Ed Driscoll

'The Beauty of Social Insurance Is that It Is Actuarially Unsound'

As is his wont these days, Rick Santelli of CNBC forcefully questions the assumptions that make up the worldview of yet another member of the Beltway Elite. At the start of last month, it was Ezra Klein of the Washington Post and the JournoList. Today it’s Thomas “China’s not debating this at all” Friedman of the New York Times, who gets rhetorically kicked in the sputniks over Social Security by Santelli:


FRIEDMAN: No, I don’t think it’s a Ponzi scheme.
SANTELLI: Earlier in the show you said that we’re putting a burden on our kids that’s unsustainable. What’s the definition of a Ponzi scheme?
FRIEDMAN: It’s a program that made promises that it cannot keep in full and it needs to be fixed and reformed.
SANTELLI: Isn’t that exactly what a Ponzi pyramid is?
FRIEDMAN: I don’t think it is a Ponzi scheme as a criminal endeavor.
SANTELLI: No, no — forget the criminal side. You need more people to perpetuate a myth because if the people stop the myth is known to all. That’s my definition of a Ponzi scheme. Let’s call at it chain letter, a pyramid scheme. Isn’t that by definition what Social Security is? Take the legalities and fraud out.
STEVE LIESMAN: Why is it a Ponzi scheme, Rick?
FRIEDMAN: It is pay as we go. Ronald Reagan fixed it. Why can’t we fix it?
SANTELLI: What does Ronald Reagan have to do with my question?
FRIEDMAN: What does your question have to do with reality?
SANTELLI: You can’t decide that more people is the only thing made Social Security work. We have a real issue because many people in government seem to like to read your work.
FRIEDMAN: What makes Social Security work is fixing Social Security in terms of the population demands.
SANTELLI: I didn’t ask if we should fix it or not. I asked if it’s a pyramid scheme.
FRIEDMAN: Your question is idiotic. That’s what you asked.
SANTELLI: You’re idiotic. I’m done. I feel good.


On his personal blog, Jonathan Last of the Weekly Standard adds, “What has amazed me over the last week or so is the silliness of those who treat the argument as if it’s somehow out of bounds just because Rick Perry is making it. Believe it or not, Rick Perry is not the first person to view Social Security as a ‘Ponzi scheme'”:

The first person I’ve found drawing the parallel is economist Paul A. Samuelson. In the November 13, 1967 Newsweek Samuelson defended Social Security by pointing out that it was linked to population growth and that “A growing nation is the greatest Ponzi scheme ever devised. And that is a fact, not a paradox.” (I found this quote in Phillip Longman’s excellent essay “Missing Children,” in the latest issue of the journal The Family in America. I can’t find the original Newsweek cite to provide full context, but Longman says that Samuelson was defending Social Security and I’m happy to trust him because Phillip Longman is stone-cold awesome.)

Now, Samuelson is not a crank. He won the Nobel Prize for economics in 1970. The New York Times calls him ”the foremost academic economist of the 20th century.” If you majored in econ during the last 30 years, there’s a good chance that you used his textbook, Economics.

Nor is Samuelson a conservative. Remember, his likening of the underpinnings of Social Security to a Ponzi scheme were meant as a defense of the institution. And in 2003 he was one of a group of economists to sign a letter inveighing against the Bush tax cuts.


Actually the full quote, as found via Google Books,  is memorable for its rosy mid-century Galbraithian assumptions about America’s future, which even in 1967 was beginning to fracture, through a series of dramatic technological, demographic, and societal changes.

In 1967 in Newsweek of all places (back when it was still owned by the Washington Post and Tina Brown was just getting ready to celebrate her 14th birthday), Samuelson wrote:

The beauty of social insurance is that it is actuarially unsound. [italics in original] Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in. And exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired…

Social Security is squarely based on what has been called the eight wonder of the world — compound interest. A growing nation is the greatest Ponzi game ever contrived. And that is a fact, not a paradox.


“Most liberals had ended the 1960s rather ashamed of the beliefs they had held at the beginning of the decade,” Patrick Moynihan said in the-mid-seventies, and the idea that a 1930s-era program and the demographics that sustained it could be maintained, “for as far ahead as the eye cannot see,” as Samuelson wrote in 1967, was at the core of those beliefs. (Which would run smack-dab into the ’70s-era notion of “Zero Population Growth,” so popular amongst the far left of the time, including John Holdren, President Obama’s Dr. Strangelove-esque “Science Czar.”)

Forty-four years later though, President Obama is presiding over yet another breakdown of the old liberal order. Or as Richard Miniter wrote recently, “Like it or not, Obama is not the new FDR, but the new Gorbachev: a man forced to preside over the demise of a political system he desperately wants to save.”

Related: “Romney Walks Right into Perry’s Social Security Trap,” Bryan Preston writes at the Tatler, starting by asking, “Who wrote this?”

“Let’s look at what would happen if someone in the private sector did a similar thing. Suppose two grandparents created a trust fund, appointed a bank as trustee, and instructed the bank to invest the proceeds of the trust fund so as to provide for their grandchildren’s education. Suppose further that the bank used the proceeds for its own purposes, so that when the grandchildren turned eighteen, there was no money for them to go to college. What would happen to the bankers responsible for misusing the money? They would go to jail. But what has happened to the people responsible for the looming bankruptcy of Social Security? They keep returning to Congress every two years.”


“Answer: Mitt Romney, the same candidate who is now demagoguing Rick Perry’s position on Social Security.”

Update: “Chris Matthews: Yup, Social Security is a Ponzi Scheme.”

Thumbnail image courtesy of  R. Gino Santa Maria / Shutterstock

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