Social Security and Charles Ponzi

No doubt you have heard the uproar over Gov. Rick Perry’s assertion that Social Security operates much like a Ponzi scheme. Perry’s attempt to discuss the “third rail of American politics” once again thrusts the program’s solvency before the American electorate. True to form, rather than sparking honest debate, Perry’s comments elicited immediate contempt and scorn from liberal ideologues bent on preserving this longstanding entitlement program rather than dealing truthfully with its present predicament.

For those unfamiliar with Charles Ponzi, he was an Italian immigrant who made a fortune in the 1920’s posturing as the wise sage promising unheard of investment returns to people placing money in his care. To backup his nefarious claims, Ponzi paid initial investors robust earnings out of cash received from even newer investors. With the initial investors flashing their new cash, others jumped into the frenzy unable to resist the allure of easy obtainable gains. Since Ponzi was making no legitimate attempt to generate actual profits for any of these people, fresh money sources had to constantly be found in order to keep everybody happy. As with all such schemes, eventually new money dries up and later investors are skid marks left with smaller bank accounts and no avenues for recourse. Their money is gone.

Why then does Governor Perry compare your future retirement benefits to this awful scam?  Because like it or not, the similarities are there:

  • Taxpayers are told their payroll taxes will be put into a trust, invested wisely, and will be returned to them with interest during retirement.
  • Meanwhile, the money is not invested but is used to make promised payments to somebody else. The government must then tax new people to take care of old promises.
  • Should the revenue stream dry up, retirees promised their own money back, must rely on the government to further increase taxes on today’s workers or print more money in order to keep the program running (Charles Ponzi didn’t have this option).
  • If this does not happen benefits run out and current retirees are left with nothing.
  • Finally, early retirees receive exponentially higher returns on their payroll tax contributions than current recipients. Note Ida May Fuller, who as the first monthly Social Security recipient collected $22,888 dollars in benefits while paying in $24.75. [1]

Gov. Perry wasn’t saying we shouldn’t provide a safety net for seniors. He was saying let’s be honest about how it is funded today. The system is broken. It should not surprise people willing to put emotion aside and allow common sense to guide decision making.

FDR set in motion a mandatory benefits program designed to force his version of fairness on all of us in a manner never to be undone because the people will always feel entitled to their money. He said so himself.

Back in the 1935, FDR signed the program into law, and in 1941 remarked about his motivation for Social Security by saying, “…We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”   [2]

Social Security was a matter of politics in the 1930’s and it remains so today. The sooner we are honest about it, the sooner we can explore real alternatives to replace it. Investors willingly gave Charles Ponzi money; taxpayers paying into Social Security have no choice. I’ll let you ponder which is worse.


[1] http://www.ssa.gov/history/briefhistory3.html#idamay

[2] http://www.ssa.gov/history/Gulick.html