Perry Is Right: Social Security Is a Lot Like a Ponzi Scheme

FDR wasn't Bernie Madoff, but his program's severe structural flaws cause it to resemble that of a fraudulent hedge fund

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Now that it is beginning to look like Texas Gov. Rick Perry has a serious shot at nabbing the Republican presidential nomination, his critics have begun dissecting his political views. One particularly controversial one is his claim that Social Security is a Ponzi scheme. As you might guess, progressive groups are particularly disturbed by this assertion, since it implies that he is against entitlements. Although he may be technically wrong, he's basically right.

Why Social Security Is Like a Ponzi Scheme

Zaid Jilani at Think Progress argues that Perry doesn't know what he's talking about:

A Ponzi scheme is an economic arrangement where the money paid into the system by later entrants is paid right back out as benefits to earlier entrants. None of these social insurance programs that Perry mentioned fit this definition. They benefit those who pay into them with guaranteed benefits.

Wait -- what? Social Security fits that precise definition. It was created during the Great Depression by President Franklin D. Roosevelt. Retirees began receiving benefits immediately, without having paid into the program themselves. Those benefits were paid by taxing current workers. So, in fact, Social Security is technically identical to the definition of a Ponzi scheme that Jilani provides.

And Those Guaranteed Benefits?

But what about those "guaranteed benefits"? Don't those make a difference? Well, let's think about this. Imagine if an investment advisor came to you and said:

"Hi there! I want to sell you a retirement vehicle for which you will be provided a guaranteed benefit of x dollars per year after the age of 65. But the money you contribute will be paid to current beneficiaries, while your money will be paid by future beneficiaries. If there's ever a shortfall, we'll just borrow money from China in order to keep the guaranteed benefits coming -- or force future contributors to provide more money. Alternatively, we might increase the age at which you'll receive benefits. And we might even think about means testing your benefit."

All of those supposed "guaranteed benefits" sure come with a lot of caveats, don't they? Is it even fair to call those benefits guaranteed? For all we know, the U.S. could continue to run into deficit problems for the next few decades and could feel compelled to do away with Social Security altogether. We have no real guarantee that political whims won't change.

So when provided that deal would you say, "That sounds great! Sign me up!"? I know I wouldn't. Of course, this is precisely the way Social Security works, and it's mandatory, so we've got no choice but to comply.

Other Defenses

There are several other arguments for why Social Security actually isn't like a Ponzi scheme. They're all weak.

No One Is Being Misled

First, don't people know exactly what they're getting into with Social Security? There's no shady investment manager promising lucrative returns, like we saw with Bernie Madoff's Ponzi scheme, for example.

But aren't Americans being somewhat misled by Social Security? If the benefits age rises, then people were misled. If the government decides to means test benefits, then Americans were misled. Just because, deep down, we might realize that Social Security will be a pretty raw deal for future generations doesn't mean it's suddenly far preferable to a regular old Ponzi scheme.

Not Doomed to Fail

Next, in an alternate world Social Security might have been just fine. If population growth had continued to increase forever, then it would never have run into money problems, and it all would have been sustainable.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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