Mitt Romney's campaign was ecstatic to hear Rick Perry double-down on his criticism of Social Security at Wednesday's GOP debate at the Reagan Library in Simi Valley.
"You cannot keep the status quo in place and call it anything other than a Ponzi scheme," Perry said at a Republican debate in California. Acknowledging that several have called his remarks controversial, he added, "Maybe it's time to have some provocative language in this country."
Perry called Social Security a Ponzi scheme in his "Fed Up!" book, and his enemies in the Bush camp have zeroed in on the language.
Most recently, Republican strategist Karl Rove said Perry's take on Social Security will prove "toxic" in the 2012 election. Former Vice President Dick Cheney also said recently it was inaccurate to call the program a Ponzi scheme.
In Simi Valley, Perry said that Chenye's characterization was "just a lie," and Rove was "over the top." Romney seized the moment.
"Our nominee has to be someone who isn't committed to abolishing Social Security but to saving Social Security," Romney said.
What are the characteristics of a Ponzi scheme, and who is telling the truth?
According to the Securities and Exchange Commission, a Poniz scheme "is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors."
Score one for Perry.
Basically, early investors are lured by guaranteed returns that are paid mainly through money derived from new investors, not from actual profit. Typically the scheme promises huge profits in a short amount of time, then collapses when money from new investors isn't sufficient to keep the scheme going.
Social Security shares the same basic characteristics as a Ponzi scheme--it requires more and more new workers to pay for the ever-increasing number of retirees. As the Baby Boomer generation retires, the number of workers that have to contribute to Social Security to pay for them is proving to be insufficient. Economist Arnold Kling said the following:
The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)--in other words, a Ponzi scheme.
Business Week agreed about the fundamental parallels between Social Security and the Ponzi scheme:
Social Security taxes current workers to pay Social Security benefits for current retirees. In other words, the new entrants into the Social Security system, the young workers, pay off the previous entrants, the older workers. And despite the fact you have a Social Security "account", there is no necessary link between what you paid into the system in taxes, and what you receive.
That's very similar to the structure of a Ponzi scheme, where new investors pay off the original investors. As long as enough new 'victims' are brought into the scheme, it keeps growing and growing. But when the new investors runs out, the Ponzi collapses. Analogously, the slowdown in population growth puts pressure on Social Security finances.
Business Week also noted that there is one thing that can keep Social Security from being a Ponzi scheme--technological innovation that leads to increased worker productivity.
If we leave the younger generation a good legacy--a sound scientific and technological base, combined with an innovative and flexible economy and an educated workforce--then Social Security is not a Ponzi scheme. The economy grows, and there's more than enough resources for everyone.
But if instead we--the current generation--invest in homes, flat-screen televisions and SUVs, then we don't leave the next generation with the technological "seed corn" they need. If the technological progress slows, then Social Security does turn out to be Ponzi-like--with unfortunate consequences for everyone.
Guess which path we're headed down. Give another point to Rick Perry.
From the Progressive side of the spectrum, the arguments against Social Security being a Ponzi scheme get laughable. Mother Jones writes that because Social Security is not deliberately fraudulent, it is not fraud. Also, governments can print money and raise taxes to keep the scheme from collapsing, and it's been around for a long time, unlike typical Ponzi schemes.
But none of that changes the fact that it requires an ever-increasing number of new victims to keep it afloat. Even if the government devalues the dollar to meet debt obligations such as Social Security (which it is doing), a large portion of the investors get screwed in the end by being paid in worthless currency.
In the final analysis, Rick Perry is right. Social Security is fundamentally the same as a Ponzi scheme. While it shares some superficial differences from being run by the government, those differences don't change the nature of what it is.