Is Texas governor and Republican presidential candidate Rick Perry a courageous and welcome truth teller for calling Social Security a Ponzi scheme, or is he being needlessly provocative instead? Or maybe you think Perry’s Ponzi comparison is just plain wrong. I favor the truth-teller option, but the debate will surely go on.
In any case, it’s certain that Perry’s Ponzi-scheme claim is in no way original. Not only have a raft of conservatives called Social Security a Ponzi scheme over the years, quite a few very respectable liberals have done so as well. It is clearly wrong either to treat the Ponzi-scheme analogy as unprecedented or to rule it altogether out of legitimate public debate. A historical tour of the use of the Ponzi-scheme metaphor will make the point.
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Jonathan Last has already identified a 1967 Newsweekcolumn by liberal economist and Nobel laureate Paul Samuelson as perhaps the earliest use of the Social Security/Ponzi-scheme comparison in public argument. Samuelson was actually drawing on the Ponzi analogy to defend Social Security. His claim was that the perpetual succession of human generations establishes the conditions for a sustainable Ponzi scheme. Regardless of whether Samuelson was the first commentator to use the Ponzi analogy, he has clearly been the most influential. Policy briefs and books churned out by conservative think tanks such as Heritage and Cato have cited Samuelson’s Ponzi column for years. This is likely how the comparison made its way into public debate.
Samuelson’s idea that Social Security could best be understood as an enduring and rational Ponzi scheme grew out of his “overlapping-generations model,” introduced in a seminal 1958 paper. Samuelson’s model implied that public debt in general, and Social Security in particular, could be financed over successive generations without major tax increases. In the 1980s, Samuelson’s overlapping-generations model was seized upon by Keynesian economists to serve as a microeconomic foundation for their favored theories and plans.
The unfortunate weakness of Samuelson’s model is its assumption that a growing economy will produce continual population increase. In an April 1978 follow-up in Newsweek to his original 1967 column, Samuelson acknowledged that demographic reality was disproving this assumption. Samuelson repeated his use of the Ponzi analogy and continued to defend his hopes for Social Security as best he could. While Samuelson hung onto some slim indications in 1977 that U.S. fertility might be on the upswing, it grew increasingly clear to critics that the post–Baby Boom decline in births was not going to be reversed. Increasingly, Samuelson’s Ponzi-scheme analogy was seized upon by those who doubted Social Security’s long-term soundness.
In an April 1999 Los Angeles Times op-ed titled “Ponzi Game Needs Equitable Solution,” for example, Stanford University economists Victor Fuchs and John Shoven hark back to Samuelson’s 1967 column, noting that his demographic optimism had proved wrong. While turning the Ponzi analogy into a criticism of Social Security’s soundness, Fuchs and Shoven nonetheless argue against private investment accounts — a favorite solution of conservatives. Fuchs is hardly a rightist; for instance, he co-authored an ambitious and controversial universal-health-care proposal with Obamacare architect Ezekiel Emanuel. Apparently, Samuelson’s Ponzi analogy has shaped the Social Security debate for figures across the political spectrum.
A watershed moment in the public realization that low population growth spells trouble for Social Security was the 1987 publication of Ben Wattenberg’s book The Birth Dearth. Wattenberg, who once worked for Lyndon Johnson and Hubert Humphrey, was by the late 1980s a centrist Democrat, hawkish on defense and otherwise alternately allied with the right or left, depending on the issue. Although many rejected Wattenberg’s claim in The Birth Dearth that a crisis of population decline loomed, time has vindicated his warning.
In a U.S. News & World Report cover story excerpting The Birth Dearth, Wattenberg sums up his argument by saying: “In short, Social Security is a Ponzi game, a pyramid scheme, a chain letter.” In a December 1995 column, Wattenberg makes the point again, calling both Social Security and Medicare “chain letter games.” Implicitly echoing Samuelson, Wattenberg adds, “There’s nothing inherently wrong with a Ponzi game. Life itself is such a game.” The problem, Wattenberg continues, is that the success of the Ponzi game called life hinges on higher birth rates than we’ve been able to produce.
Thanks to Mr. Kurtz for an informative piece. Mr. Perry has rightfully drawn attention to social security, but his electability depends on articulating a sustainable solution. It's a Ponzi scheme. Now what?
Hmm, before I even became politically aware of Social Security I always thought of the program as a Ponzi scheme. In fact, when discussing this program in one of my economics courses, as the professor was talking about the program, many classmates including myself called it a Ponzi scheme. The professor essentially said yes, it is. Even the leftie classmates accepted this position. Now, it seems that everyone gets bent out of shape for recognizing Social Security (and any other social program) for what it is: A Ponzi scheme that eventually fails because of demography (read: Not having enough babies to fulfill the promises of greedy old folks, but that's an argument for another day).
When truth becomes lie and lie becomes truth then all is lost. Most people prefer the lie of Social Security than to acknowledge the truth about it.
The U.S. Supreme Court agreed (twice): “Appellee’s right to Social Security benefits cannot properly be considered to have been [an 'accrued property right'],” it stated in Flemming. “It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments…. To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands” (emphasis added). Flexibility and boldness equals congressional caprice.
As the act says, Congress is legally free to change the terms of the program at any time. There is no contract. The entitlement really isn’t.
Once the program was safe from challenge, however, the government resumed its insurance propaganda.
So … Social Security: Ponzi scheme or not?
I think we have to say it once was, but is no more, because Social Security was unmasked as a coercive transfer scheme long ago and critics remind us of that fact constantly. If everyone knows (or can easily find out) something is a Ponzi scheme, it’s no longer a Ponzi scheme. Anyone who thinks Social Security is insurance just isn’t paying attention.
But it is a transfer program. By the time you go on Social Security your money has long been spent, and the money you receive is taken from current workers through taxation. That’s a transfer, or welfare, program in insurance clothing.
While the government has usually tried to fool people into thinking Social Security is insurance, it has operated on a different track when necessary. Will Wilkinson notes, “The Act was scrupulously drafted to ensure that the tax and the government transfers would not appear to have anything to do with each other. And the program is never described therein as ‘insurance.’”
The reason is that the government needed to protect itself — from the people. Wilkinson: “In anticipation of a constitutional challenge, Social Security officials went out of their way to purge their informational materials of insurance language.” When court challenges came, the government argued that the payments were taxes and benefits were not a matter of contractual right.
“The old-age monthly benefits program which Title II of the Social Security Act establishes is not a federally-administered ‘insurance’ program,” Health, Education, and Welfare Secretary Arthur Sherwood Flemming said in his brief in Flemming v. Nestor (1960). “The contribution exacted under the Social Security plan is a true tax. It is not comparable to a premium promising the payment of an annuity commencing at a designated age” (emphasis added).
Court Agrees
The U.S. Supreme Court agreed (twice): “Appellee’s right to Social Security benefits cannot properly be considered to have been [an 'accrued property right'],” it stated in Flemming. “It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments…. To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands” (emphasis added). Flexibility and boldness equals congressional caprice.
As the act says, Congress is legally free to change the terms of the program at any time. There is no contract. The entitlement really isn’t.
Once the program was safe from challenge, however, the government resumed its insurance propaganda.
So … Social Security: Ponzi scheme or not?
I think we have to say it once was, but is no more, because Social Security was unmasked as a coercive transfer scheme long ago and critics remind us of that fact constantly. If everyone knows (or can easily find out) something is a Ponzi scheme, it’s no longer a Ponzi scheme. Anyone who thinks Social Security is insurance just isn’t paying attention.
Can we now move past this ridiculous distraction? Gov Perry called a spade a spade, and the Establishment is trying its best to make style the issue over substance. Let's talk about fixing the problem now that the obvious has been noted.
I'll second Chad R's comment. I just want to point out that Ed Driscoll over at PJM had a piece a while ago in which he cited Samuelson's 1967 Newsweek article. What I did not know was that many other "liberals" had also acknowledged that Social Security was a Ponzi scheme. Thank you Mr. Kurtz for bringing that to our attention.
As soon as he wins the Nomination (or sooner), Perry will dash, at top speed, away from his previous comments about Social Security.
He's no dummy. He knows that such talk may win him "National Review" and the Radical Right...but it'll cost him seniors, who may hate Obama, but they love their SS and Medicare more.
At that point for the Right though, it'll be too late. They'll be stuck with a "flip-flopper" that will put Romney to shame. And then "NR" and other rightwing outlets will claim "Oh...well...once he's in office, he'll see that he was right in his original position and come back to it!"
Those of us(I was a legislative affairs professional in DC for several years) who have been aware of the history of legislative debate on the SS issue over the past 25 years, know the Ponzi scheme analogy. My question is, why wasn't Gov. Perry aware of it and if he was, why didn't he craft a new debate in those terms rather than imply that the term Ponzi Scheme was "new art" in his lexicon?
He has an article in USA Today that just accentuates his original statement at the debate. My guess is that he is playing politics as usual at a time when we need more from our leaders. I have not made up my mind yet on a Republican alternative to the current POTUS but we don't need a new purveyor of rhetoric with no solutions. Perry is not our of the running for my vote but is fading on this issue!
"Not having enough babies to fulfill the promises of greedy old folks"
Ahem. I am an "old folk", though not yet a Ponzi payee. I am frequently annoyed at being called a "parasite" by 20-somethings who have been paying into the system for a few years, and moan and snarl that I am looking to get a free ride off them. What burns me up is that if the loads of money I have pumped into the system over many decades had been invested, instead of "invested", there would be more than enough money to pay me. As it is, I am willing to submit to means testing, or wahtver it takes, and have long been resigned that I will never see the "promised" amount. Just don't call me greedy. I'm a victim, too.
Congratultaions to Perry, and shame on Mitt for showing his inner Newt.
Mr. Vetinari brings up the most important part of this debate. The system is not sustainable but how do we back out of it in the most just or perhaps the least unjust manner? The candidate that can lay out a real solution, that provides some protection for older America, gets us out of the system in the long term and that the CBO can verify makes sense by the numbers will have my vote.
I am not holding my breath though because I think the plan and the numbers are going to be ugly and only somebody who is already in office will be able to lay out the plan. And after the plan is implemented, I think people will be angry and kick out the author. But it will happen. The money is just not there so somebody is going to get forced. Like musical chairs.
So who has the guts to lay out the least ugly plan, that nobody is going to like but will actual work or at least do the least damage? Quite the item to run on.
At this point, I would like to give special attention to the man that started this whole mess, the late FDR. Read the book the "Forgotten Man". In it there is a quote, not paraphrase, but quote from a man in the FDR administration stating that their numbers in 1935 indicated that the system they created would implode by 1985 and the the system was immoral because of that. They knew this from the start of the program. Social Security withholding have been increased over the years to forestall the collapse but now it is coming.
Thanks FDR for laying this landmine for our generation.
Any time I hear someone say they've 'paid into' the system I have to laugh.
It means you've bought the lie. I'm sure Bernie Madoff's 'investors' felt like they 'paid into' the system also.
Good luck with that.
At this point I am not a Perry guy but I may soon become one if he keeps talking straight about the real problems we face. The politicans aren't being honest with us. Their dishonesty will cause many of us to face a financial disaster down the road.
He is right on the money. If you don't recognize a problem then you can't fix it. Anyone in business knows that reality.
He has on numerous occasions acknowledged that those 55 and older will get the benefits promised. However, he has also been honest in saying that those younger will most likely NOT get the benefits being promised today. Currently, you can realize 1% on your SS benefit. That is LOUSY. Anyone could do better than that with conservative investments.
I'll be on his bandwagon if he keeps this up. We can not afford the 'pie in the sky' lies that we are getting from the rest of the politicans.
It's a scam. Perry is just the first presidential candidate to label it correctly. Anywhere else in society, Social Security would be a criminal offense. Government spends elephant dollars of tax revenue on public service propaganda warning us about the evil scams awaiting daily life while presiding over the biggest fraud in history.
And "the first Presidential candidate to label it correctly"--in the middle of a Presidential campaign--is going to lose on that basis.
In the few months of a hectic presidential campaign, you can't hope to reverse 70 years of Democrat propaganda with GOP acquiescence (Reagan's 1980 GOP platform called SS "a precious resource" to be saved), plus two whole generations of Americans who have drawn SS checks. All the while having to deal with Democrat attacks and convincing the voters that your candidate is a safe choice who can run the Executive Branch responsibly.
Throwing red meat to the GOP base is going to have the opposite effect.
Obama, an ultra-liberal, knew he had to sound centrist and reassuring in order to get non-liberals to vote for him in 2008. And it worked for him.
If Perry continues to double down on his "Ponzi scheme" claim, he'll be doing the exact opposite.
I don't even think the term "Ponzi scheme" is accurate.
It is absolutely true that changing demographics and a slower economic growth rate has caused SS finances to get out of balance.
But that's true of all entitlements, not just SS. Medicare has a similar problem. Is Perry going to claim that Medicare is also a Ponzi scheme?
And this imbalance caused by changing demographics and economics was NOT part of FDR's original "scheme."
As originally set up in 1937, SS was *designed* to remain solvent. And as designed, it would have--because families had more children then, and the life expectancy was lower then.
That FDR and his SS architects couldn't have foreseen how conditions would be different in the 21st century, is not the same thing as accusing them of deliberately setting up a mass fraud.
How many actual Ponzi schemes have lasted over 70 years?
Read Amity Schlea's "Forgotten Man". I need to get that book back. I have it loaned to a friend so I can't point to the exact quote, but there is a quote from an FDR cabinet member stating that it was immoral to lay out a plan in 1935 for the Congress in 1985 that would collapse. So primary sources confirm that they knew the numbers would not work, long term, back then even with the higher birthrates. If you recall there was a major increase in withholding percentages in the mid 80's to forestall this collapse but it was not enough.
Another lie of Social Security. "Worked as originally designed. We have just messed it up on the way." I used to believe that myself but the more I study, the more I realize that everything about the system is a lie.
Social Security was never designed to remain solvent. It was intended to be a vote garnering scheme; LBJ added to the madness with Medicare and the so - called Great Society.
@sinz54 - That SS has lasted over 70 years is ***only*** the result of the federal government being willing to go deeply into unsustainable debt and to heavily mortgage future generations' wealth. The decline of birth rate and of the population of American workers paying into the Ponzi Scheme is and has been a known fact for decades as Kurtz has illustrated. Your argument is meritless.
