(Photo: REUTERS/Mario Anzuoni)
Texas Governor Rick Perry is once again taking heat for sticking by his guns on calling Social Security a “Ponzi scheme” and “a failure.” During Perry’s inaugural outing with the rest of the GOP primary field in Wednesday's debate, both his opponents and the media wasted little time in attacking the Texas Governor for his remarks.
Perry stuck by his comments that the nation's most popular entitlement program is a “monstrous lie” and cannot meet the expectations of future retirees. Yet it was his continued reference to the term “Ponzi” that critics have zeroed in on.
The term “Ponzi” is often misunderstood and misused by people when describing a certain type of illegal or unethical financial transaction. So, what exactly is a Ponzi scheme?
Named after Charles Ponzi who masterminded the scheme at the beginning of the 20th century (although the scheme had been used earlier), it is a fraudulent investment operation that pays returns to separate investors, not from the actual profit earned by the investment, but from the new money that is collected from new investors. Early investors often see the promised return but when new money fails to keep pace with the required payout, the scheme will collapse.
In most cases legal or financial authorities interrupt the scheme, or when the person or company running the scheme is disputed in some other fashion it will end.
Why would Social Security be compared to a Ponzi scheme?
When Social Security began in 1935, it was designed as a safety net for older Americans. Before then, support for the elderly fell to the states, towns and families. The program is based on and dependent upon active workers making contributions into the program.
However, unlike an individual retirement account, the money someone is paying into Social Security today is not the same dollar they will receive later on. Plus, those who qualify under disability and some spouses of retirees also receive funds.
When a person retires and is eligible for Social Security, they receive benefits for life – even if those benefits exceed the amount they paid into the program. But in order to keep the program afloat, people who are in the workforce today are funding the retirees of today. If the money coming into Social Security suddenly stopped, the government would be unable to meet its monthly commitments.
Does Social Security fit the profile of a true Ponzi scheme?
Not entirely, because it was not designed to defraud taxpayers or workers. It does, however, depend upon a constant source of revenue from current and new workers to survive. Therein lies the comparison to the “Ponzi” reference.
While Democrats cling tightly to the program in order to protect their tradition base of support, Republicans, especially Rick Perry, are saying that if significant adjustments are not made – and made soon – the program will collapse on top of itself.
Many pundits are expecting Perry to suffer some fallout over the “Ponzi” comparison; however, others are applauding Perry for bringing attention to the issue.
Romney’s wasted little time in attacking Perry on the issue.
“Our nominee has to be someone who isn’t committed to abolishing Social Security but to saving Social Security," Romney said during the debate. “We keep the program and we make it financially secure…Under no circumstances would I ever stay by any measure it’s a failure. We’ve got to keep it working.”
One of Perry’s supporters, Florida House Speaker Dean Cannon, while attempting to avoid the “Ponzi” term, summed Social Security up by saying, “It (Social Security) is mathematically unsustainable.”
New Hampshire State Rep. Pamela Tucker wasn’t nearly so careful, telling Politico after the debate, “You can call it a Ponzi scheme. People are putting money in that’s not gonna be there.”