For The Last Time: Social Security Is Not A Ponzi Scheme

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Sometimes lost in the political melee over Rick Perry’s claim that Social Security is a “Ponzi scheme” is that Social Security is not, never has been, and never will be anything close to an actual Ponzi Scheme. But that doesn’t keep pundits from falling prey to the faulty idea on a regular basis.

The latest is MSNBC’s Chris Matthews, who took a turn into Perry territory on Thursday night while explaining Social Security’s actual financial challenges.

“Today, lots of people fortunately make it past 65,” Matthews said. “They live into their 80s and 90s. They’re still getting checks. The system doesn’t work that way anymore. It’s not as healthy as it once was. So, how does a Republican deal with the fact it is a Ponzi scheme in the sense that the money that’s paid out every day is coming from people who have paid in that day. It’s not being made somewhere.”

The “Ponzi scheme talk” has been floating around for years in Republican circles. So much so that the Social Security Administration even put out a detailed explainer on its website in 2009 laying out the entire history of Charles Ponzi himself and why the program bears only absurdly passing similarities.

Let’s go over step by step why a Ponzi scheme is nothing like what Matthews, Perry, et al have described it as in making the Social Security comparison. First off, what is an actual Ponzi scheme? The way a Ponzi scheme typically works is that investors pay into a fund that promises a quick and profitable return. But the money usually isn’t even invested in anything, it’s just going into the Ponzi schemer’s pocket, who is stealing from his backers and deliberately providing phony information about where the investors’ money is going to cover up his tracks. When people need money from the fund, the schemer has to hope there’s enough to pay out their portion without running on the principal that he’s conned from his investors and thus revealing his fraud. There is no way to legitimately sustain a Ponzi scheme by definition, so they usually don’t last that long before collapsing, at which point it’s a good idea for the schemer to disappear fast.

Social Security, by contrast, is not a fraud. It’s finances are completely out in the open. And far from collapsing, it’s successfully met its obligations for more than 70 years. The way it functions is that workers pay into Social Security while retirees, who themselves once paid into the program, receive checks from when they reach eligibility.

So why do people make the comparison? Well, on a superficial level, people pay into both systems but don’t get their own direct contribution back later when they cash out, they get it from the taxes paid by the next generation of workers. This is the dynamic Matthews was referring to on MSNBC. But as long as workers are paying enough into the system, retirees get their checks just fine and the cycle continues as it has for decades. Unfortunately, there’s a projected shortfall in the coming decades as the Baby Boomers retire because the ratio of workers to retirees is no longer sufficient to generate enough money to pay out checks as planned. That means if things continue as they are today, future retirees will not be able to get the same amount of benefits that they’re owed based on their years of contributions.

The Perrys of the world see this and think there’s a fraud going on. There isn’t. Because unlike a Ponzi scheme, which deliberately lies about its finances and cannot be retooled to repay its investors by its very definition, Social Security’s problems are well known and the program can be fixed to make up the gap. And it isn’t even very hard: a tweak here or there, like raising the retirement age, raising the level of income that’s subject to taxation, or any number of alternatives proposed by Republicans and Democrats, can change the projections so that the program doesn’t just keep running for a few years, it keeps running in perpetuity.

It’s not like Congress hasn’t done it before — when they saw a problem coming in the 1980s they revised the program to generate a surplus in order to help offset the cost of all those Baby Boomers retiring. Their foresight means that closing the gap today is much, much easier.

Nick Baumann over at Mother Jones created a handy Venn Diagram to summarize the differences between a Ponzi Scheme and Social Security. Take a look below.

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