Chasing Jefferson--Yes, Mr. Gleckman, Social Security Is A “Ponzi” Scheme

Photo source: http://en.wikipedia.org/wiki/Charles_Ponzi

Reposted from Chasing Jefferson.

"A rose by any other name would smell just as sweet."

—William Shakespeare, Romeo and Juliet

The sheer stupidity and/or nefarious semantic games of the Left never ceases to amaze.

In a September 8 piece at Forbes.com, contributor Howard Gleckman purports to take Governor Perry to task for what Gleckman calls Perry’s “loony” labeling of Social Security as a “Ponzi” scheme and a “monstrous lie.” Although Gleckman acknowledges that the program is underfunded, he says Perry is wrong on both counts because according to the Social Security Trustees’ 2007 Report it will still be able to pay young people 70-75% of their promised benefits. To him, that’s “pretty close” to meeting 100% of the program’s promise, and therefore Perry’s rhetoric is simply an idiotic impediment to fixing the system’s obvious fiscal problems.

Thanks for clearing that up, Howard. That’ll make my kids feel soooo much better.

At a certain level it doesn't matter, but Governor Perry is correct. Social Security is a Ponzi scheme, and it is a lie, not just to our kids, but to everybody. And I have no idea why he's now backing off the point just because some have criticized his use of the term.

Let’s review a little history.

The term “Ponzi scheme” refers to a con game—read: fraud—made famous in 1920 by swindler Charles Ponzi, and later perfected by Bernie Madoff. The details and window dressing can be customized—in Ponzi’s case it was selling investments in a company that was supposedly engaging in a kind of international postal arbitrage—but the guts are always the same. As the Securities and Exchange Commission defines it:

“A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”

So a Ponzi scheme has three defining elements:

(1) Payment of purported returns

(2) To existing investors (that is, people who have already paid in)

(3) Out of money paid in by new investors.

Now, Social Security was born in 1935, and the idea was that people would pay into the system and the government would (snicker) hold the money in a trust fund where it would earn interest, and then return the money and the earned interest to the contributors over time upon their retirement.

No, really (snicker).

In practice, however, early recipients received benefit payments well in excess of their contributions (in itself a classic symptom of a Ponzi scheme). By 1937 the Supreme Court held in Helvering v. Davis that the program was constitutional because both employees’ and employers’ contributions were in fact just taxes that flowed into general revenue, thus destroying the “trust fund” myth. Ida Ludlow, the first recipient of monthly benefits, paid a total of $24.75 into the system, but her first check in 1940 was for $22.54, and she ultimately received over $22,000 from the system. What this means is the program has necessarily always funded benefits (i.e., paid “returns”) to current recipients (i.e., existing investors) out of the contributions of current workers (i.e., new investors), a fact confirmed by the very 2007 trustee report upon which Gleckman relies:

Even if a trust fund’s assets are exhausted, however, tax income will continue to flow into the fund. Present tax rates would be sufficient to pay 75 percent of scheduled benefits after trust fund exhaustion in 2041 and 70 percent of scheduled benefits in 2081.

Mr. Gleckman, that’s what a Ponzi scheme is.

Well, yes, it “looks like” a Ponzi scheme, but it really isn’t, and if you just understood risk and insurance you’d see that. Um, no. The recent debt ceiling and deficit discussions should have made abundantly clear that the federal government’s capacity to take and borrow is not infinite. Sooner or later, the program has the same risk of collapse that Ponzi’s stamp operation did. Nor is Social Security like insurance where risk of some negative event is spread over a number of people most of whom will never need to collect. Insurance is a wager; it’s a hedge against the happening of an event. Social Security is a retirement program—well, technically, it's a tax, see Helvering--it was supposed to be an investment upon which the contributors planned to reap a return in their old age, not a hedge in case they lived past retirement age.

The fact of the matter is Social Security is, and almost from its inception has been, structured to pay current recipients out of the current contributions, not out of profits generated from investing current recipients’ past contributions. That’s what a Ponzi scheme is. That by 2041 the program will be able to pay 75% of promised benefits doesn’t change its fundamental structure as a Ponzi scheme, nor does it make it OK. The system is going to take people’s money with a promise of X, then deliver 75% or less of X out of money it takes from someone else. And 25% of a lie is still a lie.

Furthermore, the 2007 trustee report upon which Gleckman relies predates last year’s payroll tax reduction (which cut contributions into the program by an estimated $120 billion) and the current recession. The 2010 Report Gleckman says “isn’t much different”—query, if that’s so, why he didn’t just use it; maybe because the 2010 report has the program exhausting its assets in 2037, four years earlier than the 2007 report projected?—likewise doesn’t account for the payroll tax cut. For political reasons, however, I suspect congressional Republicans will have to go along with Obama’s proposal to extend the payroll tax reduction, despite it being opposite of the Social Security Trustees’ obvious recommendation (both in 2007 and in 2010) to try to restore the program’s fiscal sustainability. So the real long term picture for the program is considerably worse than even what is reflected in the current trustee report.

Call it what you want. The bottom line is that the idea that Social Security is some kind of retirement "insurance" is and always has been a lie. It doesn’t pay you “benefits” earned from investing your contributions to the program. What Social Security does is take your money by force and give it to your parents, then take your kids’ and your grandkids' money--again, by force--and give it to you. As I posted here, even Genius Joe Biden recognizes that a system like this depends on there being enough children to contribute in the future for it to survive. With lower birthrates in the post-boomer era meaning there are fewer and fewer to pay in, the program sooner or later faces collapse under its own weight.

Smells like a Ponzi scheme to me, but the real question is this:

How much better off would we all be if instead of taking our money from us the government let us keep our money and invest in our own retirement, and let our employers keep their money and invest in their businesses (or, God forbid, increase wages)?

For more like this, check us out at Chasing Jefferson.