Naturally, since this friday was the first time that the SB server has really been down since I start blogging (planned downtime, as it happens, for a major system upgrade), there
\nwas spectacularly bad math in the local news here in NYC friday afternoon.<\/p>\n
I’m not sure how long this has been the case, but Mayors of NYC have a radio show. It’s a mixture of them spouting off about whatever they feel like babbling about, and call-in questions. I don’t generally listen, but once in a while, if the mayor says something either particularly interesting or particularly insane, I’ll hear the segment repeated on the local NPR station.<\/p>\n
In this friday’s show, he sprung a really shockingly stupid line. The supposed
\ntopic was Bernard Madoff and his pyramid scheme. Bloomberg responded by saying
\nthat “Madoff’s isn’t the biggest ponzi scheme ever. If you really want to see the
\nworlds biggest ponzi scheme, just look at social security.” He continued along
\nthose lines for a few minutes.<\/p>\n
This is, to put it mildly, bullshit. Incredibly, stupid, rampant, bullshit.<\/p>\n
<\/p>\n
As usual, I’ll start with a bit of background to clarify things.<\/p>\n
A Ponzi scheme is a particular kind of pyramid scam. It’s really a process for running a
\nscam. The way that it works is that you create some kind of “investment fund”. You promise
\nsome kind of great payoff, and convince people to invest. As you get new investors, you use
\ntheir investments to pay off the previous investors, skimming off a layer from the top to
\nenrich yourself. The whole pyramid – the layers of investors paying off investors – is really just a front for what’s really going off – which is the manager of the Ponzo scheme
\nstealing money.<\/p>\n
For example, you could start a Ponzi scheme by selling an “investment” with
\na promised growth rate of 50%\/year. Suppose you sold 10 $100,000 “shares” in your fund.
\nAt the end of the year, you need to be able to pay $150,000 to each of your original
\nten investors. So you get 20 people in invest – you’ve then taken in $2,000,000, and
\nyou’ve paid out $1,500,000, which means you got to pocket a cool half-million dollars.
\nOf course, the next year, you need to enlist 30 new investors just to break even – so you’d get something like 40 – and pocket the money left after paying off the previous
\nyear’s 20. And so on.<\/p>\n
This works great for as long as you can rope in more investors. But eventually, The whole idea of a Ponzi scheme is that you’ve got that pyramid – the ever-growing For those who haven’t followed it, Bernie Madoff is a famous New York Ok. So that’s background. Now Bloomberg is coming along and saying that Madoff’s Why do I say that that’s bullshit?<\/p>\n The biggest reason is: social security isn’t an investment.<\/em> It’s a government Social security, from the day it started, has been a direct payment system – that is, it There’s a piece of it which looks Ponzi like: generation N+1 pays in to the system, In practice, maintaining the zero-balance gets complicated, and the complications can Instead of constantly changing the social security tax rate – lowering it when the You don’t have any money saved or invested in social security. It’s not a savings It’s not a Ponzi scheme. It’s a zero-balance tax-funded benefit system. The similarity There are philosophical and political arguments against social security. Personally, as a Naturally, since this friday was the first time that the SB server has really been down since I start blogging (planned downtime, as it happens, for a major system upgrade), there was spectacularly bad math in the local news here in NYC friday afternoon. I’m not sure how long this has been the case, but […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[71],"tags":[],"class_list":["post-731","post","type-post","status-publish","format-standard","hentry","category-bad-economics"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p4lzZS-bN","jetpack_sharing_enabled":true,"jetpack_likes_enabled":true,"_links":{"self":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/posts\/731","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/comments?post=731"}],"version-history":[{"count":0,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/posts\/731\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/media?parent=731"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/categories?post=731"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/tags?post=731"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nyou’re going to get to the point where you can no longer bring in enough investors.
\nAnd the whole mess collapses, because there was nothing<\/em> really there. There was
\nno business. There was no investment. There was just a scam to allow the people who
\nstarted it to cheat a lot of people out of a lot of money.<\/p>\n
\npool of “investors” at the bottom, who are pouring money into the pool, and there’s a small group of people at the top, who are stealing money from the pool, while doing the Ponzi
\npayoff trick just to make the people at the bottom still keep pouring money in.<\/p>\n
\ninvestment broker. He’s the former president of NASDAQ. It turns out that his
\ninvestment fund wasn’t really an investment fund – it was just a Ponzi scheme. He
\nmanaged to keep it going for an astonishingly long time. And it wasn’t
\na well-hidden one – we was under suspicion for at least<\/em> a decade, but
\nno one really bothered to investigate, because despite the fact that it looked
\nlike a Ponzi scheme, acted like a Ponzi scheme, smelled like a Ponzi scheme, etc.,
\nno one could believe that a guy like Madoff would get involved in anything
\nso crass<\/em>.<\/p>\n
\nPonzi scheme – the largest one in history – is nothing, because social security is
\nthe same thing, but on a much bigger scale.<\/p>\n
\nsocial program that taxes wage-earners, and guarantees that every retired person
\ngets enough of a pension to allow them to get by. That might seem like a shallow
\ndistinction – but it’s not. It’s incredibly important. The trick behind a Ponzi
\nscheme is that you lie<\/em> to the people buying in to it. You tell them that
\nthey’re investing their money, when you’re really just pocketing it.<\/p>\n
\nlevies a tax, and the revenue from that tax is used to pay the cost of the program. It’s not
\na savings fund, it’s not a personal investment – it’s a tax program that provides a pension
\nby levying a tax. The original idea of it was to be a zero-balance program – each year, it
\ntakes in as much in taxes as it needs to pay benefits, so that at the end of the year, the
\nbalance is zero. It’s a system that deliberately<\/em> operates on the edge of what would
\nbe bankruptcy if it were a business! It constantly tries to ensure that it’s expected income
\nnever exceeds its expected payments.<\/p>\n
\nwhich pays the benefits for generation N. Each successive generation, when it retires,
\ncollects benefits based on money paid in to the system by the next generation. But remember that the point<\/em> of the Ponzi is to (A) trick people into thinking that they’re
\nmaking an incredibly profitable investment, and (B) skim a huge amount of money for yourself from the top. That’s not what social security does, at all. It’s a zero-balance
\ntax-funded benefit.<\/p>\n
\nmake it appear, in some ways, to look a bit like an investment – but it’s important to keep
\nin mind that it’s not. As I said above, the idea is to make expected<\/em> payments match
\nexpected<\/em> income. The expected payments are the amount of money that conservative
\nprojections predict will be needed to provide a basic living-wage pension to every retired
\nperson. The expected income is the total amount of money collected as taxes from
\nwage-earners, and any income earned by investing that money. It’s not<\/em> really run on
\na year-to-year balance method, because that wouldn’t work well. The government actuaries and
\naccountants who administer the program, being the kinds of meticulous people that actuaries
\nand accountants typically are, naturally realize that demographics make this complicated: the
\nratio of the number of people paying<\/em> social security to the people collecting
\nbenefits isn’t constant. In fact, there are some bulges<\/em> – that is, generations of
\npeople that are larger than average. When they retire, the payments out of the program are
\ngoing to be disproportionately large. But before they retire, the number of people paying
\ninto<\/em> the program will be equally disproportionately large.<\/p>\n
\nlarge generation is paying in, and raising it when they’re drawing out, it makes a lot
\nmore sense to set the rate so that they take in excess for a demographic bubble,
\nthey put the excess away, and save it. Then when that bubble retires, the social security administration will have the excess money that they saved away to pay the benefits. If you look at that, you can see it looking sort of like an investment. You pay social security taxes, and right now (as we head towards the end of one of those demographic bubbles),
\nmost of the money that you pay is invested by the government into federal treasury bonds. So the money that’s being paid into SS by you is, mostly, being invested. But it’s not the case that your SS money is being invested for you. It’s being used to pay current benefits – and saved to pay off the next generation of benefits – which is, most likely, not yours. Your<\/em> SS benefits will be paid by taxes paid by the next<\/em> generation of
\ntaxpayers. That’s the way it works, by design.<\/p>\n
\naccount, or an investment account. It’s a tax that’s used to pay benefits. And there’s
\nno one making a profit by stealing money from the social security.<\/p>\n
\nbetween SS and a Ponzi is that at any moment in time, the people paying in<\/em> to the system are different from the people who are cashing out – and the first generation of people who collected money from SS didn’t pay in to it at all. At any point in time, generation N+1 is paying the benefits for generation N. <\/p>\n
\nliberal, I find most of them rather unconvincing. But my opinion is beside the point. If someone like Michael Bloomberg doesn’t like Social Security, he should have the guts to be
\nhonest about why. Bloomberg is no dummy – especially when it comes to finances. He knows how it works. He knows that calling it a Ponzi scheme is an out-and-out lie. But he’s willing to tell that lie.<\/p>\n","protected":false},"excerpt":{"rendered":"