Is Social Security a Ponzi Scheme?
By Laura Meckler
Texas Gov. Rick Perry called Social Security a “Ponzi scheme” in his 2010 book, “Fed Up.” On Wednesday night he doubled down, repeating the claim at a Republican debate and adding for good measure that the program is a “monstrous lie.”
- In this Jan. 20, 1935, file photo, Charles Ponzi is shown in the garden of his home in Rome, Italy, after being deported from the U.S. (AP Photo)
Is he right?
Strictly speaking, the metaphor is misleading. A Ponzi scheme, named after Boston conman Charles Ponzi, is a fraudulent investment operation. In its essential design it’s a con. Investors don’t earn interest and instead are paid off by other dupes. Because these schemes require an ever-increasing number of new participants to pay off earlier investors, they inevitably collapse.
Social Security isn’t an individual investment plan. It’s a government insurance plan that offers seniors a predictable income. Retirees do indeed depend on future workers to pay their Social Security benefits, though unlike a Ponzi scheme, nobody pretends otherwise. The notion of this kind of inter-generational transfer is baked into the policy.
And unlike regular investments, participants in Social Security don’t own their accounts (although many conservatives would like to see such a change). If you die before you become eligible, your estate doesn’t get the money. If you live longer than average, you get more.
In broad political terms, however, Mr. Perry is making a case that fits within the mainstream of modern Republican thinking. In his book, he elaborates at greater length than during Wednesday’s debate, arguing that politicians have for too long made “fraudulent promises” to Americans about the health of the government’s social safety net.
Social Security, he suggests, is like a Ponzi scheme because it’s based on “deceptive accounting [that] has hoodwinked the American public into thinking that Social Security is a retirement system and financially sound, when clearly it is not.”
(Mr. Perry also makes a broader point, arguing that the social safety net created by the New Deal and expanded since then was a fundamentally misguided and unconstitutional expansion of government. Social Security, is “something we have been forced to accept” since then. Not all Republicans are ready to agree with that.)
American workers contribute to Social Security with the expectation that they will receive similar benefits once they retire. Surveys show many younger Americans don’t think they’ll receive a check, and yet pay into the program with the implied promise of future benefits.
For years, Social Security collected more in payroll taxes than it paid out in benefits, but now the program is drawing on the surplus accumulated during those years. By 2036, the program’s actuaries predict, Social Security will have exhausted its reserves and will only be able to pay 77% of promised benefits.
Mr. Perry and those who hold with his position contend the “trust fund” needed to pay benefits between now and 2036 is a fiction. That money is not sitting in a bank vault somewhere. It’s been spent by the federal government on everything from the war in Iraq to food stamps to agriculture subsidies. So to pay Social Security back, the government will have to borrow money.
Fixing the program isn’t hard, and there’s a consensus among experts across the political spectrum about what could be done. A combination of benefit cuts and tax increases would do the trick. Still, future seniors will not be given exactly what was promised. They might have to wait until age 69 or 70 to collect full benefits, instead of 67 as now promised. Their annual cost of living increases might be smaller.
Ponzi’s scheme was unsustainable because the basic math of his system required ever increasing and unrealistic numbers of investors. (For more on the history, click here.) If a similar plan started with 1,000 investors, by the 20th round, the scheme would need more new investors than the entire U.S. population to pay off the earlier investors.
Social Security’s system is unsustainable, at least as presently written, because the U.S. has an increasing number of retirees and fewer workers to support them
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