The core argument of Bryan White’s analysis of the above PolitiFact "False" ruling (of the statement "Social Security is a Ponzi scheme" by candidate John Loughlin, Republican running for Congress in Rhode Island) is mostly found in these comments:
“Is fraud an absolutely critical component of a Ponzi scheme? The government, as noted above, can compel participation in the program. There's no need to dupe people into participation because they're forced to participate…Fraud is not an essential aspect to the Ponzi scheme. It is an optional element used by entities unable to force participation in their financial/insurance products. Regardless, the government has arguably misled its citizens about the financial soundness of their social insurance program.”
So let’s see if that holds up in court: “…uh, Judge, my client couldn’t force participation in his Ponzi scheme like the government does with social security, so he elected to use the optional element of duping them by promising exorbitant returns....therefore his using the funds for personal purposes, not being up front about the investment, and the plaintiff losing everything invested, can't be fraud either.”
Bryan implies that most people feel compelled or forced to participate in social security, assumes FICA taxes as a high negative, but most important, ignores the fraud of the disbursement and operational component of Ponzi. Bryan slinks into a conflation of social security with Ponzi when he says fraud is not an essential part of Ponzi—fraud IS an essential part of Ponzi, and Ponzi is not the same as social security.
In other words, Bryan takes one element--how the funds are initially obtained--and uses it to dispense the entire fraudulency of Ponzi. But there are other elements of fraud in Ponzi that are not in Social Security; unfortunately, Needham only touched lightly on some of those elements.
Bryan clearly doesn’t like our social security system; maybe he should do a Robyn Blumner survey on himself and choose Chile’s Pinochet Regime system of social security privatization.
But to continue, here is the Ponzi definition from the Legal Dictionary: “A fraudulent investment plan…”"Chile's social security system requires deep reforms in all sectors, because half of Chileans have no pension coverage, and of those who do, 40 percent are going to find it hard to reach the minimum level," Piñera said in a televised debate with Bachelet on Wednesday. "This has to be confronted now, and we agree with Michelle Bachelet and will, I hope, join forces behind this large undertaking."
And the Ponzi definition from Lawyers.com: “…an investment swindle in which early investors are paid with sums obtained from later ones in order to create the illusion of profitability.”
Numerous legal cases can be cited that support the fraud definition of Ponzi:
"A Ponzi Scheme, by definition, is a scheme and artifice to defraud that was insolvent from its inception. See Scholes v. Lehmann, 56 F.3d at 755; Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 871 (D. Utah 1987); In re Taubman, 160 B.R. 964, 978 (Bankr. S.D. Ohio 1993); Martino v. Edison Worldwide Capital (In re Randy), 189 B.R. 425, 441 (Bankr. N.D. Ill. 1995); Emerson v. Maples (In re Mark Benskin & Co.), 161 B.R. 644, 650 (Bankr. W.D. Tenn. 1993) and Dicello v. Jenkins (In re International Loan Network, Inc.), 160 B.R. 1, 12 n.15 (Bankr. D.C. 1993)."
Bryan then attempts to further parse the “fraud” part out of the definition of Ponzi by claiming that in the economic theory of Ponzi, fraud is disregarded, and griped that Needham the writer should have addressed it. Reading his links, it is clear that in economics theory, attempts are made to quantify by complex formulas with different inputs *Ponzi* sustainability, and in theory, if there can be a perpetual or rational Ponzi. In otherwords, it’s something on paper only. If anyone is equivocating here, it’s Bryan, not PolitiFact. PolitiFact stuck to its guns with the legal and commonly recognized definition, while Bryan thought he could muddy things up with scholarly economic theories of Ponzi sustainability, just because one study he cites starts out by saying the fraud part of Ponzi is disregarded. It's entirely reasonable, in this case, to expect Ponzi to only be considered in its common vernacular. I would venture that if someone asked either John Loughlin or Cynthia Needham about the *economic theories of Ponzi* they would not know what it meant.
This reminds me of when I first started debating on Facebook with Bryan White and I was attempting to understand a term he used called "concrete examples" where he was defending a comment made by Dick Cheney. I used it the way I understood it, "substantive examples"--until Bryan told me that "concrete examples" was a "rhetorical device" (basically, a bullet list with a repeating phrase for each bullet). Well, I asked around, I asked an English teacher I knew, and no one seemed to know that "concrete examples" was a rhetorical device. I told Bryan who said about the same thing he did about "economic theories of Ponzi"--most everyone should know that this is what it means. Maybe if everyone was Bryan.
Like Bryan White, this is to disclose that I also have used the term “Ponzi” ("like a Ponzi", or "modified Ponzi") for social security, but only as a label: I know it does not meet the legal definition of Ponzi as described above. In a way, Ponzi has become what is called in marketing a genericized trademark or brandnomer; this may explain why it is used in those scholarly economic studies. The term Ponzi is often used loosely to characterize hopelessly over-extended businessmen in legal trouble:
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| This is one page from one study of Ponzi sustainability. There are more pages like this. |
This reminds me of when I first started debating on Facebook with Bryan White and I was attempting to understand a term he used called "concrete examples" where he was defending a comment made by Dick Cheney. I used it the way I understood it, "substantive examples"--until Bryan told me that "concrete examples" was a "rhetorical device" (basically, a bullet list with a repeating phrase for each bullet). Well, I asked around, I asked an English teacher I knew, and no one seemed to know that "concrete examples" was a rhetorical device. I told Bryan who said about the same thing he did about "economic theories of Ponzi"--most everyone should know that this is what it means. Maybe if everyone was Bryan.
Like Bryan White, this is to disclose that I also have used the term “Ponzi” ("like a Ponzi", or "modified Ponzi") for social security, but only as a label: I know it does not meet the legal definition of Ponzi as described above. In a way, Ponzi has become what is called in marketing a genericized trademark or brandnomer; this may explain why it is used in those scholarly economic studies. The term Ponzi is often used loosely to characterize hopelessly over-extended businessmen in legal trouble:
“In closing, I want to alert you to the fact that it may not always be clear that a debtor was in fact operating a Ponzi Scheme and I have been involved in cases where over zealous prosecutors applied this label to legitimate businessmen who became hopelessly overextended, made poor business decisions and pursued fiscal strategies that were totally unrealistic in hindsight.
The reality is, in their efforts to stay afloat, people in this position often continue to borrow money, incur future obligations to meet today’s bills and use the funds invested today to satisfy today’s debts. Rather than give up, admit defeat and abandon their dreams, honest people with no intent to defraud may very well continue to borrow from Peter to pay Paul long after it should have been obvious that they were hopelessly insolvent. There is a profound difference between a desperate businessman who makes poor decisions and a Ponzi operator.”
A modified “rational Ponzi” is featured by most social programs, not just the United States but, for example, in the U.K. where it’s called National Insurance. As described at Fact-Archive.com:
“Retirement programs run by national governments, though they involve the taxes paid in by workers being redistributed to pensioners, nevertheless differ in a number of basic features that are usually found in Ponzi schemes, but are not fundamental to them:
• Retirement systems, like Social Security, are openly declared for what they are. In a genuine Ponzi scheme, the perpetrators falsely claim that there is some business that generates the promised revenues. In Social Security, people know where the money comes from, and actuaries supply written predictions of future cash in-flows and out-flows.
• Retirement systems promise a stipend to the country's retired persons, not the quick and exhorbitant profits to current investors that Ponzi schemes invariably offer.
• Retirement systems rely on the taxing power of the state to ensure continuous funding. In practice, this taxing power has been used primarily for dedicated revenues (taxes), although in theory general tax revenues could be used to supplement worker payments into the systems. (Historically in the U.S., Social Security has almost always been in surplus, so this has never been an issue.) If the political process were used to raise required contributions via retirement taxes, or to reduce benefits (including raising the retirement age), either across the board or just for the better-off, there would certainly be opposition from those who would pay more or get less, but politicians have only those two choices (plus borrowing) if revenues are inadequate.
• In the long run, retirement systems pay out an approximately equal amount to what was paid in, per contributer, plus interest. (In the short run, pension surpluses can be used to cover a government's current general-revenue shortfall, as has been happening in the United States since Social Security contribution rates were increased in 1983.)
• Retirement systems are in many ways insurance rather than investment systems. A person who dies before retirement gets no money back (regardless of what he/she paid in). Someone who lives to a very old age continues to get payments regardless of the amount of money he/she has paid in. And someone disabled, even at a relatively young age (well before he/she can make significant payments into the system, or have significant private investments), still receives payments until the end of his/her life.
• Unlike in a Ponzi scheme, government receipts (taxes) and payouts (entitlements) can be calculated quite accurately in the short term (five to ten years), and predicted (with a range of assumptions) for periods beyond that timeframe. A sudden collapse is therefore unlikely.”
Finally, a few words about the statement by Needham: “…Since then, participants and those who pay into the system have been well aware of how the program is run.” Of course, Bryan has to, as they say, get as much cowbell as he can, and stated it was “unacceptable” that Needham was “[u]sing herself as the expert source for the claim that people understand the nature of Social Security financing .” Reading on, it appears she drew her conclusion from the comments by Mitchell Zuckoff who said “…there is no secret to how Social Security is run.”Maybe this recent Rasmussen Report can answer that question with more detail.
Democrats (50%) are twice as likely as Republicans (24%) to say Social Security is not a Ponzi scheme. Thirty-eight percent (38%) of GOP voters think it is. Voters not affiliated with either party are closely divided on the question.
Seventy-eight percent (78%) of those in the Political Class say the federal retirement system is not a Ponzi scheme. But among Mainstream voters, 35% believe Social Security is such a scheme, 24% do not, and 42% are undecided.”
Bryan used about 2,800 words in three posts attacking an article of about 900 words by a relative newcomer to PolitiFact (Cynthia Needham). Word to Cynthia: Don’t worry about the F grade.
| Title and Link | October 3: John Loughlin says "Social Security is a Ponzi scheme." |
| Who? Affiliation | John Loughlin, Republican running for congress in Rhode Island |
| Ruling | False |
| Checkers | Cynthia Needham (Writer, Researcher); Susan Areson (Editor) |
| # of words | 885 |
| #Sources Cited | 9 |
| Argument Summary | John Loughlin told PolitiFact (PF) Rhode Island that Bernie Madoff, the famed NY fraudster, “ went to jail for doing the exact same thing this country is doing with Social Security (SS)." He stated that SS is nothing but a Ponzi scheme. PF found that SS is not a Ponzi scheme because it does not have the element of intent to deceive, and because Loughlin used the Madoff analogy as well, rated him False. |
| Bryan’s Argument and “IS” word or Expression | Bryan cited *professional literature*, particularly one document from 1992 which states “In economic theory, however, the label 'Ponzi' survives largely stripped of its connotation of fraud” as proof that PF is equivocating on the definition of Ponzi. He also gives examples of speeches by presidents which he feels support “misrepresentations” of the financial stability of SS (i.e., intent to deceive). |
| Quick Interpretation | Ponzi is often a label for “paygo” or “ZBA” (Zero Balance Accounts). Bryan ignores the first, very crucial parameter of the Ponzi label he cites: IN ECONOMIC THEORY. His article concerned, as he noted, how long a rational “Ponzi” game can be perpetuated; the fraud is a *given* mostly in terms of r, the rate of return given the investors/lenders, so it IS relevant. |
| My criticism: | There’s more than just the fraud factor. See my write-up above. |
| Guidelines | Number 1: Beyond its scope. PF stuck with the legal definition, the most used, most popular definition of Ponzi. It was beyond its scope to get into the economic concept of Ponzi. |
| Rhetorical Devices/Logic fallacies | Equivocation: PF “rested its case” on the definition of the word Ponzi as a legal term which rests on the intent to deceive, when Ponzi in economic terms excludes that connotation (which is also not quite true). |
| DOES IT CHANGE THE RULING? | Bryan points to a Barely True on a previous rating as a contradiction, but given his “disclosure”, my guess is he’d prefer this be a Half True or Mostly True. |
| My view | I often call SS a “modified Ponzi” because of the similarities as a “ZBA” system. But it does not meet the legal definition. Neither do I buy the argument that the only difference is there’s “forced” taxation in place of “being duped”. If that’s the case the Defense Department must be a Ponzi too. |
| Comments | The SS-as-Ponzi analogy is a right-wing favorite at Cato and Free Republic. In the Clinton years, it was called a pyramid scheme, which is along the same lines. (So, which is it????) |
| Consequences of Bryan’s interpretation (What I have to believe if he is correct) | John Loughlin told PF RI that Bernie Madoff, the famed NY fraudster, "went to jail for doing the exact same thing this country is doing with Social Security." He stated that SS is nothing but a Ponzi scheme. SS is a Ponzi scheme in the economic sense because it has all the features of one, but without the element of fraud; however, in the historical context, those who are forced to pay into the SS system have been misled by our leaders about its stability. |
| Bryan’s Grade | Four Pepés: Parsing/compartmentalization, his own equivocation of confusing the legal meaning of Ponzi with the economic concept of it, the feeble "initial funds receipt is only fraud" argument, and not recognizing the implicit “r” in the “professional literature” for what it represents. |
| PF Grade | Two Pepés: Needed to show more evidence of how SS is not a Ponzi besides “intent to deceive.” |
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