SS: Ponzi Scheme Isn't the Problem

Originally Posted At The Daily Bell
By Tibor Machan
September 19, 2011

Everyone by now knows what a Ponzi Scheme amounts to. We all became familiar with it when Bernie Madoff was caught using it to amass a fortune at the expense of clients who were unaware that his plan to put away money for them amounted to such a scheme. 

The issue in the case of Madoff wasn't actually so much the scheme but the lack of full disclosure about it. Ponzi schemes are legion around the world and people knowingly take part in them. For instance, most insurance companies use them, collecting funds from new clients and paying old ones in part from the newly acquired cash. Retirement systems make use of the scheme, as well. Those who have paid in are often receiving the funds new clients pay now. And so with the Social Security system. The Social Security system would be no problem if it were voluntary and those who are part of it knew from the start the risks involved.

Fractional reserve banking is like that, too: When people deposit their money in banks the money isn't all left in vaults until they withdraw it; rather, much of it is used to give loans and make investments. And clients of the bank know this but figure the bankers are skilled at what they are doing and will not use the funds recklessly, irresponsibly. But the bankers do not expect all custumers to suddenly withdraw their funds; the banks could handle that. But since it is common knowledge, nothing is amiss in such arrangements.  

So that's not what's wrong with the Social Security system. The problem is that when you work, you are forced to be part of them system (with only some exceptions, such as when the state you work in has its own similar scheme in play). This, like the income tax, is a form of extortion, just like what happens when organized criminals force merchants to cough up money for them or lest they burn down the business! Sending working people to jail or imposing immense fines on them unless they pay their taxes, Social Security or otherwise, is just like that. One has no choice if one wants to make a living: "Pay the government or have no job!"

When Republican candidate Rick Perry called the Social Security system a Ponzi scheme, a bunch of his critics, even fellow Republicans, expressed shock. Their ire, however, is misplaced. The Republicans have no more leverage with pointing out that Social Security is mandatory than would the Democrats. Republicans and Democrats both – indeed, all political parties other than the Libertarians – favor extorting funds from the citizenry, though for different purposes. So what they argue about isn't really all that important. Ponzi schemes are everywhere. What is much more problematic is when everywhere some people force others to carry on in certain ways, to take part in various schemes, whether they or not they chose to do so. 

If there is a feature of the modern world that is basically different from ancient systems is that it is less enamoured by outright force – slavery, serfdom, torture, etc. Such things are these days more widely seen as uncivilized, barbaric. And if a political system or public policy embodies coercive force that some use on others, it is now more suspect than it was in olden days – not everywhere, of course, and not even in so-called Western democracies. After all, democracies can contain a great deal of coercion and do everywhere you look. Still, the coercion in democracies is less brutal than in systems with top-down dictatorial rulers, such as the ones in the Middle East.

What needs to be discussed about Social Security is not the Ponzi scheme element but that it is forcibly imposed on all working people in the country, nevermind whether they want it or not. It would be quite enlightening if this aspect of Social Security were debated. That would bring up a central feature of most governments, namely, their coercive nature. That is what the American founding fathers and framers were concerned about. And while they didn't reject all coercive policies  – e.g., slavery, taxation – they were very hesitant about them.

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