Sunday, September 11, 2011

Samuelson Thought Social Security Was a Ponzi Scheme that Could Last Forever

Keynesian establishment economist, and author of an introductory college economics text that was the best selling economics text for decades, Paul Samuelson, was way off base on the future of the Soviet Union (He thought it had great prospects) and was apparently as off base about Social Security.

Greg Mankiw, the current top selling economics textbook writer, highlights a 1967 Newsweek column where Samuelson admits that Social Security is Ponzi scheme but thinks it will go on successfully forever, anyways. Samuelson wrote:
The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- 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 eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.
Bottom line: Samuelson's mathematical models are proving to be as bad as the models of current day econometricians. These models fail to take into account incentives, how free markets work, how regulation stifles growth and, most significantly, that economics is about human action, which means there are no constants like those that exist in the world of physics, upon which models can be built. Economics is about understanding potential trends, such as growing price inflation during a period of high money growth. It is not about exactitude in the sense of projecting out growth trends. Samuelson's totally absurd forecasts and expectations about the Soviet Union and about Social Security should be evidence enough of the follies of such type forecasts. And it is a warning to econometricians around the globe that they should lay down their mathematical models, as time will eventually make fools of them all.


  1. It always seems funny to me how much truth can be found in such simple statements.

    SS is a ponzi? Boy, who coulda figured that one out? But, even further, he points to compound interest as what makes it work. Obviously, I have no problem with compound interest in voluntarily agreed upon contracts, but SS is not such a thing. Even more, when one factors in the fact that a certain sector has monopoly power over the issuance of the money and is the largest benefactor to that compound interest, then one must conclude that Samuelson is merely using one ponzi scheme to justify another, or even worse, he is also using one monopoly to justify the other.

    Granted, I might get some disagreement in calling the banking system a ponzi scheme, the SS system a monopoly, or even call the banking system a monopoly, but in the grander scheme, that is how I conclude it in a Rothbardian sense.

  2. With minor tweaking, SS could continue to be a successful backup income source in retirement, as it has for generations. Fortunately SS is supported by a specific tax. Most other government spending has no specific tax to cover the costs.

    SS will have problems in the future if minor tweaking isn't done. Of course, if MAJOR tweaking isn't done to the OTHER federal spending then the entire US economy and the US government will collapse and then SS will be the least of our worries.

    I guess it would be helpful if RW would print what he thinks is the definition of a ponzi scheme. To me, a ponzi scheme implies that people are being deceived by how it works. It is true that the criminals in DC have stolen from it for generations, but basically we did know that, we were just stupid enough to let them get away with it.

    With minor tweaking SS can continue to be the spectacular success that it has been for generations.

  3. Ok, maybe not a ponzi scheme. More like a 'patsy' scheme where main street is the patsy: "a person who is easily swindled, deceived, coerced, persuaded, etc.; sucker".

  4. Let us not forget about the people under 65 getting SSID through disability (Thousands and thousands of people), the welfare mentality passed on one generation to another, and the all loving our benefits illegal aliens pressure on city, county, state, and federal govt for more free entitlements and medical care. If you feed stray cats they keep coming.

    Chapter - It's Free Swipe Yo EBT