Politifact and Social Security
[Trivia: what are the 5 most populous cities in Florida?]
I’ve mentioned Politifact before, and taken aim at their general pattern of claiming to be even-handed and bipartisan whilst routinely applying different standards to claims and people of the Left vs. the Right. But it’s also worth taking the time to tear apart individual claims of theirs, as in the case of their recent hit job against Ron Johnson, US Senator from Wisconsin.
Johnson criticized Social Security, a longstanding concern of his, calling it a “legal Ponzi scheme.” Politifact called this “Mostly False.”
How does Politifact arrive at this condemnatory judgement?
Before we jump in, let’s start with the dictionary definition.
Merriam-Webster defines a Ponzi scheme as "an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks."
The scheme was made (in)famous by Charles Ponzi in 1920.
By persuading thousands of Bostonians that they could become wealthy by investing in international postal reply coupons, Ponzi made an estimated $15 million in eight months, according to a December 1998 report on Ponzi schemes in Smithsonian Magazine.
This sounds fair enough. And what was Senator Johnson’s take on all of this?
When we asked Johnson’s office for backup, spokesperson Kiersten Pels basically reiterated what we have heard before, noting of Social Security: "It collects money from working taxpayers (new investors) — doesn’t invest it, but spends it on current retirees (existing investors)."
Johnson has reiterated his stance
(No end mark at the end of that last sentence is sic.)
Johnson’s assessment of Social Security is correct. You could look for a second opinion, and some hard numbers, from Mark J. Warshawsky, a senior fellow at the American Enterprise Institute who was deputy commissioner for retirement and disability policy at the Social Security Administration from 2017 until January 2021. In the journal National Affairs he wrote last spring that “Social Security’s finances continue to worsen” in light of its being “mostly a pay-as-you-go program—that is, current benefits are financed largely by current payroll taxes. Of the $1.1 trillion in annual program costs in 2020 (98% of which are paid in benefits), almost 90% was covered by payroll taxes . . .” Another 3% was accounted for by taxes upon Social Security benefits; the balance was covered by trust funds, which are only shrinking.
In fact, “Since 2010, Social Security has paid out more in benefits and expenses than it has collected in taxes and other non-interest income.”
Naturally, the forecast is bleak. Warshawsky notes that the SSA trustees estimate that 11 years from now, the trust funds will be exhausted and payroll taxes (and taxes on Social Security benefits) will only be able to fund 78% of the program’s ballooning costs. He also notes that there are other, bleaker official estimates: the Congressional Budget Office predicts the trust funds will be depleted a couple years sooner, with attendant worse circumstances.
The forecast is bleak for well-acknowledged reasons: “the assumptions that originally underpinned the program,” says Warshawsky, are increasingly untenable, when it comes to the labor markets and social demographics that Social Security operates on top of. Just to pick one troublesome statistic pointed out by the SSA itself, “In 1940, the life expectancy of a 65-year-old was almost 14 years; today it is over 20 years.” Reality is not complying with the plan.
This sounds a lot like a Ponzi scheme: people put into a program to benefit from it later. Except that instead of any underlying economic activity that leverages capital or generates more wealth, those dollars are almost all paid out immediately to a lucky first wave of beneficiaries. It’s a party that cannot last forever, as people have been indicating for quite some time, and as the old wisdom has it:
If a thing cannot keep going, it will stop.
(I think Mark Steyn is where I first heard that adage.)
Again: “Since 2010, Social Security has paid out more in benefits and expenses than it has collected in taxes and other non-interest income.”
So how does Politifact arrive at their judgement of “mostly false”?
On a superficial level, (the comparison) is true -- money is taken in from current workers (new participants) and used to pay off obligations to retirees (old participants). The operative word is "superficial."
Unlike a Ponzi, Social Security is obligated to pay benefits, a commitment the shysters who run Ponzi schemes do not share. As for those IOUs, the government is required to make good on the money borrowed from the fund — and to pay it back with interest.
What’s more, participants are aware of how the system is operating. It’s all public. In a Ponzi, investors have no clue where their money is going and are told lies by the promoters.
They also quote an expert, Mitchell Zuckoff, who wrote a book entitled Ponzi’s Scheme.
"The important difference and the fundamental difference is that there is no secret to how Social Security is run," said Zuckoff, who researched the question for a 2009 article in Fortune Magazine. "No one is being misled, no one is taking the money and running, which are fundamental aspects of a true Ponzi schemes." [sic]
Comparing the two "is a common, and I think deeply misleading suggestion, that is openly used more as scare tactic than to truly illuminate the real issues," Zuckoff said in an interview.
Now, I want to point out that Zuckoff is also the named author of the nonfiction book 13 Hours, about the Benghazi disaster. Even if that book is journalism that doesn’t target President Obama, his having written on that topic at all shows that he isn’t a rabid anti-Right wing personality.
But we can assess this particular claim of his in detail and I think it can’t possibly hold up.
Ponzi schemes are scams because they are financially vacuous and doomed to fail. The core reason people hate them is not so much the deceit but the theft and swindling people out of tons of money—the deceit is just necessary for the scammer to get people to buy into it, and a stinging insult to the actual injury of your life savings having disappeared.
The deceit is necessary, at least, when you’re just some New York finance guy. If you’re the government, you don’t need to lie to people: you can just threaten them with jail. So, social security is funded through payroll taxes, which the government takes from you whether you’d like to participate in their scheme or not.
Note, the idea that being robbed is the real problem here isn’t some post-facto declaration of mine about what’s bad with a Ponzi scheme—what was Politifact’s chosen definition, again?
Merriam-Webster defines a Ponzi scheme as "an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks."
Swindling includes both components: taking unjustly from someone, and doing so with fraud, as opposed to with force. The government is running what is structurally a Ponzi scheme—a financially empty and ineffectual activity that depends on paying out today’s beneficiaries with today’s intakes at rates that cannot be sustained such that the last recruits are doomed from the beginning, to borrow Dilbert’s language, to get it in the shorts.
Remember what Ron Johnson said: he didn’t say it was a “literal Ponzi scheme.” He called it a “legal Ponzi scheme.” That means that it is not something that you can prosecute—and given that fact, and the fact that you can coerce people to participate (rather than needing to trick them), it is perfectly reasonable that he is talking about a scam that is not deceptive about its bookkeeping, but rather tells you to your face that the program is unsustainable. Remember, those dire figures from above were coming from the Congressional Budget Office and Social Security Trustees. Is that really an untruth about the heart of the concept, or is that a peripheral detail that is perfectly accounted for by the circumstances that Johnson himself mentions with that qualifier “legal”?
Put another way: imagine that one of your granddads gave his life savings to Bernie Madoff and lost it. Imagine that your other granddad was held up at gunpoint on Fifth Avenue by a man in a suit telling him that he needed to fork over his life savings so that he could pay off some earlier investors in his scheme, but also, there’s a chance your granddad would recover that money in the future from some other held-up guy (but he never does). Do you really feel more incensed about one of those experiences than the other?
The severest judgement that Politifact could levy, on these merits, is that Johnson’s claim is “mostly true,” on the understanding that his assessment of the structure of Social Security is correct and the caveat that this system is predicated on vacuuming up new funds via coercion rather than the trickery that “real” Ponzi scams depend on. But instead they deemed it “Mostly False,” a term they define as “The statement contains an element of truth but ignores critical facts that would give a different impression.” I’ve been reiterating as many critical facts as I can find here, and I think the impression they give is the one Johnson represented.
READER: But Charles Ponzi and Bernie Madoff ran these schemes to enrich themselves, to live lives of Manhattan luxury. Taking the money and running is not what the heart of Social Security is about!
ME: I get where you’re coming from, but I think this distinction is the superficial and misleading one.
FDR (the founder of Social Security) was a wildly popular president who enjoyed national fame and goodwill for distributing money made by some people and giving it to politically popular recipients. He’s long gone, and will never have to reckon with forcibly taking huge sums of money from that last fleet of recruits who will never see a cent of it again. As recently as February, another Democratic President, Joe Biden, was talking about this exact crux of the issue:
Let’s remember what this is all about. Some of you are on Social Security or your parents or grandparents are. You earned it. You earned every single penny, and you paid into every paycheck you ever got. From the time you were a teenager, you had money taken out for those programs.
But remember what we already established: if something cannot continue, it will stop. The moral weight of the social agreement that Biden is stressing so abundantly in the context of dialing back benefits now, while we still have some runway on this and can brace for impact, is not generous at all. It’s just kicking the can a little bit further down the road, only for the next slate of Americans to have to get an even more raw deal, on a timetable not of their choosing or control.
Even this moral high ground ignores the basic crux of the matter that, whether funding a yacht for Bernie Madoff or needed groceries for eighty-something retirees, that money (which could be invested to grow over time) is being taken for a system that is producing nothing and destined to fail.
At the end of all this, ironically, even the much-stressed dynamic of transparency is undermined by shock troops like Politifact going around and insisting that as a factual matter, it is “mostly false” to compare Social Security to a Ponzi scheme. Kicking up dust to give the public the impression that this program is essentially different from a Ponzi scheme gives them the wrong idea about how it functions, how it fails to generate wealth, how it is doomed to short-change the last generation in some form or other. (That might look like austerity measures on benefits paid out; it might look like hiked taxes in other areas to keep funding the payouts; etc.)
On a practical level, this makes it more like a Ponzi scheme, where the direct and gloomy paperwork of the CBO and SSA gets overshadowed by Politifact headlines that it’s not a Ponzi scheme. That your money is safe with them. That you will pay into it over the course of your career and get to draw benefits from it in your retirement, when your money will definitely still be there.
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