Erica Greider has a variety of gripes with Social Security and Jonathan Bernstein has a variety of gripes with her, including “Note too that Grieder calls Social Security a ‘pyramid scheme,’ which is also common usage and also totally wrong.”
I think perhaps the best way to describe what’s wrong with this is to observe that on an adequate level of generality everything is a pyramid scheme. Imagine a country with no Social Security. People would still presumably want to structure their lives such that for a while they produce more than they consume, and then later in life when they’re old they consume more than they produce. The only way for this to work is for them to save money in vehicles that earn a positive rate of return and the only way for that to happen on average is for the future economy to be larger than the present economy. That, in turn, relies on population growth and productivity growth. If population growth slows, you’re going to have a problem. In a pyramid scheme, everyone makes money until you run out of new people to bring into the scheme. Similarly, if you imagine a country with no children and no immigrants then clearly the economy is going to go bust once it starts running out of new workers. But the fact that it would go bankrupt if the country ran out of people doesn’t make Wal-Mart a “pyramid scheme” and Social Security’s no different from Wal-Mart in its implicit assumption that there will continue to be new people in the future.
The difference between a government program founded on an assumption about future population growth and a private investment founded on an assumption about future population growth is this. If your private investment turns out to be founded on a small but meaningful miscalculation, the adjustment happens automatically. If your government program turns out to be founded on a small but meaningful miscalculation, the adjustment requires an act of congress. But the facts about the quantity of real resources available aren’t affected by the existence or non-existence of a public program.
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