, 23 September 2010 17:33:29 (Central Daylight Time, UTC-05:00)
Regarding the "obligation to pay benefits", there actually is none. The Social Security Administration itself says that, because there is no contractural or property right (as established in the negative by the Supreme Court in Flemming v. Nestor), benefits can be cut or even withdrawn, as student benefits were in 1983.
Monday, 04 October 2010 16:26:03 (Central Daylight Time, UTC-05:00)
The point is that the T bonds have to be paid. That much IS required.
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