food shipments

Is Welfare a giant Ponzi Scheme?

This exact question has been posed by Ramesh Ponnuru at Right Matters hosted by the WaPo.

It is a good question but let’s adapt it for New Zealand, thus I re-write his original to put it in a New Zealand context. When I say social welfare I mean all forms of welfare including National Super-annuation and Kiwisaver. So is Welfare a giant Ponzi scheme?

WelfareA number of conservatives have used the Madoff scandal to suggest that Social Welfare is a Ponzi scheme. Washington Post writer Michael Rosenwald enlists Henry Aaron, one of the grand old men of liberalism, to argue that the program has nothing in common with such a scheme, for two reasons: It is still building up reserves; and participation in it is mandatory rather than voluntary.

Now there are of course obvious differences between Social Welfare and a Ponzi scheme, notably the absence in the former case of an intent to defraud. But there are uncomfortable similarities as well. Ponzi schemes require fresh participants to pay off the old ones, for example, and this is clearly true of Social Security as well. Moreover, what Aaron is saying is basically that a Ponzi scheme isn’t one so long as it is successful.

Social Welfare won’t be building up reserves for much longer, and in any case its “reserves” consist of IOUs from the government. Participation may be mandatory, meanwhile, but having children isn’t–and Social Welfare is actually worse than the typical Ponzi scheme in that its structure discourages the generation of new participants; studies suggest that the crushing tax burden it puts on workers suppresses the number of children they have. The comparison of Social Welfare as presently structured and Ponzi schemes is, in short, unfair to Ponzi.

What do you think? To help you here is some useful information from Willisms.