Texas Governor and GOP Presidential candidate Rick Perry said recently that Social Security is a ponzi scheme. He was maligned for that statement by Democrats and several other GOP candidates. Is Rick Perry correct?
In order to answer that question we need to define “ponzi scheme.” According to Webster’s dictionary, a ponzi scheme is a pyramid investment swindle in which supposed profits are paid to early investors from money actually invested by later participants.
The Social Security program, instituted in 1935 during the FDR administration, was designed for retired workers to receive “guaranteed” retirement payments for the remainder of their lives after they reached the retirement age of 65. The purpose of the program was to provide a “comprehensive package of protection against the hazards and vicissitudes of life.” The funding for the program was secured by government forced contributions from future workers.
According to Wikipedia.org, “in March 2009, investment councilor Bernard Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi scheme in the early 1990s. However, federal investigators believe the fraud began as early as the 1970s, and those charged with recovering the missing money believe the investment operation may never have been legitimate.
Madoff admitted during his March 2009 guilty plea that the essence of his scheme was to deposit client money into a Chase account, rather than invest it and generate steady returns as clients had believed. When clients wanted their money, “I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds,” he told the court. The amount missing from client accounts, including fabricated gains, was almost $65 billion. The court-appointed trustee estimated actual losses to investors of $18 billion. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed.
Social Security is in serious trouble for several reasons. Here are a few:
- The money paid into Social Security is not held in a separate account from the general fund. In other words, the government is using Social Security payments to fund other government programs. Therefore, there is no money held in an earmarked account which is available to make Social Security payments to retirees.
- At the time Social Security was fully implemented, around 1941, the ratio of workers to retirees was approximately 6.1 workers for every retiree. But the ratio rapidly changed in subsequent years until, in 2010, the ratio had fallen to 3.5 workers for each retiree. In the next decade the ratio will fall to 2.7 to one. T
- The life expectancy of retirees is rising. In 1941 the average life span for a worker was 61.6 years. In other words, many of the workers paying into Social Security never reached an age at which they could collect the payments. In 2003 the life expectancy of an American male worker was 76.8 years.
- The number of available workers has been negatively affected by the pro abortion movement. Since the U.S. Supreme Court Roe v. Wade ruling making abortion legal, over 50 million potential Social Security contributors were erased from the productive workforce.
By definition, Rick Perry is right. Social Security is a ponzi scheme. Does that mean we should scrap the Social Security program? I think not. But the program needs to be reformed.
Unfortunately, every political candidate who has suggested that changes to the Social Security program be made has come under criticism from both parties. That’s because retirees make up a huge voting block and opponents to changes in the program make hay by frightening older Americans by claiming that anyone suggesting change wants to take Social Security away.
There have been several viable plans to revamp the Social Security system. Space doesn’t allow me to discuss the options here, but the most practical strategy seems to be the Paul Ryan plan. You can read about it here.