Perry and the Ponzis
Until a half a minute ago, liberals called Social Security a Ponzi scheme, too.


Stanley Kurtz

Is Texas governor and Republican presidential candidate Rick Perry a courageous and welcome truth teller for calling Social Security a Ponzi scheme, or is he being needlessly provocative instead? Or maybe you think Perry’s Ponzi comparison is just plain wrong. I favor the truth-teller option, but the debate will surely go on.

In any case, it’s certain that Perry’s Ponzi-scheme claim is in no way original. Not only have a raft of conservatives called Social Security a Ponzi scheme over the years, quite a few very respectable liberals have done so as well. It is clearly wrong either to treat the Ponzi-scheme analogy as unprecedented or to rule it altogether out of legitimate public debate. A historical tour of the use of the Ponzi-scheme metaphor will make the point.

Jonathan Last has already identified a 1967 Newsweek column by liberal economist and Nobel laureate Paul Samuelson as perhaps the earliest use of the Social Security/Ponzi-scheme comparison in public argument. Samuelson was actually drawing on the Ponzi analogy to defend Social Security. His claim was that the perpetual succession of human generations establishes the conditions for a sustainable Ponzi scheme. Regardless of whether Samuelson was the first commentator to use the Ponzi analogy, he has clearly been the most influential. Policy briefs and books churned out by conservative think tanks such as Heritage and Cato have cited Samuelson’s Ponzi column for years. This is likely how the comparison made its way into public debate.

Samuelson’s idea that Social Security could best be understood as an enduring and rational Ponzi scheme grew out of his “overlapping-generations model,” introduced in a seminal 1958 paper. Samuelson’s model implied that public debt in general, and Social Security in particular, could be financed over successive generations without major tax increases. In the 1980s, Samuelson’s overlapping-generations model was seized upon by Keynesian economists to serve as a microeconomic foundation for their favored theories and plans.

The unfortunate weakness of Samuelson’s model is its assumption that a growing economy will produce continual population increase. In an April 1978 follow-up in Newsweek to his original 1967 column, Samuelson acknowledged that demographic reality was disproving this assumption. Samuelson repeated his use of the Ponzi analogy and continued to defend his hopes for Social Security as best he could. While Samuelson hung onto some slim indications in 1977 that U.S. fertility might be on the upswing, it grew increasingly clear to critics that the post–Baby Boom decline in births was not going to be reversed. Increasingly, Samuelson’s Ponzi-scheme analogy was seized upon by those who doubted Social Security’s long-term soundness.

In an April 1999 Los Angeles Times op-ed titled “Ponzi Game Needs Equitable Solution,” for example, Stanford University economists Victor Fuchs and John Shoven hark back to Samuelson’s 1967 column, noting that his demographic optimism had proved wrong. While turning the Ponzi analogy into a criticism of Social Security’s soundness, Fuchs and Shoven nonetheless argue against private investment accounts — a favorite solution of conservatives. Fuchs is hardly a rightist; for instance, he co-authored an ambitious and controversial universal-health-care proposal with Obamacare architect Ezekiel Emanuel. Apparently, Samuelson’s Ponzi analogy has shaped the Social Security debate for figures across the political spectrum.

A watershed moment in the public realization that low population growth spells trouble for Social Security was the 1987 publication of Ben Wattenberg’s book The Birth Dearth. Wattenberg, who once worked for Lyndon Johnson and Hubert Humphrey, was by the late 1980s a centrist Democrat, hawkish on defense and otherwise alternately allied with the right or left, depending on the issue. Although many rejected Wattenberg’s claim in The Birth Dearth that a crisis of population decline loomed, time has vindicated his warning.

In a U.S. News & World Report cover story excerpting The Birth Dearth, Wattenberg sums up his argument by saying: “In short, Social Security is a Ponzi game, a pyramid scheme, a chain letter.” In a December 1995 column, Wattenberg makes the point again, calling both Social Security and Medicare “chain letter games.” Implicitly echoing Samuelson, Wattenberg adds, “There’s nothing inherently wrong with a Ponzi game. Life itself is such a game.” The problem, Wattenberg continues, is that the success of the Ponzi game called life hinges on higher birth rates than we’ve been able to produce.