Skip to comments.Yes, It Is a Ponzi Scheme (In fact, Social Security is a bit worse than that)
Posted on 09/01/2011 3:15:12 PM PDT by SeekAndFind
Texas governor Rick Perry is being criticized for calling Social Security a Ponzi scheme. Even Mitt Romney is reportedly preparing to attack him for holding such a radical view. But if anything, Perry was being too kind.
The original Ponzi scheme was the brainchild of Charles Ponzi. Starting in 1916, the poor but enterprising Italian immigrant convinced people to allow him to invest their money. However, Ponzi never actually made any investments. He simply took the money he was given by later investors and gave it to his early investors, providing those early investors with a handsome profit. He then used these satisfied early investors as advertisements to get more investors. Unfortunately, in order to keep paying previous investors, Ponzi had to continue finding more and more new investors. Eventually, he couldnt expand the number of new investors fast enough, and the scheme collapsed. Ponzi was convicted of fraud and sent to prison.
Social Security, on the other hand, forces people to invest in it through a mandatory payroll tax. A small portion of that money is used to buy special-issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those early investors who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.
As with Ponzis scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.
As with Ponzis scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When todays young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.
Eventually the pyramid crumbles.
Of course, Social Security and Ponzi schemes are not perfectly analogous. Ponzi, after all, had to rely on what people were willing to voluntarily invest with him. Once he couldnt convince enough new investors to join his scheme, it collapsed. Social Security, on the other hand, can rely on the power of the government to tax. As the shrinking number of workers paying into the system makes it harder to continue to sustain benefits, the government can just force young people to pay even more into the system.
In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.
In addition, at least until the final collapse of his scheme, Ponzi was more or less obligated to pay his early investors what he promised them. With Social Security, on the other hand, Congress is always able to change or cut those benefits in order to keep the scheme going.
Social Security is facing more than $20 trillion in unfunded future liabilities. Raising taxes and cutting benefits enough to keep the program limping along will obviously mean an ever-worsening deal for younger workers. They will be forced to pay more and get less.
Rick Perry got this one right.
Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.
A Ponzi scheme is still a Ponzi scheme even if the government runs it!
Did he at least credit me in the article?
I am not really a Perry supporter but it is most defintely a Ponzi scheme.
It is a Ponzi scheme.
“...but it was not started on that premise. If the Federal Government had left the money paid into Social Security by the workers, if would have been fine and self supporting.”
Your statement is wrong, because people started collecting far more than they ever paid right from the start. There was never a trust fund that held anything except government issued IOUs right from the start.
It was a pay as you go system from the start.
It was always a political spoils system from the start.
Are you currently receiving SS, are you trying to justify your current payments? The only justification that current recipients of SS have is that they have more political power to loot the current taxpayers. Right makes might.
Upshot: Ponzi schemes are voluntary. SS isn’t.
The Federal government NEVER "left [the] money paid into Social Security by the workers [and set it aside for the future]". NEVER
Most of the money paid in by active workers went to paying benefits for retired workers. Any excess received above what was needed to pay benefits was exchanged for IOUs from the Treasury. They called those IOUs the Social Security "surplus". The only "surplus" it was was a surplus of debt to be redeemed by Social Security at the cost of either new Federal revenue or new Federal debt sold to the public.
Starting with L.B.J. who wanted to finance the Great Society and the Viet Nam War at the same time, and used the cash from Social Security we would have been fine.
LBJ did not change the system from "saving" the Social Security "surplus" to spending it. He only changed how the accounts looked on the Federal budget so that instead of the "surplus" (IOUs amounting to future new debt) being off to the side, it was moved to the "total budget" side so that it appeared to offset deficits from other areas of the budget. It was only an appearance, because the IOUs were NEVER true "assets" banked away. They are, and always were, promises that future taxpayers would have to find some new way to honor.
Any "excess" was ALWAYS spent and converted to IOUs from the Treasury, no matter how they made things look on the Federal budget.
I thought Ponzi Scams were illegal.
Perry is showing he cannot have an adult discussion of the issue, but then I doubt if he can read a budget. He is like the brother, he hire attorney to explane it to him.
“the money you pay into the system is used to pay benefits to those early investors who are retired today. “
No, that’s just not true. I wish it were.
Half of ‘the money you pay into the system’ is used just to pay the interest on loans that are taken out to pay benefits to the ‘early investors’.
With Ponzi one only lost what one invested, with SS one loses his investment AND is saddled with an additional debt.
SS is more a product of the Marquis De Sade than Ponzi.
Great response by the National Review.