Sept. 9 (Bloomberg) -- Charles Ponzi was a legendary Boston swindler who promised investors 100 percent returns in 90 days if they joined a scheme to buy and sell international postal coupons. In 1920, after roughly seven months of easy riches, he was exposed as a fraud and arrested.
Social Security is a government-run insurance program that provides the typical retiree with single-digit returns on contributions deducted from their paychecks over the course of their working lives. The program has operated for 76 years amid praise from presidents of both parties. In 1983, even as staunch a critic of big government as President Ronald Reagan vowed: “The Social Security system must be preserved.”
To presidential hopeful Texas Governor Rick Perry, however, the country’s most expensive entitlement program is a financial con that would have made Charles Ponzi blush. “It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you’re paying into a program that’s going to be there,” Perry said during a Sept. 7 debate of the Republican presidential candidates, reprising a theme from his 2010 book “Fed Up.”
Experts on both Ponzi schemes and Social Security say Perry is wrong. “Ponzi schemes are, by definition, fraud,” said Mitchell Zuckoff, author of “Ponzi’s Scheme: The True Story of a Financial Legend.”
“Social Security is above board,” he added. “We can argue about whether it’s a good system. But you can’t call it a fraud.”
Peter Diamond, a Nobel Prize-winning economist at the Massachusetts Institute of Technology in Cambridge, said changes are needed to make Social Security financially viable for the long run. People are living longer than in the 1930s and there are fewer workers for each retiree.
Even so, Perry’s remarks are “inherently misleading,” Diamond said. The economist favors a mix of benefit cuts and revenue increases to shore up the current system.
Ponzi schemes pay investors with money from subsequent participants. Once new people stop handing over their money, such schemes collapse. To critics of Social Security, such as Perry, the program’s use of payroll tax revenue from today’s workers to pay benefits for those who preceded them in the workforce smacks of such an arrangement.
“He’s basically correct on the structure of it,” said Michael Tanner, an analyst at the Washington, D.C.-based Cato Institute. “The government can just make people pay more taxes. But the basic idea of transferring money from one generation of individuals to the next is the same.”
Zuckoff says there’s a big difference between tricking innocents into making doomed investments and a social insurance program that has benefitted millions of Americans. In December 2010, 54 million Americans received either retirement or disability payments under the Social Security program.
Poverty among elderly Americans was endemic before the program was created in 1935. The first benefit checks weren’t issued until 1940, and as late as 1959 more than 35 percent of the elderly were living below the poverty line, according to the Social Security Administration. In 2009, the most recent Census Bureau data available shows, the figure was 8.9 percent.
In 1983, Congress enacted the recommendations of a bipartisan commission aimed at solidifying the program’s finances. Earnings of high-income Social Security recipients were taxed and the age at which full benefits were received was slowly increased to 67 for those born after 1959.
Those fixes sufficed until now. Last year, for the first time since 1983, Social Security spent more than it collected in revenues. A $49 billion deficit was covered with withdrawals from the program’s so-called “trust fund,” an accounting mechanism that tracks revenues from a dedicated payroll tax.
The Social Security and Medicare Trustees project a deficit this year of $46 billion and continuing annual shortfalls until the $2.5 trillion fund is exhausted in 2036. Beyond that point, the program is expected to have sufficient funds from continuing infusions of payroll taxes to pay about 75 percent of promised benefits.
Perry’s aversion to the program is nothing new. In his 2010 book “Fed Up,” he lambastes Social Security as a “crumbling monument to the failure of the New Deal” and likens it to “a bad disease.”
The Texas governor’s remarks tap a deep vein of conservative antipathy to Social Security that dates to the program’s founding. In April, Representative Jeb Hensarling of Texas, a member of the House Republican leadership, said Social Security -- along with Medicare and Medicaid -- were “morphing into cruel Ponzi schemes.”
Those running the program are accustomed to beating back accusations of shady behavior. The Social Security Administration’s historian produced a research note in 2009 distinguishing between the program and various financial scams.
“Social Security is and always has been either a ‘pay-as-you-go’ system or one that was partially advance-funded,” concluded Larry DeWitt, a program historian. “Its structure, logic and mode of operation have nothing in common with Ponzi schemes or chain letters or pyramid schemes.”
Yesterday, House Majority Leader Eric Cantor defended Perry’s language. “The point the governor was trying to make is the math doesn’t lie and the numbers don’t add up,” Cantor said at a Christian Science Monitor lunch. “We need to face the fact that people are expecting government to live up to its promises.”
Other Republicans said the Texas governor’s take-no-prisoners language risked spooking voters. Calling Social Security a Ponzi scheme was “dumb,” said Governor Gary Herbert of Utah.
Democrats crowed over a statement they regarded as political gold. “Ponzi Perry just lost the general election,” former Michigan Governor Jennifer Granholm tweeted during the debate.
As for Charles Ponzi, after bouncing between prison and fresh scams in Florida and his native Italy, he died in 1949 in the charity ward of a Rio de Janeiro hospital. He was 66. Says biographer Zuckoff: “He could have used Social Security.”
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