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Social Security Is Not a Ponzi Scheme


It is good to see that the Republican presidential candidates are battling it out over the nature of the Social Security system. It is something that few politicians have been willing to talk about, lest they antagonize the largest class of voters in the country — senior citizens.

At the Republican candidate debate at the Reagan Library in Simi Valley, California, on September 7, Rick Perry, the governor or Texas, sparred with Massachusetts’s former governor Mitt Romney over the issue.

Romney took issue with Perry’s calling Social Security a “Ponzi scheme” in his book Fed Up! Our Fight to Save America from Washington. Perry didn’t back down and added that Social Security was a “failure” and a “monstrous lie.” He said the system needed to be changed and that the United States should transition to a system that would work financially. However, he made it clear that “people who are on Social Security today, men and women who are receiving those benefits today, or individuals at my age that are in line pretty quick to get them, they don’t need to worry about anything.” Romney disagreed with Perry, saying the Republican “nominee has to be someone who isn’t committed to abolishing Social Security, but who is committed to saving Social Security.”

At the CNN Tea Party Republican presidential debate held in Tampa on September 12, Perry talked about changing and fixing Social Security. He also reiterated his earlier stance that the program should be there for certain people: “The people who are on Social Security today need to understand something: slam-dunk guaranteed, that program is going to be there in place for those. Those individuals that are moving towards being on Social Security: that program’s going to be there for them when they arrive there.”

In the days leading up to the debate, the Romney campaign distributed a flier in Florida attacking Rick Perry as “reckless and wrong on Social Security” and asking, “How can we trust anyone who wants to kill Social Security?” The flier contrasts Perry with Romney, who is said to want to “save Social Security for current and future retirees” and to ensure that “the program that millions of Americans rely on will be there for our children and grandchildren.”

Also distancing herself from Perry’s views on Social Security was candidate Michele Bachmann. One of her advisors remarked before the Tampa debate, “Clearly she feels differently about the value of Social Security than Governor Perry does. She believes Social Security needs to be saved, that it’s an important safety net for Americans who have paid into it all their lives.”

Although Social Security may be a popular program that many Americans have grown to depend on or are counting on when they retire, most misconstrue the nature of the program.

Social Security is not a retirement account. It is not an insurance program. It is not a savings account. It is not an investment account. It is not a safety net. It is not a trust fund. It is not a pension plan.

Social Security is a relic from the New Deal. It is an entitlement program. It is an income-transfer scheme. It is a wealth-redistribution plan. It is the cornerstone of the welfare state. It is the largest entitlement in the federal budget. It is unconstitutional.

Social Security doesn’t need to be fixed, changed, reformed, made to work, made fiscally sound, restored, privatized, or saved. The program needs to be abolished.

That, of course, is politically unpopular. And that is why Republicans who criticize welfare and entitlements can still defend Social Security as insistently as Democrats. That is why conservatives who attack government programs and spending can still talk about “saving” the system.

Rick Perry is partly right about the Social Security system. It is a monstrous lie that the program is anything but an income-redistribution scheme. But the program is not a failure. It has succeeded in fostering dependency on government, redistributing wealth, and shifting responsibility from the individual to society. And it is not a Ponzi scheme.

Charles Ponzi (1882–1949) was an Italian immigrant who served two terms in prison before beginning his postal reply-coupon investment scheme in Boston after World War I. He promised huge returns on investments. He made good on his claims — at first. However, no one’s money was actually being invested. All returns on investment were paid out of deposits from later investors. In order to keep up his scheme, Ponzi hired commissioned agents to bring in ever more investors. As long as new money came in, existing investors could be paid and kept happy. The scheme, of course, was unsustainable, for eventually new investors couldn’t be fleeced fast enough to continue making payments to existing investors. After making an astronomical amount of money for the time and living luxuriously for a while, Ponzi’s scheme came crashing down in 1920. He then served two more terms in prison (federal and state) before being deported.

Contrast that with how the Social Security system works.

Beginning in 1937, Social Security taxes of 2 percent (half paid by the employer and half by the employee) were paid to the government every year on the first $3,000 of income. Since 1990, the rate has been 12.4 percent on income up to $106,800. The taxes collected are not invested in an account with the taxpayer’s name on it and paid out with interest when the taxpayer retires. There is no trust fund or lock box. The money ends up in the U.S. Treasury along with personal and corporate income taxes and spent. Social Security benefits paid to retirees merely come out of current government revenues. Initially, there were many more people paying into the system than there were receiving benefits. In 1950, there were 16 workers paying payroll taxes for every retiree receiving benefits. With about 54 million Americans now receiving Social Security benefits of some kind, that ratio is down from 16 to 1 to 3 to 1. Since 2010, the Social Security system has run a deficit. According to the 2011 Social Security Board of Trustees’ annual report, benefit payments in 2010 were $701.6 billion, while payroll taxes were only $637.3 billion. Thus, new “investors” are not being added fast enough.

Social Security does indeed resemble a Ponzi scheme, but since the benefits paid do not actually correspond to the taxes collected, they could be paid in perpetuity out of the U.S. Treasury, regardless of the amount in Social Security taxes that is collected.

Social Security is many things, but a Ponzi scheme it is not.

Social Security is funded by taxes, not donations, investments, or contributions. The taxes could be raised at any time. The taxable wage base could be raised at any time, or even eliminated. Employers who don’t properly withhold Social Security taxes face fines and imprisonment. Individual taxpayers with small businesses as sole proprietors who don’t properly withhold Social Security taxes face fines and imprisonment. Social Security benefits could be reduced at any time. Benefits could be means tested. The retirement age could be raised. Cost-of-living adjustments could be reduced or eliminated.

Social Security is much worse than a Ponzi scheme. At least participants in a Ponzi scheme are free to get out once they discover they are being defrauded.

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