Social Security isn’t a Ponzi scheme

Well, that didn’t take long.

Two days, to be exact. After Texas Gov. Rick Perry announced his candidacy for the presidency, that’s how long it took him to walk back from his notion that Social Security should devolve to the states.

“Asked by Ben Smith whether Social Security should be replaced with state-based benefit programs, as Perry once suggested in a Newsweek interview, the governor hedged,” Politico.com reports.

“‘I’m for having a conversation with the country about how we find some solutions,’ he said at the Iowa state fair. ‘Having the states doing it is one of the ways.’”

Now, maybe Perry will see even more of the light and stop referring to Social Security as a Ponzi scheme. Because while Social Security is many things, it clearly is not a sibling or even cousin of, say, Bernie Madoff’s swindle that bilked investors out of billions. Here’s why.

In January 1920, Charles Ponzi was a near-penniless investment manager peddling a big idea: His bonds would pay 50 percent interest after 45 days or 100 percent after 90 days.

Investors didn’t flock. They stormed, and Ponzi used the payments from each succeeding round of investors to pay off the interest due to the earlier rounds.

By June, “Ponzi was able to purchase a palatial home in the banker’s colony of historic Lexington, Mass.,” the Social Security Historian’s Office notes.

But by August, Ponzi was in jail, as the mathematical progression that his project had depended upon collapsed.

Such is the fate of all “Ponzi schemes,” which depend on ever-increasing numbers of investors taking part.

Sooner or later, all such schemes run up against mathematical limits, up to and including the population of the Earth.

But that’s not how Social Security works.

The Social Security Historian’s Office says it plain:

“In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called ‘pay-as-you-go’ system,” the office notes on its website.

“Some private pension systems as well as Social Security have used this design. …

“There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both, money from later participants goes to pay the benefits of earlier participants.

“But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline. ...

“As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system, and so it is not a pyramid or Ponzi scheme.”

The key words in this passage are these: “rough balance.” As baby boomers retire in the decades ahead, Social Security is forecast to get out of balance. But political decisions today (such as raising the retirement age) can restore that balance, allowing Social Security to survive in a way no Ponzi scheme ever could.

“The first modern social insurance program began in Germany in 1889 and has been in continuous operation for more than 100 years,” the historian’s office notes.

“The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi’s scheme lasted barely 200 days.” Remember that the next time Perry or anyone else calls Social Security a Ponzi scheme.

Tags: social security, opinion, editorials