Rick Perry in USA Today: I am going to be honest with the American people

For too long, politicians have been afraid to speak honestly about entitlement reform — but the American people deserve the facts, Texas Gov. Rick Perry writes in an op-ed that appeared Monday in USA Today. Perry provides the cold, hard truth:

Social Security’s unfunded liability is calculated in the trillions of dollars. Last year, annual Social Security outlays exceeded annual revenues for the first time since 1983. The Congressional Budget Office projects that outlays will be roughly 5% greater than revenues over the next five years, worsening as more and more Baby Boomers retire.

By 2037, retirees will only get roughly 76 cents back for every dollar that is put into Social Security unless reforms are implemented. Imagine how long a traditional retirement or investment plan could survive if it projected investors would lose 24% of their money?

I am going to be honest with the American people. Our elected leaders must have the strength to speak frankly about entitlement reform if we are to right our nation’s financial course and get the USA working again.

The piece appeared opposite an editorial from the USA Today board. The view of the paper? “Social Security far from a Ponzi scheme.” The board writes:

Yes, Social Security has major funding problems. It pays out more in benefits than it takes in, and the gap will grow steadily worse as Baby Boomers retire. To that extent, Perry has a point. Congress, under both Republican and Democratic control, has been negligent in making necessary adjustments to bolster Social Security’s balance sheet for the long term. But the program’s problems are largely the result of people living longer, and therefore collecting more in benefits, rather than some inherent structural shortcoming or constitutional failing.

Social Security is most certainly not a Ponzi scheme, which is an undertaking designed to swindle people out of their money by using incoming revenue to produce bogus investment returns to attract more money (see Ponzi, Charles and Madoff, Bernard).

Ponzi schemes have two salient features. First, they are criminal enterprises, which Social Security is not. Second, they work only until people get wind of what is going on, at which point they inevitably collapse. Social Security’s finances are plainly visible for all to see. The imbalances emerging now are a surprise to no one, and modest adjustments in tax rates, benefit formulas and the retirement age can ensure the program’s viability for generations to come.

Perry is playing to fears among younger voters that Social Security won’t be around for them; polls have shown that more than 60% over those under 30 don’t expect to collect. But even if nothing is done, the program could still pay about three-quarters of promised benefits at mid-century.

The term “Ponzi scheme” attracts such attention because it does typically refer to a criminal enterprise. In that respect, the USA Today editorial board is right. Social Security is not illegal. But the board’s second point — that SS is not a Ponzi scheme because it hasn’t collapsed, because investors continue to invest — makes little to no sense. Social Security doesn’t have to attract investors with the soundness of its returns; the government mandates that every single worker invest in the program. If SS did have to attract investors, the program very well would collapse in true Ponzi-scheme fashion as soon as current workers found out they’d be lucky to receive as much in benefits as they invested in payroll taxes.

When Perry calls Social Security a Ponzi scheme, he’s referring to the structure of the program, which relies on new investors to ensure old investors receive a handsome return on their investment. Michael Tanner, senior fellow at the Cato Institute, explains in greater detail:

Social Security … forces people to invest in it through a mandatory payroll tax. A small portion of that money is used to buy special-issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.

As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.

As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.

Eventually the pyramid crumbles.

So, sure, Social Security is not a Ponzi scheme insofar as the government is able to force investors to enroll, as well as to pay more when slowed population growth results in fewer investors — but, absent that, it is. Milton Friedman put it this way in a 1999 New York Times article: The “guaranteed” benefits of the entitlement program exist “solely on the expectation that future Congresses will honor promises made by earlier Congresses — what supporters call ‘a compact between the generations’ and opponents call a Ponzi scheme.” Charles Blahous, Ph.D., a member of the Board of Trustees of the Social Security Trust Fund, has also admitted the program is a Ponzi scheme:

Why does it make folks so angry to hear the truth? Communications consultant and former RNC research director Jeff Berkowitz has a theory. “The reason it’s so controversial is because it’s so exactly true,” Berkowitz said to The Daily Caller. “The more you expose the uncertainty, the more people become concerned about the safety of their investment.”

As I’ve written before, Perry’s comments aren’t problematic because they’re false: They’re problematic because Social Security is a popular program, because “the people want their treats” and because other politicians are willing to continue to pander. But Perry’s rhetoric is also enormously helpful because it’s generating this conversation, just as he hoped.

P.S. TheStreet.com is presently polling readers as to whether they think SS is a Ponzi scheme, in case you want to participate.