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Is Social Security a Ponzi Scheme?

Last week I published a post entitled 3 Big Myths About Social Security, which ended with Myth #3: Congress Has Raided the Social Security Trust Fund. I soon received some heated comments from readers, calling Social Security a lousy investment and a Ponzi scheme, among other things. I understand the rationale for using these terms -- in fact, I must admit to using similar phrases in the past to describe Social Security. But I don't use these terms anymore as a result of insights I've gained that I'd like to share here.

First, Social Security is not insurance or an investment in the conventional sense, where the amount of benefits you receive is directly related to the amount of money you invest via your FICA taxes. Confusion on this point arose from the misleading words used to describe Social Security back when Franklin Roosevelt and other political leaders first introduced the program to the U.S. public back in the 1930's.

What Social Security really is, is the formalizing of the long-revered, ancient tradition of supporting elders who are less able to fend for themselves. Ancient tribes and clans often provided food and shelter to older members who could no longer hunt or gather food. And I'd be willing to bet that at the time, the younger tribe members didn't keep track of the amount of food or housing they gave to their elders with the expectation that they would eventually receive similar amounts. They did it simply because they thought it was the right thing to do.

Senator Russell Long, a lifelong supporter of Social Security, explained it this way: Social Security is nothing more than a promise to a group of people that their children will be taxed for that group's benefit. I'm O.K. with his definition -- I've been glad to pay my FICA taxes to help fund the Social Security benefits of my parents' generation.

A Ponzi scheme is a purposeful investment swindle in which early investors are paid off with money put up by later investors in order to encourage more investors. Along the way, the perpetrators pocket a lot of the investors' money -- remember Bernie Madoff? Social Security simply doesn't fit this definition. While the first Social Security beneficiaries did receive more in benefits than the amounts they paid in FICA taxes, Social Security lacks the fraudulent, profit-making intent to fit the definition of a Ponzi scheme. Social Security is simply one generation helping another.

Here's the big issue to debate in a democratic society, though: What's the appropriate amount of taxes that our government needs to take to pay for Social Security from workers who are struggling to just meet daily living expenses? And what's the appropriate level of benefits needed to support our senior citizens? These exact questions were addressed by the recent proposals from the Deficit Commission, and I applaud them for tackling these tough issues.

Some readers also commented on the "shell game" aspect of counting the special U.S. Treasury bonds as "assets" in the Social Security trust fund, when they are also a "liability" of the U.S. government. As of the beginning of 2010, the Social Security bonds amounted to $2.5 trillion of the total $13.3 trillion of federal debt. From this perspective, U.S. Treasury bonds are a poor investment for the Social Security trust fund -- until you consider alternative investments:

  • CDs in banks? You've got to be kidding.
  • Corporate stocks and bonds? At the scale of ownership that would be needed by the government, some people would call this socialism or communism.
  • Real estate? Ditto.
  • Foreign stocks and bonds? Some would ask: Why are we supporting the Chinese or Europeans?
In spite of the problems with investing the Social Security trust fund in U.S. Treasury bonds, it's hard for me to think of an investment that wouldn't have more problems. The real problem is that it could be hard for us collectively to repay the $2.5 trillion in Social Security's U.S. government bonds when the total federal debt is $13.3 trillion and climbing.

From my perspective, the real problem is the total federal debt. We need to have open, honest debates about the tough steps that must be taken to get the federal debt under control, and about the appropriate level of benefits that's needed to support our senior citizens. Frankly, I'm disappointed that the Deficit Commission couldn't find the majority vote to pass along their proposals to Congress, and that extremists from both sides of the political spectrum are obstructing progress by insisting on uncompromising positions.

Wouldn't it be refreshing if our political leaders could put our country's interests ahead of their party's partisan interests, and do what's right for our country? We can help by stopping the use of inflammatory terms like "Ponzi scheme," "shell game," and "raid." These terms drive people to the opposing corners of the ring, instead of working together and debating the realistic compromises that we need to solve these very real problems.

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