Sunday, September 25, 2011

Social Security, Ponzi Schemes and Frank Koller's Defense: Unsustainable

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In a better world, words and facts would be the only things that matter in a serious discussion about the future of the country.

Sadly, in this world, the facts are that the current crop of Republican presidential candidates (backed by their senior advisors and supporters) is so dramatically distorting the meaning of two words in the English language that the future is in serious jeopardy.

Ponzi Scheme happily rolls off the tongues of Rick Perry, former Minnesota Governor Tim Pawlenty, Rush Limbaugh, University of Maryland economist Peter Morici and many others.

(I guess I should bang my head against a wall for deluding myself that they really don't know what a Ponzi Scheme is. Of course they do.)

But let's refresh. Here is the standard definition of this phrase in the English language.
Ponzi Scheme: "a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors." (For you keeners, here's the SEC definition.)

The crucial word here is "fraud." So just to be clear, let's review what fraud means.
Fraud: "A wrongful or criminal deception intended to result in financial or personal gain."
Now, let's take this a little further, sticking with facts.

The Social Security Act was approved by the Congress of the United States and then signed into law by President Roosevelt on August 14, 1935. It has never been overturned by the US Supreme Court in the 76 years since then.

Who -- exactly -- over the past three-quarters of a century has criminally benefited from Social Security?

Social Security's serious challenges -- and there are many -- derive from huge changes in the demographic makeup of the country, startling shifts in the ratio of workers to recipients, dramatic differences in the structure of the country's economy since the 1930s, questions of appropriate contribution rates and debates over rising administration costs, among other factors.

Crime, however, ain't one of the problems facing the system.

The real "deception" here is the craven mislabeling of Social Security as a Ponzi Scheme by so many Republicans. Their blatant distortions about Social Security are clearly -- and only! -- designed to result in "personal gain" for themselves during this election cycle.

Gee, doesn't that sound like fraud?


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Truly stupefying that Koller would even bother tackling this subject so half-heartedly while lobbing claims that he should know, intuitively, are just not true.

Rather than explicating how the admitted "serious challenges" that social security faces shouldn't cause us to consider scrapping the fiscally unsustainable (see the parallel here, Frank?) progam, he attacks his political opponents for their dramatic and loose use of familiar phrases like "ponzi scheme." Even this, succeeds on its own terms only through tedium and selectivity in a brilliant "forest-for-the trees" approach.

Let me explain.

Koller has initially selected a rather broad definition of fraud. This is perfectly acceptable given his anticipated audience. Fraud allegations are very strictly construed and must be plead with specificity in a court of law. However, in my experience, most people feel that actions that fall well below the standard of "legal fraud," as defined most places, are accurately described as fraudulent, myself included. The definition chosen by Koller, when dissected, boils down to "A wrongful deception intended to result in gain." Fair enough. I think that perpetuating a scheme wherein new investors are promised impossible returns is accurately described as fraudulent.

Mr. Koller seems like a pretty sharp guy so when he suggests that the campaign bluster about social security amounts to fraud, the irony starts leaking from my flatscreen. Clearly, he is being intentionally obtuse as the metaphor is rather evident. The common understanding is that a Ponzi scheme operates, more or less, thusly:

Investors are offered an allegedly sound investment (of course, social security is mandated upon pain of imprisonment)., typically with some guaranteed return which is unsustainable. Because of this, the investment cannot meet the obligations of the promised returns. Rather than cease the investment and pay out the losses, those holding the investment cover it up to protect themselves financially, politically and personally by paying early investors with the funds brought to the investment by the later investors. Because the investment itself is not profitable enough to pay its liabilities to investors, it will never become financially solvent. The amount of investors who pay in and receive nothing will continue to grow until the scheme finally collapses because it is unsustainable. Meanwhile, those in charge of handling the investment pay themselves with the investor's monies for their "services."

I suggest Koller read Harry Markopolous' "No One Would Listen" about Bernie Madoff, one of the most recognized Ponzi schemers of our time. While social security breaks from the common understanding or strict definition of a Ponzi scheme in some notable ways, the gist is the same. Investors are misled into paying in to an unworkable scheme wherein monies are paid out to some investors to perpetuate a scheme that benefits few but which will ultimately take more money from most investors than it returns, resulting in gross inequity. The longer the scheme is perpetuated, the greater the inequity.

Koller has the nerve to ask who has benefited criminally from social security? What are you, on dope? First, I fail to see the relationship between "criminal benefits" and fraud as broadly defined above. Many "rip-offs" that are perfectly "legal" are frauds nonetheless. But you know what, Frank? I'll bite. Go to http://www.google.com/news and type in the search box "social security fraud guilty." Crime isn't a problem facing the social security system, you say? Fantasize much?

I'm not even going to bother to explain why the fact that the Supreme Court has not overturned the Social Security Act in 75 years couldn't be more irrelevant to Koller's tripping over himself to engage in mental gymnastics justifying his own claims of fraud against those whose ideas differ.

Lastly, I noticed that Frank didn't elaborate on administration costs and "other factors." Arguably there is fraud and criminality here, too. Of course, ultimately, it is tough to nail Frank down because he wants to read his definition of fraud differently depending on the application. When it comes to social security, he apparently wants critics to establish fraud to legal standards (which I have done, though it is admittedly not integral to the system, just an inevitable side-effect). When it comes to accusing his opponents, however, any deception for gain is enough to start slinging the accusations. How convenient.

Any way you slice it, Koller's defense of social security against accusations that it is a fraudulent Ponzi scheme is weak at best and ultimately, like social security and Ponzi schemes, is just not sustainable.

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