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Charles Ponzi in the 1920s, Social Security in the 1930s

After reading my cover article pointing out the outrageous truth about Social Security ( Members Only), the two leading contenders for the Republican nomination for president immediately began arguing over whether to call the program a Ponzi scheme.

Ha, just kidding! Doubt either Mitt Romney or Rick Perry have taken time out of their busy schedules to devour the latest issue of SMI. But I found it interesting to read that the Ponzi comparison has a long history:

Not only have a raft of conservatives called Social Security a Ponzi scheme over the years, quite a few very respectable liberals have done so as well.... Jonathan Last has already identified a 1967 Newsweek column by liberal economist and Nobel laureate Paul Samuelson as perhaps the earliest use of the Social Security/Ponzi-scheme comparison in public argument. Samuelson was actually drawing on the Ponzi analogy to defend Social Security. His claim was that the perpetual succession of human generations establishes the conditions for a sustainable Ponzi scheme. Regardless of whether Samuelson was the first commentator to use the Ponzi analogy, he has clearly been the most influential. Policy briefs and books churned out by conservative think tanks such as Heritage and Cato have cited Samuelson’s Ponzi column for years. This is likely how the comparison made its way into public debate.

It's a natural analogy because SS's structure has always relied on supplying new contributors to the system to pay the benefits of the earlier contributors. When you no longer have enough new contributors, the scheme collapses. Good deal for those in early; bad deal for those in late. As SmartMoney points out in 10 Things Social Security Wont Tell You:

Today's workers -- boomers, Gens X and Y -- like to carp about Social Security, but it's not all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They're also likely to get smaller benefits when it's their turn to retire....

For example, a single man who retired in 1980 at age 65 after earning an average wage of $43,500 would have paid about $96,000 in Social Security taxes, and probably received $203,000 in lifetime benefits, according to a study by the Urban Institute, a non-partisan policy think tank in Washington D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $398,000 in lifetime taxes but receive just $336,000 in lifetime benefits -- about 16% less than he paid in. "People who were first in the system got a great rate of return," says Alan Gustman, chair of the economics department at Dartmouth College. "It's the younger generation that is going to be in the most difficult position."

Of course, Charles Ponzi (and other infamous villains such as Bernie Madoff) constantly needed to find new sources of money to keep things moving along. The U.S government took a simpler route—passing a law making SS compulsory for most of us. Noting the similarities in approach (if not enforcement mechanism), even Mitt Romney has compared those managing Social Security to criminals.

Whether one labels SS a Ponzi scheme or not, it's been obvious for a long time that the program is not self-sustaining and needs to be reformed. Hopefully, the current "crisis" environment regarding the federal debt will provide Washington with the needed backbone to take constructive action.

Need a better understanding of Social Security? Download our special FREE report: IRAs, 401(k)s and Social Security: A Retirement Planning Primer

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Posted by Austin at 10:07 AM | Comments (0) | TrackBack
Category(s): Retirement, Taxes
Tag(s): investing, ponzi scheme, retirement, social security

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