Is Social Security a Ponzi Scheme?

Republican presidential contenders scare seniors with some simple truths.

At the Republican presidential debate in Tampa on September 12, Mitt Romney said Rick Perry had needlessly "scared seniors" by calling Social Security "a Ponzi scheme." Romney, more sensitive to the anxieties of retirees, prefers to say "the American people have been effectively defrauded out of their Social Security" (as he puts it in his 2010 book No Apology) because Congress has spent the program's surplus revenue instead of saving it to pay for future benefits—the sort of crime for which bankers "would go to jail."

See the difference? Neither do I. Both the former Massachusetts governor and the current Texas governor understand that Social Security is a transfer program disguised as a retirement plan and that its frequently mentioned "trust fund" does not actually exist. Their spat over how exactly to characterize that situation is illuminating not because it reveals substantive differences between them but because it shows how often these simple truths are overlooked.

The day of the debate, for instance, USA Today opined that "Social Security is most certainly not a Ponzi scheme," because Ponzi schemes "are criminal enterprises, which Social Security is not." Fact-checking Perry after the debate, CNN declared that "Social Security is not a fraudulent criminal enterprise" but "a legitimate government program." When the government does it, that means it's not illegal.

Digging deeper, Reason Foundation Senior Policy Analyst Shikha Dalmia noted that Social Security is in some respects worse than a Ponzi scheme, since participation is mandatory, money is diverted not only to earlier investors and the fund manager but also to various government programs, and the con goes on and on, even after it is revealed. I might add that Ponzi schemes offer much better returns (initially).

At the Tampa debate, Perry pointed out that Social Security "has been called a Ponzi scheme by many people long before me." It's true! And what did they mean by that?

As CNN helpfully noted, "the Securities and Exchange Commission defines such a scheme as 'an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.'" Social Security benefits likewise are funded not by returns on money that current retirees "paid into the system" but by payroll taxes collected from current workers. Yet the government misleadingly portrays Social Security as a pension program, periodically informing us about the retirement benefits we've "earned," as if our money is being saved and invested for us.

Don't be embarrassed if you've fallen for this scam. So has The New York Times. It tried to set Perry straight by reporting that "economists of all stripes agree" Social Security won't "exhaust the money in the trust fund" until 2037.

But as the Times itself conceded last year, this trust fund is no more than "an accounting device" that represents how much the government owes itself—or, in other words, how much must be extracted from taxpayers to cover all the surplus Social Security money Congress has squandered over the years. The surpluses themselves are long gone, replaced by Treasury bonds that can be redeemed only through higher taxes or further borrowing (which eventually translates into higher taxes).

"This trust fund is an elaborate illusion cooked up by government magicians," Perry observes in his 2010 book Fed Up! In No Apology, Romney agrees, calling the trust fund a "fiction that's often used to obscure the extent of the crisis."

Social Security's benefits already have begun to exceed its annual revenue, meaning the program is contributing to the deficit instead of making it seem smaller. By the 2040s payroll tax revenue is expected to cover only three-quarters of promised benefits.

All of the possible solutions ultimately involve raising taxes or cutting benefits. But in settling on a particular fix, it is helpful to understand the true nature of the system we are reforming.

Senior Editor Jacob Sullum is a nationally syndicated columnist.

© Copyright 2011 by Creators Syndicate Inc.