Everything that needs to be said has already been said.
But since no one was listening, everything must be said again.

Andre Gide

Monday, September 12, 2011

Paul Samuelson on Social Security

Great quote here, via Greg Mankiw's blog, by Paul Samuelson on social security:
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.
To the right is a cartoon, via Lones Smith, that is just too funny (and sad) for words.


  1. Did Paul say SS ponzi was a good ponzi or a bad ponzi? Did he recommend a replacement for producing income security for us old coots? Seems like any US debt obligations are ponzi's also.
    Was it Krugman that said the US government was an insurance company (ponzi) with an army?

  2. Dilbert:

    You may be interested in Simon van Norden's post here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/09/ponzi.html

    To answer your question directly, I don't know what Samuelson said (as I did not read the original article).

    Having said that, I am familiar with Samuelson's overlapping generations model. It is possible for the Ponzi scheme to be Pareto improving under a strict set of circumstances. Whether these circumstances hold in reality, however, is a different question altogether.

  3. David:

    1) Thanks for the link.
    2) The conditions are that the return to investments must be less than the growth rate of contributions to the Ponzi scheme.
    3) There was a nice article long ago (Ball et al., JMCB 1998, p. 699) that analyzed those conditions held in the case of US government debt. Using data going back more than a century, they concluded that it did most of the time. However, the article carefully avoided the use of the word "Ponzi". (Note that Ball's co-authors on the paper were none other than Greg Mankiw and the current head of the CBO.)
    4) Whether these conditions will hold in future depend greatly on your outlook for growth and interest rates. For example, if you think the 10-yr TIPS rate will stay at roughly zero, then it seem pretty certain that the economy will grow faster than that...(but that's a big "if".)

  4. I think I had your comment (4) in mind when I posted this. And thanks for the reference to Ball, et. al.!

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