IMHO: “Back” Pay?

During last week’s GOP presidential candidate debate, Texas Governor Rick Perry grabbed headlines by reaffirming his position that Social Security is a “Ponzi scheme.”


Pundits were quick to jump on the comment, apparently believing that such rhetoric will “spook” the electorate (specifically older and independent voters) and ultimately make Perry unelectable, while purists were quick to point out the distinctions between the operation and intent of the two approaches, apparently believing that the technical distinction would matter (to anyone besides purists).

True, a Ponzi scheme, such as the one Bernie Madoff ran, as well as Charles Ponzi’s original design, is positioned as an investment.  Investors hand over money to someone, believing that their money will be invested and grow.  Instead, the scheme “runner” generally pays off longer-term participants with money invested by newer investors.  Sooner or later, there are not enough new investors to fulfill those expectations and the whole thing blows up—though, depending on the sales skills of the Ponzi purveyor (and the expectations of the investors), it can run for years. 

Technically speaking, Social Security is not an investment program.  Despite those individual withholding statements provided occasionally by the Social Security Administration, nobody has a Social Security “account” into which all those years of FICA withholdings (not to mention the employer contributions) are deposited.  People who see those Social Security checks in retirement as a return of the money they put in (with interest) are, IMHO, misguided (at best), though politicians have long found it in their interest for workers to see a link between the two. 

That said, IMHO, most Americans don’t “pay into” Social Security because we expect that we’ll receive those benefits; we do so because it is required by law.  Whatever that system’s historic success, and the dependence of the nation’s retirees on its benefits, I think most in my generation—and certainly those in my children’s—have doubts as to its long-term financial sustainability.  Adjustments have been made over time to address those potential shortfalls—the retirement age has been lifted, the taxes withheld from current pay to fund that system have been increased, the benefits eventually paid from that system have been subjected to taxation (effectively reducing benefits)—and these days, most honest politicians will admit that those same kinds of changes will be required again to avert a future crisis. 

Moreover, that payroll tax “holiday” that we took for the past year—and that President Obama has now proposed to extend—is, whatever its benefit to the nation’s sluggish economy, money that is effectively being “diverted” from the Social Security trust fund (as in many American households, retirement savings apparently must take a back-seat to the here-and-now). 

Whatever you want to call it, to my eyes, Social Security is basically a societal retirement income insurance policy.  Those FICA withholdings are premiums and, depending on our life circumstances, we may or may not collect on it.  One thing is for sure, however: Whether it’s for life insurance, car insurance, or Social Security, when we make those payments, we expect that we will receive the benefit(s) for which we contracted.  Older workers are, naturally, counting on receiving those benefits—because they have been told they can expect them by a reliable source, because they have spent a lifetime dutifully making those payments, and because they have seen their elders do the same.  But whatever label you may put on it, the reality of Social Security is that many of yesterday’s (and today’s) recipients have received benefits far in excess of what they put in, and many, perhaps most, of tomorrow’s recipients will never get theirs “back.”

Is Social Security a “Ponzi scheme”?  Perhaps not, but its current design and operation still rely on assumptions and structures that share striking similarities.  

A Ponzi scheme needs faith and trust of its investors to be sustained.  Ultimately, so will Social Security.