Perry was not too far off calling Social Security a Ponzi scheme

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.

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8 Responses to Perry was not too far off calling Social Security a Ponzi scheme

  1. tom says:

    Doug, I agree with your recommendations, but would like to add one more:

    *Just keep your damn socialist hands of my social security!

    *(thank you David Steinberg)

  2. Howard Ratcliffe says:

    Perry advocates Texas should secede from the Union. The tab for the Texas \Exceptional Drought\ and wildfires is going above $5 Billion. Fresh off supplying assault weapons to Mexican Drug Cartels, the BATF started fires in West Texas in May ostensibly to destroy explosives; Lubbock City attorney Tom Edwards has filed suit as the area was under a fire ban.
    Trained volunteer fire fighters are being turned away from the blazes by the US Forest Service and FEMA and Texas is not receiving Federal Funds.
    States may not print money; just where is Texas going to get the funds to pay damages, to homes and crops, and fight fires?
    Social Security may indeed by a Ponzi Scheme, but it is an Entitlement Trust Fund that may be abandoned. No food, scorched earth, drug cartels with US weapons and no Federal Social Security Checks is a recipe for planned disaster.

  3. ctrentelman says:

    if social security is a ponzi scheme, then so is every insurance plan on the planet.

    The term \Ponzi Scheme\ is rapidly getting taken over by people who want to use it to attach a negative connotation to Social Security or any other \income redistribution\ plan they don’t like (as opposed to redistrubiton plans they do like — those are called \incentives\) but precision of language demands that we keep \Ponzi Scheme\ for very narrowly defined criminal activities like those Mr. Ponzi conducted–key word being criminal.

    Or Wayne Ogden, or whoever.

    Social Security is insurance — you pay in, when it is your turn, you get paid back out. Properly managed and following demographic and actuarial tables, such a plan can function well. Social Security is solvent until 2035 as it stands now, and only a very minor tweak in the rate of income to the trust fund would extend that far far into the future. That is not a ponzi scheme.

    I wonder if Gov. Perry’s parents receive Social Security? And if so, I wonder why he allows them to…

    • Howard Ratcliffe says:

      The point I was trying to make is Rick Perry wants to secede from the Union taking with it the Social Security, Medicare, and Federal Pension obligations. Social Security was established in 1935 and raided by Clinton in the 90′s; today it is insolvent, so what better way to eliminate the obligations than voluntarily eliminate them. Can you imagine the chaos in Texas with Mexican Drug Cartels armed with American assault weapons, the NAFTA Superhighway as access, MEChA, Voz de Aztlan and LaRaza Unida telling the young to take back Aztlan (1/2 California, NM, AZ, 1/2 Utah, 1/2 Colorado, 1/2 Texas and South Florida)? This is very real and happening with Texas leading leading off.
      Obama’s Jobs Bill is nearly identical to FDR’s New Deal; can’t anyone see this?
      Anyway I appreciate you allowing dialogue on these tough issues; Standard Examiner is a leading light for sure.

    • efialtis says:

      “if social security is a ponzi scheme, then so is every insurance plan on the planet.”

      That isn’t true…
      Insurance was designed to be used if needed. True, that was the original intent of Social Security, but Social Security (thanks to progressives) has moved beyond that scope and is now a “retirement package”… it includes medical disability and “pension”…
      Insurance can still deny coverage, has huge restrictions on what it will and will not do, who its partners are, etc.

      These items are different.

      However, if you wanted to compare social security with, say, a Union or Government retirement pension/package, then yes, these are very much the same…

      It takes 40 NEW firefighters paying into the system to provide the pension of ONE fire fighter…
      Ponzi…

      Just imagine what will happen when all the baby boomers are old, and they had fewer children… more people collecting benefits than those paying into the system… oops.

      As for being criminal? Heh… Enron… ring a bell?
      They did EXACTLY the same thing to their retirement benefits the government has done with Social Security…

  4. Doug Gibson says:

    Social Security has the ability to continue taking taxes from people, or deferring their benefits, true. But insurance, Charlie? I think not. You make a promise with a company with insurance and expect the same deal you signed. Unfortunately, Social Security is a welfare program that robs those forced into it of far better returns. I feel sorry for seniors forced to rely on it when a simple muni bond fund would have produced far more income for their golden years.

  5. Blue Sky says:

    The difference is that a Ponzi scheme is intended to defraud its investors. Social Security is intended to help the elderly survive.

    • Owain says:

      Social Security is a scheme to get politicians re-elected. If it were intended to help the elderly to survive, it wouldn’t be as badly designed as it currently is.

      Snark aside, as originally intended, yes it was intended to be a program to aid seniors. Since it’s inception, it has been mismanaged, and there has never been the political will to reform the program so it is feasible fiscally. Politicians have been content to lie to the public about social security’s viability, so now we find ourselves with a program on the verge of bankrupcy that has become, in effect, a Ponzi scheme where current politicians ARE defrauding the American public so they can be re-elected.

      It matters not what the original intent was. This is the actual state of the program today.

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