Republican Debate: Some Quick Reactions

Thu, 08 Sep 2011 02:18:44 +0000

Tonight's was the first Republican primary debate I watched start to finish.  My bottom line is that, based on this performance, only Mitt Romney and Jon Huntsman looked like viable candidates in the general election.  I was underwhelmed by Rick Perry, and sadly disappointed in the discussion of Social Security as a Ponzi scheme.  There is a difference between a Ponzi scheme and a pay-as-you-go system.  The Social Security Administration provides a very clear explanation here.  The key excerpt:

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

So we could image that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants. (There does not have to be precisely the same number of workers and beneficiaries at a given time--there just needs to be a fairly stable relationship between the two.) As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.

The problem with Social Security is that over the long-term, the flow into the pipeline is projected to be less than the flow out of the pipeline.  Republican candidates should have been talking about ways to gradually phase in progressive reductions in that outflow to match the inflow.  If instead they want to fix the projected imbalance with new revenues, they should have been talking about ways to separate that money from the rest of the government's budget with personal accounts.

In case anyone cared about the facts ...