Perry: Social Security is ‘Ponzi Scheme'; Romney: It’s Not a Failure ‘By Any Measure’

Terence P. Jeffrey | September 8, 2011 | 4:18pm EDT
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Former Mass. Gov. Mitt Romney shakes hands with Texas Gov. Rick Perry at GOP debate, Sept. 7, 2011. (AP Photo/Jae C. Hong)

( - In a Republican presidential debate last night at the Reagan Library in Simi  Valley, Calif., Texas Gov. Rick Perry did not back down from his assertion that Social Security is a "Ponzi scheme" that must be fixed, while former Massachusetts Gov. Mitt Romney took exception to Perry's analysis of the program, saying of Social Security that “under no circumstances would I ever say by any measure it's a failure.”

Under the Social Security system, the payroll taxes that people send to the federal government for Social Security are immediately deposited into the general Treasury and any surplus over and above what is needed to cover current Social Security benefits is spent on general government expenses.

In 2010, however, the Social Security system ran a deficit, not a surplus. Social Security benefit payments equaled $701.6 billion, according to the Social Security Board of Trustees Report [2], while payroll taxes for Social Security equaled only $637.3 billion.

In its report, the Social Security Board of Trustees estimated that the Social Security system (Old Age and Survivors Insurance and Disability Insurance) would remain in deficit for decades to come. “Under the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period,” the trustees said.

The "interest income" that Social Security earns is money that the federal government pays itself for the money it has previously borrowed from the Social Security system to cover other government expenses. In order to "pay" this interest to the Social Security system, the government must tax money away from current workers or borrow it from outside creditors--and thus increase the national debt.

The longe-range insolvency of Social Security system is driven by its pay-as-you-go funding system and shifts in national demographics. In 1950, a decade after Social Security first started paying benefits, there were 16 American workers paying payroll taxes for every older American receiving benefits.

“At the end of 2010,” says the Social Security trustee’s report, “about 54 million people were receiving benefits: 37 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers. During the year, an estimated 157 million people had earnings covered by Social Security and paid payroll taxes.’

With 157 million workers paying payroll taxes and 54 million people receiving benefits, the ratio of taxpaying workers to Social Security benefit receivers is now 2.9 to one.

That ratio will drop still further as additional Baby Boomers retire and need to have their Social Security benefits funded by the smaller number of children they had as compared to their parents.

In Wednesday night’s debate, John Harris of the Politico challenged Gov. Rick Perry for writing in a book he published last year—Fed Up! Our Fight to Save America from Washington—that, as Harris put it, “Social Security was wrong from the beginning.”

Perry countered that he did not want to end a program that had been in place for 70 years but to transition to a system that would work financially—calling the current system a “Ponzi scheme” and “monstrous lie.”

“Well, I think any of us that want to go back and change 70 years of what's been going on in this country is probably going to have a difficult time,” said Perry. “And rather than spending a lot of time talking about what those folks were doing back in the '30s and the '40s--it`s a nice intellectual conversation--but the fact is we have got to be focused on how we’re going to change this program.”

Perry then said that people who are already on Social Security or approaching the age when they will be eligible to receive Social Security benefits do not need to worry about changes being made that will effect their experience with the program.

“And people who are on Social Security today, men and women who are receiving those benefits today, are individuals at my age that are in line pretty quick to get them, they don’t need to worry about anything,” said Perry. “But I think the Republican candidates are talking about ways to transition this program, and it is a monstrous lie.

“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,” said Perry. “Anybody that’s for the status quo with Social Security today is involved with a monstrous lie to our kids, and it`s not right.

Harris then told Perry that former Bush—and Perry--political adviser Karl Rove had said that Perry’s use of the term “Ponzi scheme” to describe Social Security would be “toxic” in a general election and that former Vice President Dick Cheney had said Social Security is not a Ponzi scheme.

“My understanding is you’re standing by every word you’ve written in that book. Is that right?” Harris asked Perry, after citing the comments of Rove and Cheney.

“Yes, sir,” said Perry. “You know, Karl has been over the top for a long time in some of his remarks. So I`m not responsible for Karl anymore.”

“Vice President Cheney though said it`s not a Ponzi scheme. You say it is,” said Harris.

“Absolutely,” said Perry. “If Vice President Cheney or anyone else says that the program that we have in place today, and young people who are paying into that, expect that program to be sound, and for them to receive benefits when they research retirement age, that is just a lie. And I don`t care what anyone says. We know that, the American people know that, but more importantly, those 25-and-30-year-olds know that.”

Harris then asked Romney to respond the “kind of provocative language” Perry was using to describe the Social Security system.

Romney started out conceding that there is a problem with the funding of Social Security.

“Well, the issue is not the funding of Social Security. We all agree and have for years that the funding program of Social Security is not working, and Congress has been raiding the dollars from Social Security to pay for annual government expenditures. That`s wrong,” said Romney. “The funding, however, is not the issue.”

Then Romney launched an attack on Perry for what he wrote about Social Security in his book.

“The issue in the book Fed Up, governor, is you say that by any measure, Social Security is a failure,” said Romney. “You can't say that to tens of millions of Americans who live on Social Security and those who have lived on it.

“The governor says, look, states ought to be able to opt out of Social Security,” said Romney. ”Our nominee has to be someone who isn't committed to abolishing Social Security, but who is committed to saving Social Security.

“We have always had, at the heart of our party, a recognition that we want to care for those in need, and our seniors have the need of Social Security,” said Romney. “I will make sure that we keep the program and we make it financially secure. We save Social Security.”

Romney then said that he would never say that “by any measure” Social Security is a failure.

“And under no circumstances would I ever say by any measure it`s a failure,” said Romney. “It is working for millions of Americans, and I`ll keep it working for millions of Americans.”

Perry rebutted Romney, indicating he wanted to fix Social Security—but that it was a “Ponzi sheme” and that “maybe it’s time to have some provocative language in this country.”

“We`re not trying to pick fights here,” said Perry. “We`re about fixing things. You can either have reasons or you can have results. And the American people expect us to put results in place.

“You cannot keep the status quo in place and not call it anything other than a Ponzi scheme. It is,” said Perry. “That is what it is. Americans know that, and regardless of what anyone says: Oh, it`s not--and that`s provocative language--maybe it’s time to have some provocative language in this country and say things like, let`s get America working again and do whatever it takes to make that happen.”

In “A Citizen’s Guide to Social Security Reform [3],” published in 2005, the Cato Institute explained what a “Ponzi scheme” is and why some people use that term to describe Social Security.

“Why do some people call Social Security a Ponzi scheme?” asked Cato. “Charles Ponzi, an Italian immigrant, started the first such scheme in Boston in 1916. He convinced some people to let him invest their money, but he never made any real investments. He just took the money from later investors and gave it to the early investors, paying them a handsome profit on what they had originally paid in. He then used the early investors as advertisements to get still more investors, using their money to pay previous investors and so on.

“To keep paying a profit to previous investors, Ponzi had to continue to find more and more new investors,” the Cato Institute explained. “Eventually, he couldn’t expand the number of new investors fast enough, and the system collapsed. Because he never made any real investments, he had no money to pay back the newest investors.

They lost all the money they ‘invested’ with Ponzi. Ponzi was convicted of fraud and sent to prison.

“Like Ponzi’s plan,” said Cato, “Social Security does not make any real investments. It just takes money from later investors (workers) and gives it to earlier investors (retirees). Like Ponzi, Social Security will eventually not be able to recruit new ‘investors’ fast enough to continue paying promised benefits to previous investors. Because each year there are fewer workers for every retiree, Social Security will eventually collapse—just like Ponzi’s scheme.”

In 1935, when Congress was debating the Social Security Act that had been proposed by Democratic President Franklin Delano Roosevelt, Republican Sen. Daniel Hastings of Delaware went down to the Senate floor to plainly explain what he believed to be the flaw in the way FDR’s proposal would be funded.  He described it as a plan for the current general to bill its children and grandchildren for what they would consume today.

“When the young men of the future ask why they and their employers should have to pay so large a rate, the answer will be that years a before their fathers and grandfathers had made promises to each other which they did not have the money to carry our in the full,” said Hastings. “Therefore, they conveniently decided to pass on the deficiency by assessing a surcharge against their children and grandchildren.”

The non-partisan Peter G. Peterson Foundation has estimated [4] that as of the end of fiscal 2009, the Social Security administration already face $7.7 trillion in unfunded liabilities—equaling the difference between the amount it is expected to pay in benefits to people now alive and the amount of tax revenue that will be available to pay for those benefits.

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