Social Security is a Ponzi scheme

With the debate over whether or not Social Security is a Ponzi scheme surfacing in yet another Republican debate, it’s very confusing that Gov. Rick Perry has not clearly defended the words he used regarding the program in his recent book, “Fed Up!”

In his book, Perry specifically refers to Social Security as a Ponzi scheme and “fiscal insanity,” then likens it to Bernie Madoff’s infamous fraud that came toppling down in 2008. Considering how terribly accurate his description is in his book, it leaves many wondering why “Slick Rick” is left bewildered and tongue-tied when he is forced to defend his words. Mitt Romney took issue with the phrase “Ponzi Scheme,” insisting that it was only being used to scare seniors. But if speaking the truth about Social Security is scaring them, then perhaps all of us have a reason to be afraid.

One might wonder what is so horribly wrong with allowing people the freedom and personal responsibility of saving for their own retirement. The truth of the matter is that if such a provision were to be allowed, the entire facade of Social Security would come crashing down.”

Whether or not Perry is capable of defending his words published less than a year ago, the truth of the matter is that Social Security is absolutely– 100 percent – a Ponzi scheme. One has to look no further than the textbook definition of a Ponzi scheme to see this: Paying off previous investors not with real market returns on their assets, but with the cash from subsequent investors.

Here’s the skinny on Social Security. When taxes are collected from workers’ paychecks each month, none of it goes towards personal accounts, nor is it invested or used to purchase assets in any real sense of the term. From the cash collected, most of it immediately goes out the door in order to pay current beneficiaries, with some being scraped off the top to pay for generous salaries of governmental administrators. The remaining surplus is used to purchase “assets” which make up Social Security’s “trust fund”.

Here’s where the additional swindle comes in. By law, this “trust fund” consists entirely of US Treasury securities. These securities are simply US government debt, or IOUs from American taxpayers. By slight of hand, the government has taken a federal liability, and by passing it from the right hand to the left, led its citizens to believe that it has suddenly become an asset. The reality is that none of the money was saved or invested; it was all spent to pay off previous workers who were convinced they were saving for their own retirement, with any remaining funds being borrowed by Congress and blown immediately.

This simple fact becomes particularly apparent when one notes how furiously the political class fights even an opt-out provision to Social Security. One might wonder what is so horribly wrong with allowing people the freedom and personal responsibility of saving for their own retirement. The truth of the matter is that if such a provision were to be allowed, the entire facade of Social Security would come crashing down. It would then become more than obvious that workers’ payroll taxes are not being saved for them in some sort of “lockbox,” but instead used to subsidize Congress’ spending addiction and reduce real savings and investment throughout the economy.

The fiscal deception that is being used by politicians to defend Social Security may be something Enron could be proud of, but it shouldn’t pass for honest accounting by the government of the United States. By any private-sector measure, Social Security is a con job and a complete fraud. What’s worse is that at least in traditional Ponzi schemes you have to be willing to give your earnings over to the money manager. In Social Security, none of us even get the freedom or benefit of making that choice.

Steven Christopher is an economics alumnus and graduate finance student in the C.T. Bauer College of Business and may be reached at [email protected].