Saturday, September 10, 2011

Yes, it's a Ponzi scheme

Greg Mankiw quotes the famous left-wing economist Paul Samuelson:
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.
This fundamental truth is one that the Washington establishment, as epitomized by Thomas "I wish we were more like China" Friedman, refuses to acknowledge:

It seems that Rick Perry has roiled Washington by committing a Kinsley gaffe.

Update: Even Paul Krugman agrees it's a Ponzi scheme!

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