Friday, September 09, 2011

Is Rick Perry Right about Social Security?

During the debate on Wednesday night, Republican presidential candidate Rick Perry has taken som flak for calling Social Security a Ponzi scheme. Who's right?

On page 163 of Fubarnomics, I call Social Security a quasi-Ponzi scheme. I hedged because Ponzi schemes, pyramids, and related scams and flim flams are by definition illegal. Social Security isn't illegal and can't be unless declared unconstitutional, something SCOTUS has not done and is unlikely to do at this or any future juncture. Also, as Stephen Colbert hinted at last night in his critique of Perry's claim (sorry Parry's claim for Colbert -- the A is for AmericA and IowA), Social Security is not designed to enrich just one or a few people at the top, it is designed to provide modest annuities to millions of superannuated individuals (and in some cases their spouses and dependent children).

Social Security is like a pyramid scheme because it worked by increasing the number of taxpayers at the bottom of the pyramid. Demographics (the Baby Boom) helped at first, as did enlargements to the program. But now there are no new groups of any size (with the possible exception of immigrants) to add to the program and the demographics have reversed. Instead of a pyramid with a few at the top garnering benefits and a lot at the bottom each paying a little for their support, Social Security is more like a rectangle with the number of taxpayers not far outnumbering the recipients. Soon, the remaining taxpayers may feel the burden of taking care of so many beneficiaries too much to bear. In that sense, the Ponzi scheme metaphor is apt.

Interestingly, the government does seem to be following some of the recommendations I made in Fubarnomics, especially shifting Social Security from a special, highly regressive tax to the general fund. Obama apparently wants to continue the transition. The next step would be to tell everyone older than some age (I've volunteered mine) that they will receive Social Security payments as promised and everyone younger (including myself) that they had better start saving now because they will not receive any Social Security retirement benefits (and that the life insurance and disability components will phase out over the next few years). The final step would be to improve the regulation of our private security system: retirement plans, disability insurance carriers, and life insurers.

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