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GRAY MATTERS: Social Security – The Anti-Ponzi Scheme

SaulFriedman75x75 Pulitzer Prize-winning journalist Saul Friedman (bio) writes the weekly Gray Matters column which appears here each Saturday. Links to past Gray Matters columns can be found here. Saul's Reflections column, in which he comments on news, politics and social issues from his perspective as one of the younger members of the greatest generation, also appears at Time Goes By twice each month.

Even before I spent a dozen happy years living and working in Texas, one of my heroes was Sam Houston, the first president of the Texas republic, the state’s first governor and its senator. He resigned as governor because he staunchly opposed its secession from the union. Today, such principled heroics are rare in Texas.

Instead, the Texas congressional delegation is larded with an abundance of dunces and demagogues, like Representatives Joe Barton who apologized to BP for having to pay for its oil spill and Louie Gohmert who warned that illegal immigrants were coming to the U.S. to have “anchor babies” who will grow up and become terrorists. And who can forget Tom DeLay and Dick Armey?

Which brings me to the present governor, Rick Perry, who was just re-elected to a third term and will become chairman of the Republican Governors Association. Although he’s a member of Lincoln’s party, Perry is a rabid supporter of states rights and earlier this year, he said he was considering secession from the union as if that was a success the first time.

More recently he has threatened to secede from Medicaid which would leave 3.1 million poor people, including 2.3 million Texas children, without health care. And in promoting his new book, Fed Up! Our Fight to Save America from Washington, Perry suggested the state and its counties could secede from Social Security, which he said is “bankrupt.”

And he has remonstrated fellow Republicans for not calling Social Security a “Ponzi scheme.” Last week he doubled down on the charge calling one of the most treasured programs serving more than 50 million Americans. “worse than a Ponzi scheme.”

Ordinarily I would not bother with such nonsense but like the urban legend that members of Congress don’t pay into Social Security (they do), this demagoguery keeps coming back from people who should know better.

Even CNBC’s Jim Cramer, who failed to see the financial crisis coming, has likened Social Security to a Ponzi scam. Worse, too many Americans don’t know enough about Social Security to dismiss these lies.

To dispose of Perry’s initial lie about Social Security, as any fool who can read knows by now, the most recent report of the program’s trustees said that even if no action is taken to shore up the long-term finances of Social Security, it won’t go into the red until 2037.

But if it does (and it won’t), the trustees figure its payroll tax income will enable it to pay 75 percent of benefits until 2084. Moreover, as Alan Greenspan and the trustees have said, it won’t take much adjustment – perhaps a two percent increase in taxes or eliminating the $106,800 salary cap on payroll taxes - to keep it in the black until the end of the century.

One big reason: It holds in reserve more than $2.6 trillion in Treasury Notes which pay nearly $1 billion in interest to Social Security each year.

And that, of course, is the largest difference between Social Security and the schemes made famous by Charles Ponzi and, more recently, Bernard Madoff: There were no such invested funds earning money for either of them. Indeed, they made no investments.

But more important, Social Security is not and was never meant to be an “investment program.” It is, rather, a mandatory pension insurance program, financed by mandatory payroll taxes equally contributed by workers and employers. And, as the financial service Motley Fool reported last year, “that helps shore up its foundation far more firmly than a typical Ponzi scheme.”

Charles Ponzi was a Boston investment broker who became infamous in early 1920, when he sold foreign postal coupons promising, and even paying, returns of 50 percent or more. What he did, as we shall see, was to use one victim’s money to pay off another. Madoff did the same, promising 12 percent returns when the market was struggling and losing value.

Mitchell Zuckoff, the author of a book on Ponzi schemes, wrote for CNNMoney in the wake of the Madoff affair that comparisons of such cons with Social Security are hard to knock down but “since I for one consider real Ponzi schemes too important...it’s worth rebutting the myth.”

Put simply, he writes,

“[A] Ponzi scheme is a fraud in which money from one group of people is used to pay promised returns to another group of people. The money isn’t invested; it’s just transferred and at some point the scheme collapses because there’s not enough income to satisfy the withdrawals...

“In the case of Social Security, no one is being misled...Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed (6.2 percent each from employee and employer) on their income (up to $106,800) to pay benefits with no promises of huge returns.”

Indeed, the genius of the Social Security system’s design, as its web site says,

“For an average worker, Social Security replaces about 40 percent of annual pre-retirement earnings.”

That’s not much for an affluent worker, but for a low-income worker who has no other retirement plan, it’s enough to avoid the abyss of poverty. Social Security, which insures surviving spouses and children, is one of the nation’s last of the traditional defined benefit pension programs which are fast disappearing.


“Social Security is morally the polar opposite of a Ponzi scheme and fundamentally different from what Madoff did. At the height of the Great Depression, our society resolved to create a safety net in the form of a social insurance policy that would pay modest benefits to retirees (and later) the disabled and the survivors of deceased workers.

“By design, that means a certain amount of wealth transfer, with richer workers subsidizing poorer ones. That might rankle, but it’s no fraud.”

I would add, despite the bitching of conservatives and younger workers (who place too much faith in their bosses and those inadequate 401(k)s and resent the transfer of their tax dollars without a healthy return), there is something noble about a pension insurance system in which the younger generation helps support the retirement of their elders.

The young forget that, with luck and Medicare, they will grow old. And their benefits are guaranteed.

Yet today, Governor Perry and his right-wing cohorts, now in effective charge of American politics, would toss aside the morality of the Social Security system in exchange for the amorality of the stock market.

On November 8, 1954, President Eisenhower wrote his brother Edgar on “moderation in government.” He added,

“[S]hould any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear from that party again...There is a tiny splinter group that believes you can do those things...a few Texas oil millionaires...Their number is negligible and they are stupid.”

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Thanks, Saul. I'm sending this to my son and other young workers who might wonder if they should pay into a "bankrupt" fund.

The young workers need to hear this loud and clear. I will join Paula in sending this to my son who believes S. S. won't be there for him.

The far right have always hated Social Security and try to weaken it as a first step in doing away with it. The demagogues like Governor Perry will pay at the ballot box for their stupidity because there are too many of the largest voting block who rely on the income from the program.

Saul -- Good rebuttal to Texas politics. Thanks for the informative post -- barbara

Ike hit it on the nose. Then again, those of us on the other side of this issue can't sit on our laurels.

Interesting commemts Saul, and a pretty good analysis as long as you stay away from Texas politics.

Recall that most conservatives are NOT nineteenth century liberals = laissez-faire libertarians, who believe in ruthless capitalism. I don't agree with this thinking, nor do I agree with the other extreme, socialists who fail understand the source of government revenue is currrent tax receipts.

Although the millions of dollars paid into the SS trust fund was set aside in government bonds, these bonds must be paid out of current tax revenue, and are a huge drain in a time of slowed economic growth. The FED solution to monetize the interest payments you mention above, insures SS payments may cause more problems as the funds paid out are worth less and less. Economics = the dismal science.

Thank you for this lucid explanation of Social Security and how it differs from schemes and gambling. I would like to link my blog post tomorrow to this one for further explanation of the facts. Thank you so much!

The fact that the voters of "The Great State of Texas" re=elected Rick Perry for a third term says volumes about their lack of even minimal intelligence but they're calling the shots here in Texas now and god help us all.

A key point in Saul's analysis is "in the black until the end of the century." By then, the baby boomers will have come and gone, and the strain put on the economy by an aging population will be over. There's no point in dismantling either SS or Medicare over a temporary issue (and as Saul points out, the issue with SS is minimal anyway) -- the trick is to plan ahead with imagination.

For an excellent resource on SS solvency, see http://www.eoionline.org/retirement_security/social_security.htm

Saul, This is OT, but would you please comment on this OpEd about Medicare and the Affordable Care Act that appeared in the Denver Post today 12/2/2010. I don't know anything about the author or the organization she represents and I would like to hear what you think about her analysis.


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