Rick Perry stirred up a hornet’s nest of media pundits, from both the left and the right, when he casually said that Social Security was a Ponzi Scheme. Partisan pseudo-reporters, non-thinking political commentators and other dullards quickly formed their defensive square and screamed, “That’s not true; a Ponzi Scheme is illegal!” And they are technically correct. Any law duly passed by the House and Senate and signed by the President is legal (although the Supreme Court may subsequently declare it unconstitutional).
But what if Rick Perry had said instead, “Social Security works exactly like a Ponzi Scheme, such as that of Bernie Madoff”. What would the leftist partisans and their fellow travelers say if the statement were phrased in that manner? What reference could Rick Perry and others who agree with his view turn to for justification? How about the Securities and Exchange Commission, the SEC.
On its web site the SEC provides this definition of a Ponzi Scheme: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors“. This is exactly how Social Security works. There are no investments providing returns. There is no actual “Social Security Trust Fund”; it is just an accounting collection of IOUs from all of the various government agencies that have spent almost every penny of Social Security payroll withholding not actually paid out to beneficiaries.
So Social Security is technically not a Ponzi Scheme, but only because what would otherwise be an investment fraud is allowed under U.S. law. Those who blurt out emotional responses need to hold their indignity in check long enough to think about the real issue. How can an unsustainable, Ponzi-like scheme be reformed into an enduring program to ensure an adequate retirement income for the largest number of workers?
The path toward a solution begins with a problem definition, which was skipped by the well-intentioned people who brought us the “temporary” Social Security program intended to assist workers who had been economically crippled by the Great Depression during their most productive years. One critical part of a problem definition is articulating the desired goal that the solution is to create / enable. The goal is simple: enable every income earner to establish and make regular contributions to his or her personal retirement income plan that is actuarially adequate; provide strong incentives / disincentives to assure that the maximum number of earners faithfully follow through.
Realistically, that “maximum number of earners” who faithfully follow through will be significantly less than 100%; seventy to eighty percent will be a more likely number. Human frailties have no bounds, and there will be innumerable reasons why individuals reach retirement age with far less than enough income. This remainder will fall into the welfare social safety net, and although there may be a little grumbling, we are not going to let those seniors starve in the dark.
What would make such an imperfect private retirement plan good for our country? Today Social Security operates not just like a Ponzi Scheme but also operates like a welfare system: a very large fraction of beneficiaries will take out much, much more than they ever paid in. Those retirement funds (withheld from our paychecks plus an equal amount paid by our employers) are not invested across our working lifetime and therefore grow not one penny larger; all the additional money that taxpayers must supply amounts to plain old welfare. Reducing that welfare burden by even 50% would be a win for all Americans.
Would there be any losers? Of course! The progressive politicians who have been so successful in scaring the ignorant fraction of Social Security beneficiaries and the almost-senile fraction will be forced to come up with a believable rationale why nothing should be changed. Those politicians will be quite unhappy when they have to earn the votes required for their reelection.
Posted by thedrake01 
