Social Security and Ponzi Schemes: Is Rick Perry Right?

Comparing Social Security to a Ponzi scheme is a bridge too far — unless the federal government fails to take action to curb entitlement spending.

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Melina Mara / The Washington Post / Getty Images

Republican governor and presidential candidate Rick Perry has been critical of Social Security on the campaign trail.

Texas Governor Rick Perry really knows how to light a bonfire.

The governor, who is running for president, made comments last week that Social Security is a “monstrous lie” and essentially a “Ponzi scheme,” and it’s set the chattering class’s hair on fire, with both sides of the cultural divide weighing in on the merits of Perry’s remarks.

Uncle Sam has officially weighed in, too. The U.S. Social Security Administration has a good, though of course biased, take on the matter. The SSA clearly comes down on the non-Ponzi side of the street.

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Here’s the money quote from the SSA’s self-defense of its own program:

Social Security is and always has been either a “pay-as-you-go” system or one that was partially advance-funded. Its structure, logic, and mode of operation have nothing in common with Ponzi schemes or chain letters or pyramid schemes. … The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi’s scheme lasted barely 200 days.

Perry’s point is that like a Ponzi scheme, Social Security is unsustainable, a sentiment shared by the non-partisan  U.S. Congressional Budget Office.

This from the CBO:

The cost of the Social Security program will rise noticeably in coming decades — a change that has long been foreseen. Average benefits typically grow when the economy does (because the earnings on which those benefits are based increase). However, in the future, the total amount of scheduled benefits will grow faster than the economy because of changes in the nation’s demographic structure. As the baby-boom generation reaches retirement age, and as decreasing mortality leads to longer lives and longer retirements, a larger share of the population will draw Social Security benefits.

Moreover, whereas the number of people ages 20 to 64 is projected to grow by 11 percent in the next 30 years, the number of people age 65 or older is projected to double. As a result, in three decades, the older population is likely to be more than one-third the size of the younger group, compared with one-fifth today. By 2030, the Congressional Budget Office anticipates, about 86 million people will be collecting Social Security benefits, compared with about 50 million today. The average benefit will have grown by about 29 percent in real terms. Consequently, CBO estimates that unless changes are made to Social Security, spending for the program will rise from 4.3 percent of GDP in fiscal year 2007 to 6.1 percent of GDP by 2030. With further increases in life spans, spending for Social Security will gradually rise thereafter, reaching 6.4 percent of GDP in 2082.

There are two big caveats in the CBO’s outlook.
1) A declining, or even flattening, economy will place more undue pressure on Social Security, with even less workers contributing and more retirees taking money out of the system. With fewer people working, more unemployed Americans  — especially in their 60’s – may opt to take out their benefits early (a big no-no in financial advisory circles). But income is income, and out-of-work seniors who can grab their Social Security payouts early may do so, and that further weakens the system.

2) Also, the CBO says that unless “changes are made,” Social Security will take a 6.4% bite out of GDP by 2082 – about 70 years from now. That’s assuming politicians will continue to duck the issue and not rein in entitlement spending, a problem that both President Obama and former President George W. Bush say that Congress needs to tackle.

So the superficial answer to Perry’s comments is that, yes, both Social Security and a Ponzi scheme share one undeniable trait – new investors are needed to pay off older investors.

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Past that, it seems like an unfair comparison. A Ponzi scheme is designed to intentionally fleece investors, and do it without their knowledge. Social Security, on the other hand, is designed to take care of older Americans in their retirement years – a social pact between generations of Americans. What’s more, Social Security tells people where their benefits are coming from. Ponzi schemes do not. Of course, knowing where the money is coming from is different than guaranteeing it will be there when you need it.

What’s more, while it’s tough to stop a Ponzi scheme once it gets rolling, resetting Social Security only requires a moderate change in the plan’s structure – think a thin cut in benefits and a small tax increase – to cover the estimated $4.3 trillion Social Security deficit gap (about $60 billion a year) over a 75-year period.

If entitlements are genuinely addressed by Washington pols, and the system is put back in balance with reasonable changes, then all this talk of Social Security being a Ponzi scheme really is a bridge too far.

But give Governor Perry credit for opening up a much-needed debate, and one that politicians have been avoiding for years.

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