Is it a Ponzi Scheme?

This column originally appeared at Big Jolly Politics:

I don’t know about the rest of you, but I thought the last two Republican Presidential debates on MSNBC and CNN have produced pretty good political theater, in large part because of the participation of Governor Perry.  Although I may be a little biased, I think he has more than held his own and is, right now, the best candidate among the field (and I am still more than just a little amazed by all of this).  That is not to say that the other candidates would not make better Presidents than our current Commander-In-Chief—they all would—but Perry has impressed me the most so far.

The dust-up in the last debate over the vaccination-mandate fiasco of 2007 was to be expected, for it was one of the biggest blunders of Perry’s tenure as Governor.  To his credit, he has responded to the criticism the only way he should—he has explained why he did it, and acknowledged his mistake.  There will be some who will never forgive him for this blunder and try to decipher corrupt motives from his actions; but, for many others (including those, like me, who often have been skeptical of his leadership over the years), he showed in the last debate that he learned a lesson from his mistake and has grown from the experience—a valuable and, indeed, necessary trait for a leader in the times we face.

But the really interesting debate that has emerged is over Social Security—and what a welcome and instructive debate this has become.  Essentially, three lines of debate have formed:

1. Governor Perry has framed the debate by calling the current system a “Ponzi scheme” and a “monstrous lie”, by saying it was an improper use of federal authority when it was first enacted, and by committing himself to fixing the system for future beneficiaries;


2. Mitt Romney has confronted both Perry’s descriptions of the system, and his reflection on its history, as being too provocative, while also committing himself to fixing the system; and


3. The rest of the candidates have committed to fixing the system one way or another, while trying not to get in the middle of the argument over the wisdom of Perry’s remarks.

So, what is the net outcome of this debate so far?  It is now refreshingly clear that Republicans are united in fixing the Social Security system to make it solvent for future beneficiaries; but, so far, only a few of the candidates are willing to confront and describe the actual problem with the system and give us an indication as to how they would approach fixing the problem.  It is clear that Perry—and probably Cain and Gingrich, too—realize that you can’t fix Social Security by tinkering around the edges.  Instead, you have to be honest with the American people about the problem at the core of the system, and how it needs to be fixed.

With that said, is Perry’s criticism correct?  And, if it is, what should we be seeking as a fix to the system?

To answer the first question, we need to understand how Social Security has been marketed to the voters over the years.  Since its inception, the creators and supporters of the current Social Security system have referred to it as an old-age insurance system, as a public pension system, as a trust account, as a contractual promise to pay out in retirement an amount based on what was contributed during working years, and as a social safety net to protect the elderly from poverty.  Are any of these descriptions correct?  Upon close scrutiny, the answer is “no”.  It is neither insurance, nor a pension, nor a trust account because it is not based on either actuarial, investment, or fiduciary criteria that provides for a return to the taxpayer of what he or she paid into the system plus investment growth.  It is not even a promise to receive what you paid into the system, because the dollars you paid into the system were received by other beneficiaries as you paid your tax, and you will receive payments from other taxpayers when you retire.  Finally, there is no real correlation between Social Security payments and poverty prevention—Warren Buffet gets the same benefit that your Uncle Fred and Aunt Martha receive, who, in turn, get the same benefit the poorest of our elderly receive.

So, what is this system, really?  You and I are asked to pay into a system and are told periodically that we will receive an amount of money at a certain age based on these payments.  Our future payments are not derived from the amount we paid into the system plus investment growth, but rather from new payments into the system from other people.  The fact and amount of our future payments are based on whether new people continue to pay into the system, and are dictated by the decisions of the person(s) controlling the system—not by the market.  These are characteristics common to illegal Pyramid and Ponzi schemes.  The only differences are that

1. the Social Security system is not only legal, participation is mandatory; and
2. payments can continue, even if new taxpayers don’t materialize, because the federal government can print money to cover the shortfall.

That means, that, unlike a classic Pyramid or Ponzi scheme, payments can continue with freshly printed dollars—though the value of those dollars will plummet as more are printed.  Eventually, though, you’ll arrive at the same result:  if you rely on the printing press at the Mint to save the system, you really won’t get back the money you were promised (just like how a Pyramid or Ponzi scheme ends—though a little less abruptly).

Quite frankly, if you measure the promises surrounding Social Security against its reality, Governor Perry’s descriptions are fairly accurate—it’s like a Ponzi scheme, and the marketing of Social Security has been a “monstrous lie”.

Well, then…what’s the answer to the second question—what should we be seeking as a fix to the system?  As all of the Republican candidates have acknowledged, the promise of this system, and its protection for many elderly Americans, has existed too long with too much public reliance to end it now, if ever.  But I think it would be immoral to continue lying to each other about this system and to not address and fix its faults.  Over the last 30 years there have been a lot of good ideas floated and even practiced—as in the case of Chile (as Herman Cain often notes) and a handful of other nations in Eastern Europe, including Russia—so we don’t have to come up with answers out of thin air.  Whatever fix we adopt should incorporate most, if not all, of the following basic principles:

1. A cut-off age for beneficiaries should be set above which the system will continue as presently structured, and below which fundamental changes will be made;
2. The age at which benefits are to be paid eventually must be re-set to an older age, and then indexed to the life expectancy of the population, so that both the age at which benefits are received and the average projected period for receiving benefits can be affordably subsidized by the working population;
3. Incentives should be created for allowing older Americans to continue to contribute to the economy through paid or volunteer work, after they have reached a point when they physically may not be able to continue working in their original professions but prior to their receipt of benefits;
4. The system should be re-structured so that younger workers are able to split their Social Security tax payments between support for a safety net for means-tested elderly and the younger workers’ own personal retirement accounts; and
5. Eventually, the payment of benefits from a safety net that is fully supported by current tax dollars should be based on means-testing, so that those who have the means to support their own retirements through their private and public accounts do not receive direct transfer payments from the government; such direct transfer payments should be received only by those who are truly in need.

These principles are neither controversial, nor hard to implement, but for the vested interests and expectations surrounding the politics of Social Security.  Those vested interests and expectations will only be broken through candor coupled with new commitments.  To the extent Governor Perry has forced the Republican field of 2012 candidates to face and debate this issue, he has already met an important test for the leadership we will need over the next few years.