Re: Re: Romney Camp: Perry Wants to ‘Dismantle’ Social Security

by Andrew C. McCarthy

Nicole, with due respect, that is a very incomplete description of the fix for a Ponzi scheme.

The civil remedy you describe is usually secondary. The priority is a fraud prosecution against the designers of the scheme. We do that because the designers have fraudulently induced people to invest their money — they made false representations that the money would be responsibly invested and safeguarded, then they converted the money to their own purposes. Moreover, our understanding of fraud rests centrally on the duty of disclosure: Designers of the scheme have a fiduciary responsibility to tell investors that the designers were not actually managing investments but converting much of the money to their own use while recruiting subsequent investors in order to pay off earlier investors. If they fulfilled that duty, no one would willingly invest.

We prosecute Ponzi schemes and incarcerate their designers, often for decades, because it is society’s judgment that this sort of chicanery merits our condemnation. There are many situations in which it is not possible to make the net losers anything close to whole, either by forcing the fraudster to forfeit his ill-gotten gains or by compelling the net winners to pay. But when that happens, we don’t throw up our hands and say, “Well, since the civil remedy isn’t a plausible solution in this case, no good is served by acknowledging that a Ponzi scheme occurred.” To the contrary, we take great pains to prove it, and punish it, because we want people to understand we think it is reprehensible.  

The point is not whether the Ponzi civil remedy is a viable solution. Obviously, in the case of social security, it is not. Even if the social security system is both unconstitutional and unsustainable, provision should be made in the short term for people nearing retirement who have reasonably relied on the promise of government pay-outs. As in any Ponzi scheme, there have to be losers here, but they won’t be those on the verge of collecting. More likely, they will be people my age who have paid into the system for over 30 years but are more than a decade away from statutory retirement age; and young people just starting out, who — while politicians dawdle — will be forced to pay into the system even though we know it will not be there for them (at least not in its present form).

But social security, unlike Bernie Madoff, is much more about politics than law. Congress and presidents can’t be jailed or sued over fraudulent government programs. If this were a legal case, you’re right that net winners would be liable. But in politics, that is an untenable result — the brunt will be borne by less sympathetic losers.

Still, in arriving at a long-term solution, it is certainly relevant to ask (a) is financial maintenance of the elderly the sort of thing the federal government should be doing, consistent with the Constitution and with what we know about government’s honesty/competence; and (b) assuming legitimacy and competence, shouldn’t such maintenance be done as an honest, transparent welfare system for elderly people who are truly in need, rather than a faux universal “insurance” system — in which the government pretends “contributions” are safeguarded in a “trust fund” rather than admitting that taxes are collected for an account Congress raids as it pleases, leaving future taxpayers on the hook to replenish the account?

We are in this mess because of the way social security was designed and perpetuated. People who disapprove of Ponzi schemes will not be surprised by that. It is thus a useful analogy because it helps people understand the problem and persuades them that any solution should resist repeating the Ponzi model.

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