A Social Security system Bernie Madoff would love

C.J. Ciaramella Contributor
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There goes Rick Perry again, saying things that make liberals’ heads explode.

Speaking to a crowd in Iowa this weekend, the Texas governor and GOP presidential hopeful doubled down on statements he made in his book, Fed Up!, that Social Security is essentially a pyramid scheme.

“It is a Ponzi scheme for these young people,” Perry said. “The idea that they’re working and paying into Social Security today, that the current program is going to be there for them, is a lie. It is a monstrous lie on this generation, and we can’t do that to them.”

The left reacted, predictably, with shock and outrage. Liberal blog Firedoglake called Perry’s rhetoric “wingnutty talk” and “crazy shit.”

So just how apt is the comparison between a Ponzi scheme and the popular entitlement program?

A Ponzi scheme is a fraudulent investment plan that pays returns to investors with their own money, rather than with actual profits. It lures investors with higher-than-usual payouts — money coming, of course, from new investors.

Since Ponzi schemes depend on perpetual growth and pay out more than they takes in, they’re ultimately doomed to failure. The only question is how much money a scammer can pilfer before the pyramid crashes down or the law sniffs the scheme out.

Exhibiting its distinctively strained logic, Daily Kos writes, “The only way Social Security could ever become anything like a Ponzi scheme is if we suddenly ended Social Security.”

Think Progress adds that entitlement programs like Social Security aren’t Ponzi schemes because they reward “those who pay into them with guaranteed benefits.”

Whether or not a Ponzi scheme and Social Security share much in common rests on whether one accepts the fundamental premise that Social Security’s benefits are guaranteed.

Jeff Berkowitz, a communications consultant and former research director at the Republican National Committee, said statements like Perry’s — accurate though they may be — rub Americans the wrong way because they call that guarantee into question.

“The reason it’s so controversial is because it’s so exactly true,” Berkowitz said. “The more you expose the uncertainty, the more people become concerned about the safety of their investment.”

Daniel Indiviglio, a journalist at The Atlantic and previously Forbes, writes that Social Security depends on steady growth to keep paying retirees — a steady growth which is not occurring.

“[T]he same could be said of a Ponzi scheme. It’s only when investor growth slows that a problem arises. Of course, this is exactly the problem that Social Security faces: population growth slowed, and now it’s running out of money.”

Slower population growth, plus an influx of retirees from the baby boomer generation, means fewer workers are paying for each current retiree.

“When FDR implemented Social Security, there were 16 workers for every one retiree,” Berkowitz said. “Now there’s less than three for every retiree, and it’s moving downward.”

Over the next 75 years, Social Security is on pace to owe $7.9 trillion more in benefits than it will receive in tax revenues, according to a 2010 Heritage Foundation report.

Berkowitz said the system needs to be reformed, “otherwise whoever is not at or near retirement isn’t going to get the full benefits they were promised.”

One crucial feature of a Ponzi scheme, at least from law-enforcement’s point of view, is that its creator intends to defraud investors. That can’t be said of Social Security. Still, Berkowitz said that only means the federal entitlement system is “a warm and fuzzy Ponzi scheme.”

Think Progress wonders aloud “if Perry will be able to get away with maligning these popular programs on the campaign trail.”

If history is any indication, the answer is probably yes.

Laissez-faire economists and politicians have been calling Social Security a sham since it was a glimmer in FDR’s eye. In 1936 GOP presidential candidate Alf Landon called the Social Security Trust Fund “a cruel hoax.”

And how’s this for “wingnutty?” In a 1999 New York Times article calling for the privatization of Social Security, the Nobel laureate economist Milton Friedman wrote that the “guaranteed” benefits of the entitlement program exist “solely on the expectation that future Congresses will honor promises made by earlier Congresses — what supporters call ‘a compact between the generations’ and opponents call a Ponzi scheme.”