WASHINGTON — Does Social Security meet the definition of a Ponzi scheme? The Securities and Exchange Commission says Ponzi schemes involve “the payment of purported returns to existing investors from funds contributed by new investors.”
Social Security pays benefits from funds contributed by younger workers.
The SEC says Ponzi schemes “require a consistent flow of money from new investors ...”
Benefits enjoyed by beneficiaries are dependent upon contemporaneous payroll tax revenue, not returns on investments in a trust fund.
The SEC says, “In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors.” Check! Supporters of the current structure, such as President Barack Obama, seek new Social Security taxes on workers earning over $106,800.
In major ways, Social Security is a Ponzi scheme.
To be sure, defenders of Social Security claim it isn’t, and there are differences. Social Security is mandatory, for example, while Ponzi schemes are not.
And when a Ponzi scheme is about to collapse, it can’t raise your taxes. But both take your money away from more productive investment opportunities and endanger your principal.
Admittedly, there are a few other differences.
If you manage to get some of your principal out of a Ponzi scheme, it’s yours. Social Security benefits are taxed.
And if you apply for benefits after age 62 but before full retirement age, and continue working, perhaps part-time, you have to give the government back $1 of every $2 in benefits after you earn $14,160 in a year.
Charles Ponzi was a rogue, but even he didn’t try to penalize people for honest work.
The Social Security Administration, attempting to differentiate its program from a Ponzi scheme, says: “The problem with Ponzi’s investment scheme is that it is difficult to sustain this game ...” No kidding. But the Social Security game is similarly difficult to sustain.
The Social Security and Medicare Board of Trustees, in its 2011 “message to the public,” says, “Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing ...”
Social Security claims it isn’t running a Ponzi scheme because it has “sustained its game” for decades, while Ponzi’s lasted just seven months.
I say, try bragging about how long you’ve lasted after you’ve covered the full benefits of all 76 million retired baby boomers. If you can.
“Pay as you go” programs like Social Security may be set up with the best of intentions, but they don’t work long-term when the number of people paying in keeps getting lower relative to the number of people taking money out.
There are ways to fix Social Security to the benefit of all. Guarantee full benefits to people at or near retirement. Allow younger workers to invest most of their payroll taxes in conservative, regulated investments that grow. Provide a government floor benefit so lower income workers can be assured of adequate benefits. And raise the full Social Security eligibility age to 70 or higher, reinvigorating the concept that workers should be saving money to retire.
When Franklin Roosevelt signed Social Security into law in 1935, average life expectancy was 61.7 years and the Social Security retirement age, 65, was 3.3 years later. By 2006, life expectancy was 77.7.
If we used the same reasoning now that Roosevelt used then, we’d have a Social Security full eligibility age of 74.4 today.
Yet today, the most common age for people to start receiving Social Security benefits is 62 — not 74 — and this contributes to the program’s unsustainability.
If Social Security is not a Ponzi scheme, it’s close. Too close. It’s past time for Americans to seriously discuss, and then adopt, fundamental change to our Social Security system.
• Ridenour is chairman of the conservative National Center for Public Policy Research.