Is Social Security a "Ponzi scheme"?
September 9, 2011
At the Republican nominee debates the other evening, Gov Rick Perry said that Social Security was a "Ponzi scheme" and a "monstrous lie". Radio talk shows and TV news reporters have made a big issue of this and NPR yesterday had an interview in which this notion was flatly denied and the concept scoffed at. So I wonder if there is any truth in what the Gov says.
Ponzi schemes bring to mind Bernie Madoff, so I thought to look at what he did and compare.
Madoff convinced people to give him money for which he promised a return. He then proceeded to pay that return out of new investments, presumably because he was not generating the returns he had promised. Of course as he kept paying out returns in excess of what he was making, his deficits were getting bigger and bigger, so he was having to fund those deficits with even more investors, until ultimately it got too big, the stream of new investors slowed and his scheme fell apart.
Social Security takes money from people via FICA taxes and promises them a pension, or in other words, a return many years later when they retire. The only difference at this stage of the comparism is that Social Security is a more daring proposal to the contributor because instead of giving you a return in the short term, the government forces you to wait 40 years to get your return. Forecasts published in the media say that Social Security will be running at a huge deficit in the not too distant future. Anecdotely, there are many reports of how people have drawn far more out of social security than they ever contributed, which would explain the future deficit. This deficit is being funded by new contributions, or investments, being made by younger entrants to the work force. Eventually the deficit will get so big that there will not be enough new contributions and the structure will collapse, leaving all the new contributors with no return and a loss on their investments (i.e. no pension).
This was the fate of the investors in Madoff's Ponzi scheme, so the paralells are definately there. Madoff employed a vast organization, as does Social Security, so no distinction there.
Social Security, however, is obviously not a "scheme". It is a well meaning, social program that seeks to provide for people in their retirement. Because it is a "tax", there is no single mastermind out there conning people, so it does not have the apparent evil agenda Madoff had.
Anyone who cares to think it through for just a moment has to realize that Social Security has the same effect as Madoff's Ponzi scheme, take from the new contributors to pay the old. That it means well is a big difference, but small comfort for the new contributors who are beginning to question whether they will ever see their "return".
