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Is Social Security a Ponzi Scheme–I Don't Think So Governor Perry!

2 comments

With the GOP debate just a few days behind us and with Obama’s jobs speech occuring just last night, you probably have a few political messages floating around in your mind. But I want to make sure that people get one thing straight–Social Security is not a Ponzi scheme, as Tea Party favorite, Rick Perry, would like us to believe.

Rick Perry hammered away at Mitt Romney on Wednesday night, holding fast to his outrageous claims that social security is a "Ponzi scheme" and a "failure". But Governor Perry might be painting himself into a corner, considering that the program has been a popular bedrock for 75+ years. It seems as though the Republican party is faced with an ideological battle between its fanatic Tea Partiers and its more middle-of-the-road conservatives. How that will play out, is yet to be seen.

However, what bothers me the most about the Tea Party’s claims about social security is the argument that it is some kind of "hand out"–people pay into this system their whole working lives. True, the system is in need of some desperate reforms, but that does not mean the same thing as abolishing it all together–let’s not throw the baby out with the bath water. In 1983, even the staunchest critic of so-called "big government", Ronald Reagan, vowed that "The Social Security system must be preserved".

The biggest problem is that people are living a lot longer than they were back in the 1930s and there are fewer workers for each retiree. But consider what life was like before Social Security was created in 1935, as many elderly Americans were in poverty. Even after the first Social Security check was disbursed in 1940 and as late as 1959, 35% of elderly Americans lived under the poverty line. Rather than dismantling the program all together, Nobel Prize winning economist, Peter Diamond, favors a mix of cuts and revenue increases to preserve the popular and life saving system.

2 Comments

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  1. Kevin Scott says:
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    If the only way you can see to fix social security is to cut benefits, means test, increase the retirement age, and increase payroll taxes, then you make the point that social security is a ponzi scheme.

    The SEC defines a ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”

    I find it interesting that as the baby boomers begin to enter retirement, see “large number of investors ask to cash out,” above, that the sustainability of the social security system is brought into question. The government takes 12.4% of individual earnings, and returns an average monthly benefit of $1,177 (ssa.gov).

    Using the median US income of $44,389, investing 12.4% in a personal account for a 45 year working life, and using a very reasonable 5% return on investment nets the individual $915,000. This is enough money to pay the average monthly social security check for 64 years. And at the workers death, the money is portable to his heirs.

    Tell me again why this failed government money grab is better for the individual than private accounts?

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    Kevin-

    First, thanks for reading my blog and taking the time to respond. Social Security was never intended to be an “investment” in the ordinary sense of the word. The entitlement is funded from tax revenue currently generated, not based on any kind of principal/interest scheme. In other words, today’s employees are helping to compensate today’s retirees. This is how the system has always worked.

    Large private banks, on the other hand, do follow a typical investment model. Like a Ponzi scheme, these banks can fail when “a large number of investors ask to cash out.” Of course, private accounts can also fail when their investments (for example, mortgage-backed securities) perform poorly. Deregulation of the private banking industry led to a number of poor investment choices, resulting in a devastating market correction. This scenario can easily happen again.

    I’m not suggesting the current system is perfect, but private bank accounts are certainly not a cure-all. Let’s not forget the purpose of the Social Security Act: “To provide for the general welfare by establishing a system of Federal old-age benefits, and by enabling the several States to make more adequate provision for aged persons, blind persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws[.]” This is a proper function of government, and it should be preserved.