Presidential candidate and Texas Gov. Rick Perry grabbed headlines when he compared Social Security to a Ponzi scheme. That sounds correct to many people. But the question is more complex than Perry may realize.
Some might deem human existence a Ponzi scheme, since economies continually need new people reaching working age so someone can produce goods and services to meet the needs of those becoming too old to work.
These folks depend on a cohort of younger people to turn out the goods and services needed by society.
That is the fundamental challenge our society faces from retiring baby boomers. We have known for 50 years how much the number of elderly would grow relative to the number of workers. This meant that a higher proportion of the output of each person in the labor force would have to go to nonworking people compared with what we are used to. And we would continue to need new entrants to the labor force.
Move from the real economy of labor, raw materials, goods and services to the monetary economy of interest, dividends, taxes and government spending, and you get into the question of what social mechanisms can ensure that retirees get some of the goods and services produced by others.
These could depend on kinship, with younger members of a family providing for older ones. It could depend on ownership of assets, so that retirees depend on rents, interest, dividends or profits. Or, it could happen via a government social insurance plan into which people are required to pay.
Our society has a combination of all these mechanisms. But regardless of the mix, working-age people have to “pay for” the consumption of retirees.
A Ponzi scheme is by definition a fraudulent effort to appropriate money from many people by paying high returns to an initial few so as to deceive the rest. It is inherently unsustainable.
Social Security has no fraudulent intent.
Yes, it is not sustainable into perpetuity. But it has paid out benefits for more than 70 years.
Moreover, it could continue such full benefits for another quarter-century. And relatively small cuts in benefits and increases in taxes could make it sustainable into perpetuity. So it is hard to see how calling it a “Ponzi scheme” springs from anything other than ignorance or demagoguery.
Unfortunately, an ill-understood and perhaps ill-designed restructuring of Social Security 28 years ago caused much confusion.
Benefits were cut slightly and taxes increased precisely to fix the baby boom problem. This resulted in more tax revenues flowing into the program than benefits flowed out.
That surplus could have been put into corporate stocks and bonds. That would have constituted a form of “privatization” and was deemed politically unacceptable at that time. Failing that, surpluses in Social Security revenues would obscure the true size of deficits or surpluses from general taxes and spending, regardless of the actual government accounting mechanism used.
Rival candidate, U.S. Rep. Michele Bachmann, R-Minn., thinks this is a bad idea. She calls it “a tremendous fraud,” with one of her staffers saying the “federal government has stolen money out of the Social Security trust fund. People have the illusion that their money is safe in a vault somewhere.” Bachmann says we should “take the money that is coming in for Social Security, and truly lock it up.”
When Al Gore was a presidential candidate, he talked about putting Social Security in “a lockbox.” But it is not clear that either Gore or Bachmann really understands exactly how this could be done.
Putting money “in a vault” somewhere is possible for an individual. But it isn’t for a nation, and anyone elected to national office should understand that. The fact that presidential candidates from both parties apparently don’t understand it reflects a failure of public policy education.
ed@edlotterman.com.
