Is Social Security 'A Ponzi Scheme'?

Part of the fallout from the GOP debate involves the question of Social Security.

GOP Candidate Rick Perry has gone on record calling the program a Ponzi Scheme. Is he right?

Before we can answer that, we need to look at exactly what a Ponzi Scheme is, as a number of people might either not understand the term or have a mistaken idea of what it actually is.

Charles Ponzi was an Italian immigrant in Boston with a criminal background who invented a scam in 1919 that lasted for quite some time. He claimed to be able to provide a 50% profit on investments within 90 days by redeeming international postal reply coupons bought overseas in foreign currencies, redeeming them in US dollars and making the profit.

The reality was that the built-in limitations within the system and the red tape involved made a 50% return in 90 days a fairy tale. Yet Ponzi continued to attract investors and pay them off at his advertised rates.

How he did it was simple..he simply used the new suckers' money to pay off the older ones.And as word spread, there was an ever-growing pool of suckers available, and a lot of 'investors' who didn't even bother to take their profits but let them ride, piling up 'fortunes' on paper.

Banking laws were a lot more lax then, and Charles Ponzi was able to keep the scam going for almost two years before the Boston Post ran an expose that revealed, among other things, that the existing supply of postal reply coupons was not adequate to cover the returns Ponzi was supposedly making and that he was merely robbing Peter to pay Paul.

Ponzi attempted to pay off his investors by 'borrowing' money from the vaults of another bank he had control in, the Hanover Trust and by taking out fraudulent loans at other banks. But by then the local bank commissioners had taken a look at what passed for his books, seized control of Hanover just in time and put a hold on his other assets, and Ponzi went to jail. His investors were lucky to end up with an average of 30 cents on the dollar.

Note than Charles Ponzi's little endeavor failed for three reasons - bad publicity cut down on the pool of new suckers, he was stopped from borrowing his way out and he had no ability to generate fresh debt or print new money.

Now, let's examine the basic model of Social Security. It doesn't recruit suckers by appealing to their greed,but instead makes participation mandatory except for government employees with their own pension funds. Instead, it promises guaranteed benefits for life in exchange for paying into the system.

Also, unlike Mr. Ponzi, Social Security is backed by the full faith and credit of the US Government which does have the ability to borrow, take on fresh debt and print money. So where's the problem?

The government originally established the Social Security trust fund in 1935 during the Depression as a way of providing a kind of very basic and supplemental social safety net for destitute seniors. In 1935, there were 7.8 million Americans age 65 ( the original retirement age) or older, about 5.4% of the US population. Overall life expectancy in 1935 was only 58 years old for men and 62 for women, so a lot of Americans who started paying into the system back then never lived long enough to collect benefits, especially since a little item known as WWII was just around the corner.

The actuaries figured out that a person who was 65 in 1940 would be able to collect benefits for an average of 12.7 years for men, 14.7 years for women.

There have been some major changes since then.

According to the last census, today those Americans aged 65 and older now exceed 35 million, over ten percent of our population and growing. And they're living a lot longer. While the feds are trying to stem the tide somewhat by raising the retirement age,the numbers are simply overwhelming..especially since the Social Security Trust Fund has essentially been looted by Washington to pay for domestic spending programs. This notably started with President Lyndon Johnson, who was the first to establish precedent by hacking into the system to pay for the Great Society.

Another factor is the huge influx of illegal aliens into the US. While some of them have paid into the fund, many have not or have not paid enough for a long enough period to receive benefits. Many illegal aliens in this situation go on the rolls of Social Security's Supplemental Security Income ( SSI) program, which provides a monthly check and doesn't check things like immigration status too closely. Many legal immigrants with green card status or a handy anchor baby born in the US bring over family members via ICE's family unification program and promptly apply for benefits for the new arrivals, even though they have never have paid into the system at all.

So Social Security faces the same basic problem the Ponzi Scheme did. There's a diminishing pool of new 'customers' paying in - only about 1.75 private sector workers for every retireee - and an ever increasing amount of 'investors' to pay out. While there's no official ban on more federal borrowing to continue to pay off the 'investors', there's a practical limit to how long it can go on, especially since the money to buy federal debt to fund the new spending is increasingly coming from overseas.

The big difference between a Ponzi Scheme and what the Social Security program has become is a lack of criminal intent. Only the end results have become equally criminal...that, and Washington's refusal to do anything about the situation.

Social Security is either going to be reformed or it's eventually going to be eliminated. The politicians in DC land are eventually going to have to face up to that, because there's no third choice.

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