Is Social Security a Ponzi Scheme? | Eastern North Carolina Now

    Publisher's Note: This article originally appeared in the Beaufort Observer.

    Of course it is

    Republican presidential candidate Rick Perry has called Social Security a Ponzi scheme. Democrats are busy cranking out emails castigating him for pointing out the obvious.

    But the truth is, Perry is right. And correct. Social Security is a Ponzi scheme, if by Ponzi you mean a financing scheme that depends on new additions to keep it going. Social Security does just that. Here's why.

    Workers in America and their employers are required to pay a portion of their paycheck into Social Security. At a designated age the worker can 'retire' and begin drawing a monthly check. In the meantime, the deposits draw interest, typically whatever Treasury bills, notes and bonds pay.

    Then when the worker retires (we'll disregard disability for these purposes) he or she soon draws out of the "Trust Fund" more than both the worker and the employer contributed, plus the interest those "contributions" earned. So how does the fund continue to pay, in some cases, for many years after what was paid in is exhausted? The answer has always been: New workers contribute relatively more than the older workers draw out.

    Is that a Ponzi Scheme? Of course it is.

    The Social Security system was never intended to be a "retirement plan" in the technical sense. Had it been then new retirees just after it went into effect would have drawn virtually nothing. And it is interesting to note here that the computation of your benefits is not based on how much you contributed but on how much you earned. That fact is glossed over by those who talk about Social Security being a retirement fund into which they paid contributions as justification for the benefits they perceive they are "owed." If, indeed, that is all they drew out of the fund there would be no problem with its solvency. Social Security is not a retirement plan. It is a compact between the older generation and the younger generation that because the older generation support their elders while they were working then the younger generation that is now working will support the older generation that is retired.

    Look at this way (correctly) the crucial variables in Social Security are the number of current workers (relative to the number of current retirees) and the amount of contributions that are now being paid into the fund.

    So the problem with Social Security is that the amount being paid in by current workers is not sufficient. And that can be changed by one of two ways, or a combination of the two: More workers or higher contributions. Higher contributions can be achieved either one of two ways, or a combination: An increase in the rate or an increase in the base upon which contributions are computed.

    So whether or not Social Security is or is not technically a Ponzi Scheme is really irrelevant. It is. It was designed to be. But it has worked, and it can work.

    But for it to continue to work, more workers must pay more into the system, not because they expect to get what they pay in back, but because they can be confident that future workers will do the same thing they are doing. In other words, Social Security is a Ponzi Scheme and it can and must be continued, not as a retirement plan but as a social compact between the old and the young.