Texas governor Rick Perry is being criticized for calling Social Security a “Ponzi scheme.” Even Mitt Romney is reportedly preparing to attack him for holding such a radical view. But if anything, Perry was being too kind.
The original Ponzi scheme was the brainchild of Charles Ponzi. Starting in 1916, the poor but enterprising Italian immigrant convinced people to allow him to invest their money. However, Ponzi never actually made any investments. He simply took the money he was given by later investors and gave it to his early investors, providing those early investors with a handsome profit. He then used these satisfied early investors as advertisements to get more investors. Unfortunately, in order to keep paying previous investors, Ponzi had to continue finding more and more new investors. Eventually, he couldn’t expand the number of new investors fast enough, and the scheme collapsed. Ponzi was convicted of fraud and sent to prison.
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Social Security, on the other hand, forces people to invest in it through a mandatory payroll tax. A small portion of that money is used to buy special-issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.
As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.
As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.
Eventually the pyramid crumbles.
Of course, Social Security and Ponzi schemes are not perfectly analogous. Ponzi, after all, had to rely on what people were willing to voluntarily invest with him. Once he couldn’t convince enough new investors to join his scheme, it collapsed. Social Security, on the other hand, can rely on the power of the government to tax. As the shrinking number of workers paying into the system makes it harder to continue to sustain benefits, the government can just force young people to pay even more into the system.
In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.
In addition, at least until the final collapse of his scheme, Ponzi was more or less obligated to pay his early investors what he promised them. With Social Security, on the other hand, Congress is always able to change or cut those benefits in order to keep the scheme going.
Social Security is facing more than $20 trillion in unfunded future liabilities. Raising taxes and cutting benefits enough to keep the program limping along will obviously mean an ever-worsening deal for younger workers. They will be forced to pay more and get less.
The blind adherence to this sacred cow of an earlier era is inexplicable to the realities of changed conditions and the potential solutions to provide in spirit if not the letter of social 'security'. We can do better.
It is even worse. Ponzi perpetrated his fraud in 1916, years before SS was created. The fact that no one at the time protested against this similar scheme says a lot about the greed and stupidity of the both the pols and the people. Perhaps Menken was right.
Michael: You didn't mention that the taxpayers were promised that these funds would be safe in a "lock box". The public was led to believe that each person had an account in which these funds were deposited. It's unfortunate that those in Congress that supported the change in law to use these funds in the general fund can't be held responsible like Ponzi.
The problem is:
1. What can be done to insure that the people like my wife and I who have paid into the system for 85+ years continue to receive the payments that they were promised?
2. How do you address the problem of those approaching retirement that have also paid into the system and are about to be taken to the cleaners?
This is the federal government at it's "best". Promising something, collecting revenue, spending the funds for some other pet project(s), unable to deliver on the promises made, and then wringing their collective hands about what to do.
You should not benefit from failure to do due diligence. You should have voted for someone else. We all should be more active and involved in government.
You personally may have been very involved, but most people ignore government as much as possible. Many do not even vote. So this is a group failure, for which even the responsible individuals must suffer.
Fil-TX, you are thinking about the system the wrong way, I think. Social Security is not a "system" that you "paid into". That would describe a retirement/pension plan. No, you (and I) paid required taxes that were then spent on things that arguably provided no personal benefit to us.
You (and I) have been voting for 40+ years, and the people getting elected on those votes were fools or idiots who didn't do anything to make the payouts sustainable except raise the SS taxes. For failing to do due diligence on our elected representatives, we deserve to suffer. Even if, as individuals, you or I did such diligence and yet someone else was elected, there is no way to account for that, so we'll have to endure "shared sacrifice".
Our biggest mistake was in trusting government. What the government creates, it can destroy through repeal or mismanagement. People suffer for their mistakes. We are not, as a group, too big too fail. We (people over 50) do vote reliably but so does anyone else who feels threatened. The young will start turning out if the taxes to support us increase too much. The young:old ratio may approach 1:1, but I hate to see it come down to generational warfare.
I agree though that a plan is needed. I wish that the commenters who feel owed by the system would express some willingness to take a haircut, in the interests of getting at least something back. I read somewhere that the average SS payment is $976 per month. I know cheap places to live where half of that would be plenty.
But in the end, I think it might be useful to (shudder) use the Obamacare approach and require everyone to participate in a privately managed retirement savings plan. These are more tightly controlled by regulating agencies, and your money (barring embezzlement) is in a lockbox of sorts. Often you can even restructure the balance of investments in which the money is put. You could choose to invest none of it, to avoid worrying about stocks, etc.
Some such approach, coupled with reduced payments overall and the promise that the current SS fiasco would be phased out over twenty years (at least, the collection of "dedicated" taxes) might even mollify the younger people who are paying money to support us. Or welfare could be expanded to the old, instead of just the single mothers and their ilk.
Anytime I hear someone claim they've 'paid into' SS, first I cringe, then I have to think 'poor fool, you've bought the lie'.
The lie is that you've paid into anything. ALL YOU'VE DONE IS PAY ANOTHER STUPID TAX. That's it, that's all you've done. How much of your other taxes do you expect to get back?
But the Congress has something that Ponzi didn't have and that's the ability to reduce the number of retirees. They will just give Grandma a pill and say it was great but it's time to go. It's already the law of the land.
It's funny that the Democrat's programs of the green type is what will destroy the programs of the grey type.
We need more growth, more kids, big families, lots of new victims for the system to work, and what do they do, encourage the opposite.
That's why Perry is important. You and I both know it's a scam but nobody is going to listen. Perry can get the conversation going and force people to start thinking it through.
More fear-mongering from someone who either truly doesn't understand how Social Security operates or simply is trying to make Social Security sustainability issues look more daunting than they really are. $20 Trillion?! Can you put that in context for us, Tanner? Oh yes, better to just leave that number out there in the minds of the readers and let them imagine the worst.
How much context do you need for the number "20 trillion"? That is close to twice the entire GDP of the United States of America. And that doesn't include Medicare and Medicaid. Oh yeah, there are also all of those state and local pension funds that are under funded. And if all of that were not bad enough, you have California which, if not insolvent, is on the brink of insolvency.
So you tell me, what kind of context would make "20 trillion" less alarming? And if Social Security isn't a ponzi scheme where the banker writes out IOUs to himself, what, pray tell, is it?
I'll assume the $20 Trillion is a legit number for the sake of discussion.
Is the $20 Trillion due all at once? No.
Can I total up all of the expenditures I expect to make over my lifetime and act like they are due and payable now? Yes, but it tells me very little about my capacity to afford them over time.
All SS needs is to lift the cap on the SS payroll tax, in keeping with the "90% of income rule" as recommended by the Greenspan Commission in the 1980s, and SS is solvent for the foreseeable planning horizon.
Fear-mongering? However you present it, here are the facts: as of August 2010 there is less being paid into the Social Security Trust Fund than is being paid out to beneficiaries. Social Security is now using its "surplus". This is the definition of a Ponzi scheme, and there is a liability associated with that borrowing that will continue to hang over our heads and will be passed on to our children. Please explain to me how this could possibly be anything but a spending crisis for our nation.
That deficiency is short-term issue due to the cruddy economy. If you believe that GDP growth and employment will return to historical norms, then that short-term deficiency will go away.
In the longer term , there are very modest changes in either FICA taxes or benefit formulas that can be made to make the system sustainable.
