Charette: Social Security — Ponzi Scheme?

Editor’s note: This article was initially published in The Daily Gazette, Swarthmore’s online, daily newspaper founded in Fall 1996. As of Fall 2018, the DG has merged with The Phoenix. See the about page to read more about the DG.

William F. Buckley, one of American conservatism’s great intellectuals, famously advised that principled voters ought to support the most conservative candidate who also has a prayer at actually winning. In the ongoing Barnum and Bailey’s Circus that is the GOP primary, I’m apt to support Mitt Romney rather than Ron Paul for this very reason. Whereas Ron Paul is the cranky, albeit wise, libertarian who decries the Federal Reserve in his sleep, Romney is the even-keeled executive who, though less exciting or ideologically pure, promises to offer a meaningful, sane foil to President Obama.

But it’s Rick Perry who throws the real flames: likening Social Security to a Ponzi Scheme. Now, technically Perry is correct, but his comments have drawn a lot of criticism from within the Republican Party, and I’m not quite sure Perry himself can articulate the metaphor. Perry continued the hyperbolic language, but watered down the substance of his claim, in his USA Today Op-Ed last Sunday. In it he said that Social Security might actually be salvaged, without explaining how.

First, let’s not give Perry much credit for the poetics. Conservatives and libertarians have been tossing around the Ponzi resemblance for years. In fact, some pinpoint a 1967 Newsweek article by the left-leaning economist and Nobel laureate Paul Samuelson as the first coinage of the Social Security/Ponzi terminology. Samuelson, himself a straight-up Keynesian, recognized that retirees were cashing-in more than ten times what they’d paid into the system. Samuelson suspected we might survive the startling disparity between working pay-outs and retired cash-ins based on his “overlapping generations model”. But that only works if economic prosperity fuels an ever-larger population. Downturns in Western birthrates over recent decades have negated the thesis. Birthrates are contracting, while our grandparents accumulate more and more birthday candles. Within this system, there just aren’t enough young to financially hoist the old into perpetuity.

Throughout the 1980’s and 90’s, prominent conservative think-tankers whispered about the Ponzi possibility at the Heritage and Cato Foundations. More interestingly, so too did liberal journalists at The New Republic, New York Times, and Chicago Tribune. Both Republicans and Democrats have accused each other of fleecing Social Security over the years. Sometimes bipartisan accusations of corruption are the strongest litmus tests of truth.

Charles Ponzi was a shifty character whose shtick depended on manipulating investors based on price differences for postage stamp coupons. Of course, these investors would only receive their pay-offs if Ponzi managed to dupe an ever-larger pool of “investors”. The whole pyramidal game was rooted in deception. In the sense that Social Security is also widely misunderstood by the American people, there’s a grave similarity between the 1920’s con artist and FICA. Smart people can walk away from a swindler. But we’re all made to open the front door for the knocking Federal Government.

Managers of the government fund compare Social Security to private insurance, and many Americans assume it to be such. Yet as early as 1960, the Supreme Court confirmed that Social Security is a tax, not insurance. Insurance would entail contractual rights, while the tax is more of an elaborate exercise in finger-crossing that future Congresses will keep FDR-era promises.

In reality, the payroll taxes on today’s workers don’t sit in a magical lockbox waiting on retirement. Nothing is invested or saved. Rather, today’s taxes pay today’s retirees. Meanwhile, to keep up the insurance illusion, paper entries go into a hazy “trust fund”, which is a short-term asset and long-term liability for the government. As soon as the benefits paid out exceed taxes, we’re out of luck. And we’ll be out of luck very soon.

President Obama’s recent jobs proposal calls for slicing payroll tax cuts and makes the situation even more slippery. Tax cuts make me as giddy as the next conservative, but payroll taxes are already failing to meet the massive pay-outs of Social Security and Medicare. The only way the Treasury can compensate is to hike taxes elsewhere, which won’t help stimulate the economy.

Most Americans are wedded to the notion of their own future Social Security checks on the Treasury’s horizon. But they also understand the concept of personal responsibility and would probably appreciate the flexibility to design and cultivate their own rainy day funds. Hopefully Perry’s remarks, however brazen, will resonate. Hopefully Romney won’t manipulate the elderly vote. Hopefully we’ll tear down this precarious Social Security tightrope. And hopefully we’ll nominate a conservative who can foil the great Ponzi Scheme, which is to say, nominate a conservative who has a shot at getting elected.

4 thoughts on “Charette: Social Security — Ponzi Scheme?

    • September 21, 2011 at 9:00 am

      Ahh the fair and balanced NYT lays it out for us. OK so Perry’s kids will get 80% of what’s owed them by the government, but what about their kids? And oddly enough, I don’t put much stock in the Social Security Administration, you know the one in question, saying that it isn’t a Ponzi scheme; that is like Gaddafi saying he’s not a dictator and the rightful ruler of Libya. It kind of sounds just like a Ponzi scheme. People pay taxes, expecting a return on that investment when they become eligible for Social Security. What is it called when the person “investing” the money can’t pay what is owed, and eventually cannot pay at all? I’m by no means an expert on Ponzi schemes, but I’m pretty sure that’s what a Ponzi scheme is; even if it isn’t Americans understand it as such.

      • October 7, 2011 at 12:12 am

        Sorry, Charette and Mr. X – it looks like you guys have absolutely no idea what a Ponzi scheme is!
        Ponzi schemes, by definition, rely on obfuscating their revenue streams in order to trick new investors into thinking that whatever returns they are promised actually exist. They are never solvent – never, not even for a second.
        In contrast, there’s never been any question about the pool of cash in the Social Security ‘trust fund’ – which Charette rightly points out to be an investment in itself. Being separated from other cash flows of Uncle Sam means that it’s always been rather easy to perform triage when necessary (as has happened on dozens of occasions in the past) to adjust revenue as needed.
        Correct me if I’m wrong, but it seems that Charette’s implying that the Social Security ‘trust fund’ (which, of course, it actually isn’t – no trust fund ever invests in government bonds) is an attempt to obfuscate these funds. This, of course, is the sort of childish hogwash that Rick Perry himself would struggle to conceive. Every dollar in the trust fund can be accounted for in seconds. The Social Security Administration is required to report these figures to Congress every year and updates their figures every weekday. They are invested into the most stable, low-risk asset that one can buy, and most importantly -they are actually invested-. There is a revenue stream. The reason there’s a trust fund is because it accumulates interest and helps keep your taxes down, not because liberals in Congress want to make Charette pouty.

        Anyway, back to Ponzi schemes and Social Security – Social Security has run a surplus for the vast majority of its existence. Ponzi schemes, by definition, don’t. The only method by which a Ponzi scheme has to generate new revenue – and thus keep the scam running – is to get new customers. They can’t force investors to give up more of their money than they feel comfortable doing, which is why they resort to hiding their wallets and deceiving investors about its contents. The government, on the other hand, *can* force revenue – ask Wesley Snipes. It’s called taxes, and the means through which it is collected (read: not voluntarily) is another defining characteristic that separates SS from a Ponzi scheme.

        Social Security…
        1) Is not hiding their financial means, as you seem to think can be supported through laughably naive interpretations of Social Security’s ‘hazy trust fund’
        2) Has ran a surplus for the vast majority of its existence, a notion that is itself incompatible with Ponzi schemes
        3) Has the wherewithal to generate new revenue without simply attracting more investors – taxes – that no Ponzi scheme in history has ever used (again, because it’s incompatible with the archetype of a Ponzi scheme).

        Who am I kidding? Knock yourself out, Charette. Keep on telling yourself that Social Security is a Ponzi scheme. There’s a reason that only nutcases resort to this sort of argument; it’s blatantly incorrect and wildly destructive to our national discourse.

        • October 10, 2011 at 11:19 am

          I believe you missed the point of my post. The point of Perry’s hyperbole is to use an example that Americans understand to explain another. Everybody knows Bernie Madoff and that he created a Ponzi scheme (Do you “do” a Ponzi scheme? “Commit” a Ponzi scheme? I digress.). That is fantastic that you know exactly what a Ponzi scheme is and I commend you for it, as I stated that I myself do not know what a Ponzi scheme is like you do. My point simply was this: on the surface, similarities can be drawn. I’m talking on the most basic level. People are giving money to someone (the government) who is putting it in a trust and they expect a return based on what is promised to them. They may not receive that money because the program is it stands now cannot sustain it (I think the year they throw around is 2037?). This oversimplified definition is what many Americans attribute to being a Ponzi scheme, because sadly not all of us are endowed with the textbook-like knowledge that you possess. Would you say that this is a fair claim? I am sorry for not being able to articulate it better previously.


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