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September 8 2011

Social Security = Ponzi Scheme?

Carrie L. Lukas

There's a lot of debate about how Gov. Perry's comments about Social Security being a "Ponzi Scheme" will play politically (see here, here, and here, for starters).

And I very much understand that, especially when the issue is Social Security, these matters need to be considered through a political lens.  Defenders of the unsustainable status quo invariably make any modest proposal to tweak the system toward solvency sound like an effort to rip the program apart.  They certaily will make the Governor's blunt assessment of the program's fundamental structure seem like a first step toward scrapping the program entirely and throwing seniors into the streets.

Yet let's be clear that Gov. Perry is absolutely right in his assessment of Social Security -- a Ponzi scheme is a financial program in which benefits to one group depend on having enough new entrants into the program to pay promised benefits, and then adding more entrants after that.  Ponzi schemes collapse once the program's administrator can't convince enough suckers to join. 

The only thing that distinguishes Social Security from the average huckster's Ponzi scheme is that government can (and indeed does) force people to join the program, and can change the rules to force participants to pay more.  The twenty-somethings lucky enough to get a jobs today have no choice but to have the first ten percent of their paychecks sent to the Social Security Administration, which will immediately send them to pay Grandma's benefits. 

Social Security's fundamental problem is that this Ponzi scheme, even though participation is required by law, is become the classic demographic train wreck.  There are too many people collecting benefits for too long and not enough people paying in.  That problem is going to get much worse in future years.  Something has to change or under currently law, Social Security is going to eat uup massive amounts of the general buget and then future retirees will be smacked with an across the board benefit cut of about 30 percent. 

I think the American people understand this.  They know that admitting that a program is inherently flawed isn't the same as saying you want to abolish it.  I think most people -- yes, even most seniors on Social Security -- welcome some candor, rather than the usual political carping, about the program.  

But that's a political question, and we will learn the answer as the campaign plays out.  The policy issue is another matter, and the Governor's Ponzi scheme assessment is spot on.


Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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