September 25, 2011
Ponzi Schemes Vs. Social Security

In his 2010 book, “Fed Up,” Governor Rick Perry called Social Security a “Ponzi scheme.” A Ponzi scheme is an individual investment plan wherein investors are paid “interest” by the principal paid into the scheme by later dupes. A geometrically increating supply of new investor principal is required to pay off the “interest” to previous investors.

The WSJ calls Perry’s claim misleading and PolitiFact terms it False.

Social Security isn’t an individual investment plan, it’s a “pay-as-you-go” government insurance plan. While retirees depend on current workers to fund their benefits, that’s where any similarity to a Ponzi scheme ends. Some retirees will receive more benefits than they paid in payroll taxes and some retirees will receive less. There is no promise of receiving more than you put in. Any deficit is lost to your heirs.

As population demographics rise and fall, the balance of the Social Security Trust Fund will rise and fall. This vulnerability to demographic variability is one of the problems with pay-as-you-go systems. The amount going into, and the benefits going out of, the system must be adjusted to maintain the system. But, there is no unsustainable progression, unlike pyramid or Ponzi schemes.

Using current demographic estimates, the Social Security Trust Fund would become exhausted between 2036 and 2041. To maintain a 75-year solvency, Sen. Bernie Sanders (I-Vermont), has introduced legislation, Keeping Our Social Security Promises Act (pdf), that would remove the income cap on payroll taxes for those making more than $250,000. The wealthiest Americans would then pay payroll taxes on the same percentage of their income as the middle class, namely 100%. The bill is co-sponsored by Boxer, Whitehouse, Akaka, McCaskill, Blumenthal, Leahy, and Franken.

Perry has some noted company: Nobel prize winner Paul Samuelson who wrote “Social Security is a Ponzi Scheme that Works,” and Nobel prize winner Milton Friedman called Social Security “The Biggest Ponzi Scheme on Earth.” Even Nobel prize winner Paul Krugman said that Social Security had a “Ponzi game aspect.” Krugman says he was emulating Samuelson who was trying to be cute. There’s no cute in political theater.

The lifeblood of a politician is money, in the form of campaign contributions. The wealthy can invest in politicians to prevent any increase in their payroll taxes. Until the lifeblood of politicians is votes, the wealthy will continue to win the class warfare.

H/T: Kevin DrumSocial Security OnlineMarginal Revolution.

  1. letterstomycountry posted this