The Corner

More Social Security & Ponzi Schemes

Nicole, c’mon. You’ve “never heard of the authorities trying to ‘reform’ a Ponzi scheme”? How long do you figure I’d have kept my job as a young government lawyer if I’d knocked on Rudy Giuliani’s door and said, “Boss, I know this Ponzi thing looks bad. But it’s been a good deal for a lot of people for a long time. Maybe, instead of enforcing the fraud laws, we should just persuade him to reform it!”

The reasons private Ponzi schemes get prosecuted have nothing to do with whether they are beyond salvaging. The fraudster cannot reform without confessing to having committed a crime to that point; his sudden desire to go straight would not be a legal defense against the fraud he has already perpetrated. And the government has no obligation to reform a fraud scheme it had no responsibility for designing in the first place. No one asks whether the private Ponzi scheme should be reformed. We prosecute in order to signal to other would-be Bernie Madoffs that society is not going to tolerate deceptions of this kind.

The difference between a fraudulent government program and a fraudulent private scheme is that the former cannot be prosecuted. As you know far better than I do, the government exempts itself from the regulations, bookkeeping requirements, and criminal laws it imposes on private businesses (and the Constitution’s Speech and Debate Clause broadly immunizes members of Congress from prosecution for legislative activity). But the fact that officialdom holds itself above the law does not make its deceptive schemes any less fraudulent.

As a great admirer of your work, I’m very surprised by your claim that Social Security’s designers and perpetuators have not attempted to perpetrate a fraud. The program was hatched in fraud. As I pointed out yesterday, FDR pretended it was an insurance program in order to sell it to the public; once Congress enacted it, he then told the courts it was not an insurance program but a tax in order to get it upheld (by justices he had successfully intimidated with a court-packing plan). He later admitted that disingenuously portraying the tax as a contribution for earned insurance benefits was “politics all the way through.” The goal was never to make the economics work. As you correctly point out, they don’t work, and FDR was well aware of that fact. The goal was to make sure, as he put it, that “no damn politician can ever scrap my social security program.” Fostering a sense of public entitlement, he presciently reasoned, would induce politicians to position themselves as defenders of this entitlement — and never you mind the math. 

Furthermore, the real objective of Social Security was not to set up a retirement insurance program. It was to lay the foundation for a full-blown entitlement state, complete with socialized healthcare. The original plan included a Medicare component, which was abandoned because FDR realized it would jeopardize passage of social security. (The push on Medicare, as I’ve recounted before, was renewed immediately after passage — although it took 30 years, due to deep opposition from the public and the medical profession.) As Gov. Perry points out in his book, while feigning to address a “crisis,” Social Security (like Obamacare) collected the taxes (“contributions”) for several years (from 1935 to 1942) before any benefits were paid out; and the eligibility age was pegged at 62 even though life expectancy was then 60. The goal was not to ensure a decent retirement for “beneficiaries”; it was to erect — in incremental stealth — an entitlement state that the public would never have supported if Progressives had been forthright about their ambitions. Social security was the foot in the door. 

Your resort to “or should know” gives the game away. Yes, you admit, Social Security “has a long-run mismatch between revenue and expenses.” And yes, it commingles the contributors’ funds, just like a Ponzi scheme. But by your lights, this is not “outright fraud” (non-outright fraud is OK?) because, by now, “everyone knows, or should know” that this is how the system works. 

But why should we know? Is it because the pols have honestly disclosed it to us as they require private businesses to do? Emphatically, no: They’ve been jiving us for 80 years about an “insurance program” (i.e., a redistribution scheme) in which eventual “beneficiaries” (welfare recipients) make “contributions” (pay taxes) into a “trust fund”/”lock-box” (a pot that Congress raids at will) which protects our “accounts” (the IOUs with which Big Government replaces the funds it swipes — paper promises that will have to be satisfied by crushing taxes imposed on future taxpayers). As you quite correctly say, the goal of a Ponzi scheme is “to perpetuate the fraud to enrich its designers.” Big Government is duly enriched, probably beyond FDR’s wildest dreams.

Your argument boils down to this: Social security can’t be fraud because, after eight decades, the nature of the scheme is so palpable that we should be deemed to have consented to it even if it is not quite what it was advertised to be. This is reminiscent of Bernie Madoff’s “net winners,” to whom you referred in your first post. Upon inspection, a lot of the potential investors Madoff attempted to recruit told the early investors (a/k/a, the net winners) that the scheme seemed too good to be true. But the early investors didn’t want to hear it. They rationalized: Sure something seems fishy, but it’s been going on for years without interference from the regulators and prosecutors, and as long as I’m getting good returns, why should I ask questions about whether it’s all on the up and up?

“Social Security is a government program,” you say, “and a popular one[.]” Yep, Ponzi schemes are always popular … until they collapse. And after they collapse, the fact that the early investors “should have known” that the scheme was a fraud is held against them. The neon clarity of the fraud, and their conscious avoidance of it, does not change the unpleasant fact that fraud it was. 


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