In the last couple of Republican presidential debates, a comment made by candidate Rick Perry on whether Social Security is a Ponzi Scheme has been the center of much discussion. The argument has spiraled (as these things tend to do) away from the concept of what a Ponzi Scheme really is and whether it is a justifiable comparison toward whether the use of such terminology is intended to scare senior citizens who depend on their SS checks to survive.

Notwithstanding those tangents, the objective observer might want to seriously consider the similarities and differences between Charles Ponzi’s original scheme and the nation’s old-age pension program, Social Security. As candidate Herman Cain said, “I don’t care what you call it, it’s broken.”

To add to the discussion, Donald Boudreaux of George Mason University and Cafe Hayek makes a worthy comparison:

(Cafe Hayek) What is that essence?  I submit the essence of a Ponzi scheme is

(1) its promise that contributions today to the scheme’s manager will pay off handsomely (that is, better than alternative investments) in the future to each contributor;

(2) that current contributions to the scheme are not invested but are spent – in particular, are spent to make good on promises made in the past to previous contributors who now expect their stream of pay-offs;

(3) that the manager of the scheme maintains his ability to pay the promised streams of pay-offs only by getting other contributors into the scheme, but

(4) the manager doesn’t let on to contributors (and would-be contributors) that the funds for paying off the promises come not from any profitable, productive investment of contributed funds – nor from any actuarially justified program for reallocating risks across persons or across time – but come, instead, simply from the hope that future contributors can be corralled into the system;

(5) that if future contributors do not arrive in sufficient numbers, the scheme has too little money on hand to pay off all promises;

(6) that the manager of the scheme, in short, successfully persuades his or her targets that the scheme is financially something that it really is not.

Note that I do not list “pyramiding” – a “pyramid scheme” – as being among the essential qualities of a Ponzi scheme.

On these points, Social Security strikes me (again, as it has struck even some of its illustrious champions) of having a great deal of Ponzi-ness about it.

One might add that Ponzi Schemes are illegal. And that seems to be the main difference between them and Social Security, which is perfectly legal.