Light of Truth – Social Security is Not A Ponzi Scheme

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(Note:  This article continues a weekly series called “The Light of Truth” shining the light on factually inaccurate and slanted information polluting Texas and National politics.)    

As Rick Perry continues his Presidential Campaign, he has been repeating talking points that falsely assert Social Security is insolvent:

“It is a Ponzi scheme for these young people. The idea that they're working and paying into Social Security today, that the current program is going to be there for them, is a lie, …. It is a monstrous lie on this generation, and we can't do that to them.”

So what is the truth?

REALITY CHECK FOR SOCIAL SECURITY

  • Social Security is currently solvent;
  • Future funding shortfalls are  minor and can be easily handled; and,
  • The Ponzi Scheme accusations are false and based on superficial analysis.

SOCIAL SECURITY IS CURRENTLY SOLVENT

According to the non-partisan Congressional Budget Office Report , Social Security is financially solvent and can continue to pay benefits at their current level for over 25 years without experiencing any funding shortfall.

The current political problem is that for the first time, the amount paid in social security taxes is less than current benefits, forcing the so-called social security trust funds to be tapped.   However, even if there are no changes to taxes or benefit formulas, as late as 2040, social security taxes alone will cover 80% of projected benefits.

So the short answer is Social Security is not at any immediate actuarial risk.

SOCIAL SECURITY'S FUTURE FUNDING IS EASILY MANAGEABLE

In the off-chance that Congress has done nothing to handle the anticipated social security shortfall in the next 25 years, the system could still remain solvent merely by requiring a 20 percent reduction of benefits.  Of course, such a drastic across-the-board cut can easily be prevented by prior action.  

The Congressional Budget Office has done the math on 30 specific fixes, including such items as increasing social security taxes by 1,2, or 3%, eliminating or altering the taxable maximum, lowering benefits for the wealthiest Americans, changing benefit formulas, raising the Full Retirement Age, and altering the Cost of Living Adjustment (COLA).  The gravamen of the report is that the total amount of shortfall will not go beyond a manageble .6% of Gross Domestic Product.  Although Democrats and Republicans might prefer different fixes, the fact is that among the many options for maintaining future solvency, there are plenty of options to find an agreed fix that can be implemented.    

SOCIAL SECURITY IS NOT A PONZI SCHEME

The Ponzi Scheme assertion has been around for a while, and is based primarily on the well-known fact that Social Security is not an investment fund, but a pay-as-you-go program in which future benefits are based in part on past participation (the more taxes you pay, the higher your future benefit).  Because of these Ponzi Scheme assertions, in 2009 the Social Security Admistration issued a report detailing the many differences between social security and a Ponzi Scheme, stating:

  • “There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both money from later participants goes to pay the benefits of earlier participants, but that is where the similarity ends.  A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression …so it is not a pyramid or Ponzi scheme.”

The biggest difference from a layman's perspective is that the crux of a Ponzi Scheme (aside from the illegality, fraud, and deceit) is getting people to pay into a pyramid scheme structure promising huge returns, knowing that sooner or later, there will not be enough people to fill the base of the pyramid for such large returns, forcing the entire scheme will collapse.  

However, under social security, as long as we are keeping track of the math, we can keep the entire structure operating properly.

The only question is whether we have the political will to do so.

Social Security, is an open, fully transparent tax structure that is currently solvent and has long-term viability if Congress merely picks among 30 simple funding fixes proffered by the CBO (or any combination of the 30 fixes.)  

The idea that Social Security will not be there for future generations or is a house of cards that could come crashing down is simply false political posturing.  

Americans young and old alike need to know that they can have confidence that the system is viable and solvent.  

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3 Comments

    • Actually Not

      The only similarity is that both a ponzi scheme and Social Security are “pay as you go” systems.  Otherwise the differences are clear.

      1.  A ponzi Scheme is a Fraud that relies on secrecy; Social Security is open and transparent;

      2. A Ponzi Scheme is a “get rich quick scheme” that relies on high rates of instant return to trick people into joining.  Social Security promises low rates of long-term return in exchange for helping the current generation.

      3.  The high rate of return that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.  The comparitively low rates of return in Social Security means that it can go continue with mere constant cash flow.

      4.  A ponzi scheme is designed to get money for the owner; Social Security is designed to stablize the economy and provide support to our senior citizens.

      5.  A ponzi scheme is based on false math that is bound to collapse; Social Security is based on sound math, that is not bound to collapse.

      If we want to serve the new generations, we need to merely fix the math, not pretend it is unfixable.

    • Not a Ponzi Scheme
      The “Ponzi scheme” idea comes from the notion that the money/labor/whatever of present-day workers is going to fund today's Social Security recipients, whereas future recipients will be getting their funds from future workers.  That however is true of any savings account (other than stuffing bills in your mattress).  The economy is dynamic:  the money you put into savings will be lent out to various borrowers, who will be repaying the bank at a future time; the money you eventually get back will not be the same money you put in.  The difference in a “Ponzi scheme” however is that the structure inherently cannot pay back all that is put in (because the money is not being invested in anything productive); everybody can't get something for nothing, so in the end a lot of people get nothing for something.

      It is strange how our future projections depend on what we are trying to promote.  There aren't going to be enough workers in the future to support the minimal demands of pensioners, yet there will be enough to pay for the stupendous lifestyles of our maharajahs, the billionaires.  Similarly, there aren't enough jobs for the people who need them, but somehow at the same time there aren't enough workers to do the jobs that our economy needs (and pay for what's needed).

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