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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].

17 Comments

  • Seems as though a lot of your blog posts are just rants. How about offering a possible solution to the problem. How do we fix the Social Security system? At this point we are unable to take it away. Millions of elderly depend on their monthly check.

    • Raise the eligibility age by 2 months every year for the next 36 years. So 36 years from now, the eligibility age will be 6 years older than it is now. This would impact no one who is currently receiving benefits, only minimally impact anyone who is nearing retirement, and significantly shift the cost curve towards long term viability. Not a perfect, or complete, solution, but it would be a good jumping off point to start a discussion from.

    • 2009? Really? It would help if you reference back to that post. I've only been reading Cougar Daily for the last few months.

      Either way… You still do not solve any problems. You only create long-term problems by doing away with SS. How do you expect the majority of Americans to save for their own retirement when only 25-35% of Americans carry a degree? The other 65-75% will probably never make over a million dollars in their working lifetime. What happens when a large majority of elderly Americans are put out in the cold because they couldn't save enough money for a retirement that lasts longer than they initially planned? … You have government intervention again that will bring about programs like SS. The comment below by Carly is a good start for the country. One thing we're all guilty of is waiting till things are in shambles and then acting on it. This could have been fixed years ago in the Clinton/Bush era with major reform but idiot far Lefties and far Rights couldn't work together.

  • Making Social Security sustainable would fix the dilemma and put an end to the argument of whether or not the program is a “Ponzi scheme.” Such things as raising the retirement age could help. This needs to be done because seniors spend an ever-increasing number of years in retirement, during which taxpayers finance a large fraction of their incomes and medical expenses. The growing length of retirement for men in part reflects a decline in the number of years spent working. Since 1900, male life expectancy at age 20 has risen by 14 years, yet working-life expectancy is currently lower than it was when Theodore Roosevelt was first elected president. At the start of the last century, a 20-year-old man could expect to live an additional 42 years, during which he could expect to work 38 years; the average period of retirement was thus relatively short. By 2004, life expectancy for a typical 20-year-old man had climbed to 56 years, yet his working-life expectancy was still 38 years (http://eng.am/qglaR0).

    • Raising the retirement age will do only one thing: increase the ranks of the unemployed as necessary retirement doesn't happen, younger workers can't be promoted, and new college grads are increasingly unable to even find entry-level positions.

      Isn't it nice how the Retardicans shout "raise the retirement age" without considering these basic facts?

  • It has only been in recent years that SS has come under fire by politicians looking for a scapegoat to win elections. They terrify and misinform the public in the process. The era of "scare tactic politics" is heavily upon us, and the net result is rants like this. Few members of Congress, and indeed the public, have a real clue how the SS system works, but rants like this make it clear that ambitious politicians can create genuine fear as bewildered folks tremble at the rather bizarre notion that they have been led astray by their evil government.; Perry, the hero, has exposed it. This is the same guy who had no problem taking money from a pharmaceutical company then allowed state legislation mandating young girls to get anti-STD inoculations to cover his tracks. Oh yes, we can rely on Perry's sterling word to expose government scams. What a waste of ink.

  • Unfortunately, you have left out a big part of the picture, and that part disqualifies Social Security from being a Ponzi scheme. From 1935 to 1983 Social Security operated strictly on a pay-as-you-go basis with each generation paying for their parents' benefits. During that period Social Security did resemble a Ponzi scheme. But everything changed with enactment of the Social Security Amendments of 1983. As part of that legislation, the baby boomers were hit with a hefty payroll tax increase that required them to both pay for their parents' benefits and also prepay the cost of their own benefits. The legislation was designed to generate large annual surpluses for about 30 years. This surplus money was supposed to be saved and invested in marketable U.S. Treasury bonds which could later be resold in order to raise money with which to pay benefits to the boomers. (continued)

  • (continued from above post)
    But, instead of saving and investing the surplus revenue, the money was deposited directly into the general fund and used to finance such things as tax cuts, wars, and other government programs. As Senator Tom Coburn (R-OK) said during as senate speech on March 16 of this year, “Congresses under both Republican and Democrat control, both Republican and Democrat presidents, have stolen money from social security and spent it. The money’s gone. It’s been used for another purpose.” That is the real fraud. The government has stolen the Social Security surplus.
    Allen W. Smith, Ph.D.
    Professor of Economics, Emeritus
    Eastern Illinois University http://www.thebiglie.net
    [email protected].

  • THE TWO BIG LIES ABOUT SOCIAL SECURITY:

    LIE 1. Social Security has no financial problems. With no government action of any kind, Social Security can pay full benefits until 2036.

    LIE 2. Social Security, in its current form, is unsustainable. It is going broke, or it will go broke.

    THE TRUTH: All of the $2.6 trillion in surplus Social Security revenue generated by the 1983 payroll tax hike has spent by the government, as it came in, for other government programs. The year 2009 was the last year in which the Social Security budget ran a surplus. Beginning in 2010, Social Security began running annual budget deficits. In 2011, and all future years, the cost of Social Security benefits will exceed the payroll tax revenue, and the government will have to dig into the general fund in order to pay full benefits

  • If the $2.6 trillion had not been spent on other things, Social Security could pay full benefits until 2036. Social Security could be made fully solvent for decades beyond 2036 with a single legislative act. If the cap on earnings subject to the payroll tax were removed, Social Security would be fully solvent for at least another 75 years.
    Allen W. Smith, Ph.D. http://www.thebiglie.net

    • Instead of listening to columnist whos best response is that ponzi schemes are private in nature listen to people who are actually knowledgeable on the issue. For instance Laurence Kotlikoff…who calls it for what it is and that is its a ponzi scheme. I am puzzled by how you think this is not a ponzi scheme. A big difference between madoff and social security is that madoff does not have the ability to take out massive loans to pay off investors with.

      Again for your own sake actually reference people who have knowledge on the issue. Also, Paul Samuelson also though it was a ponzi scheme…so did

      • Social Security is paid for by 2037, and afterwards it is projected to pay for 3/4's of recipients. It needs amending, sure, but as long as it is paying out as intended and is sustainable, it is not a Ponzi scheme.

        You cite Koltikoff (BU professor, former Mike Gravel adviser (heh)), but I could just as easily just as easily cite Paul Pierson (professor UC Berkeley) or Teresa Ghilarducci (chair of economic policy analysis, New School). And we could go back and forth until those who don't believe it to be one vastly outweigh those who make such a claim.

        But enough of that. The fact remains that it just doesn't fit the criteria.

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