No, Social Security is not a Ponzi scheme

No, Social Security is not a Ponzi scheme
by Alex Field |

Rick Perry got himself into trouble during the Fall 2011 presidential campaign by suggesting that Social Security is a Ponzi scheme. He's not the first to do so; economists have sometimes talked in similar terms. But when economists use this language, they're usually not serious.

Ponzi schemes are frauds in which the operator promises or credits investors with exceptional returns, supposedly based on the performance of the assets purchased. The organizer acquires no assets, pays maturing promises or other withdrawals with funds from new depositors and skims money off the top to support lavish personal consumption.

They bear some resemblance to chain letters. When I was 10, I received one, asking me to send a postcard and the letter to six individuals, adding my name at the bottom, and removing that at the top.

I was warned of dire consequences for those who broke the chain and promised hundreds or thousands of postcards in return. I sent out six postcards. Eventually, I received four.

Chain letters, like Ponzi schemes, require continued growth in participants to allow early investors to pocket outsize returns, which is why they are sometimes called pyramid schemes. If they involve money, they are considered gambling — illegal, since in this country you can't use the mail to gamble.

Bernie Madoff's operation was a Ponzi scheme. Social Security is not. It doesn't require continued growth in the number of participants to pay benefits. And there is no fraud. Plentiful information on the system's finances can be found on its website.

Social Security is an insurance system in which people make contributions while they work and receive benefits when retired or disabled. Payroll taxes, interest income on bonds in the trust funds and, since 1983, revenue from taxes on benefits fund the annuities.

The system has lower costs per benefit dollar than private insurance systems. The poverty rate among the elderly is below that of the general population, thanks largely to Social Security.

Social Security pays the bulk of benefits out of current contributions. To remain almost entirely self-financing, the system runs surpluses now to fund deficits later because the ratio of those paying in to those drawing out, which stood at 4.0 in 1965, is declining — it's projected to fall to 2.1 in 2035 before stabilizing.

Anticipating boomers' retirement, 1983 legislation raised payroll taxes and made other changes that have generated surpluses. These are invested in special government bonds backed by the full faith and credit of the United States, which has never defaulted.

Relying on Social Security for retirement income does require relying on the government to honor its promises. Given the interest rates Uncle Sam pays, investors believe this is more likely than that any private entity will.

If the more conservative assumptions are right, the system could still pay more than three fourths of promised benefits in 2036, when the trust funds would be depleted. This shortfall could be remedied by gradually increasing the full retirement age, or subjecting higher incomes to the payroll tax.

Unlike Medicare, the Social Security system is basically sound.

Participants, including those just entering the system, should not be scared into believing they are contributing to the equivalent of a chain letter, or a Madoff-style Ponzi scheme.


This opinion piece originally appeared in McClatchy newspapers, in more than 70 publications across the United States.

READ AND HEAR MORE: A review of Alex Field's recent book, A Great Leap Forward: 1930s Depression and U.S. Economic Growth—plus a podcast of Field reading from the book.

 

Spring 2014

Table of contents

Features

Radiant house

Building a house for the 2013 Solar Decathlon. That, and changing the world.

Américas cuisine

Telling a delicious tale of food and family with chef David Cordúa ’04.

Lessons from the field

Taut and tranquil moments in Afghanistan—an essay in words and images.

Mission Matters

Carried with compassion

The Dalai Lama’s first visit to Santa Clara.

Farther afield

Building safer houses in Ecuador. Research on capuchin monkeys in Costa Rica. Helping empower girls in The Gambia. And this is just the beginning for the Johnson Scholars Program.

What connects us

The annual State of the University address, including some fabulous news for the arts and humanities. And the announcement of Santa Clara 2020, a new vision for the University.