At the GOP presidential debate last night, candidate Gov. Rick Perry caused a kerfuffle among commentators when he called Social Security a Ponzi scheme. The remark isn’t as outrageous as many assume. A Ponzi scheme is where “investments” collected are used to pay “dividends” to earlier investors. The scheme collapses when new investments dry up or early investors want to pull out.
Social Security is more complex. It’s a pay-as-you-go system where younger workers’ contributions are paying the Social Security benefits of older retirees. For decades, Social Security revenues have outpaced outlays. However, the government has used those profits to pay for other government expenditures. So any assets that might have grown as a result of investments never occurred. When that happens, the feds issue T-bills to the Social Security Trust Fund. However, those T-bills are essentially money borrowed from yourself. Trying to collect would be a fiasco.
Despite Perry’s rhetoric, he’s not calling for Social Security to be scrapped. That’s not possible because it’s been around too long and too many Americans rely on the program. But, if no reforms are made, it’s hard to see how younger workers will receive their checks.
One of three options, or perhaps all three, are necessary to shore up Social Security: 1) increase the eligibility age to at least 70 (that’s a poor investment for working and paying into it for 50 years, but it’s necessary) 2) Get rid of earnings cutoff levels for the Social Security taxes. If someone earns $1 million a year, take a percentage of the $1 million, rather than the current earnings limit, which hovers around $100,000. (that’s a poor deal for the wealthy, who will barely see any Social Security, but it at least destroys the pleasant myth that Social Security is fully paid for by contributions) and 3) implement a national sales tax of a few percent that is devoted to Social Security to make sure it stays in the black.
Social Security is not the same as a Ponzi scheme, but it will surely collapse like a Ponzi scheme if we don’t take tough steps to reform this ill-advised program that we are now stuck with.