Is Social Security a Ponzi Scheme?

Governor Perry generated quite a stir during a recent Republican debate when he referred to Social Security as a Ponzi scheme. According to Governor Perry, Social Security is a “monstrous lie…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."

We can debate how long Social Security can remain solvent, but it is not a Ponzi scheme. In fact, this article in the New York Times offers details on just how Social Security differs from a Ponzi scheme.

That said, we all know there’s plenty about Social Security that needs fixing. Simply, last year Social Security began paying out more in benefits than it received in taxes. And as more Boomers retire, that shortfall is expected to grow, especially given high unemployment rates. The New York Times article points to the nonpartisan Congressional Budget Office’s estimate that the combined Social Security trust funds would be exhausted in 2038. However, a number of steps could keep the program afloat. Washington could choose to increase taxes, reduce benefits by raising the retirement age, or reduce cost-of-living increases. Of course, none of these options will be popular with voters, so it remains to see what our elected officials who often are more concerned with keeping their jobs than with attacking our nation’s most serious problems will do. If the debt ceiling debates are any indication, we could be in for a rough ride on the way to Social Security reform.

What’s the Future of Social Security?

Do American workers have confidence that they will receive future benefits from Social Security? Results from the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey (RCS) show most American workers are skeptical about the program. Here are some statistics from the report:

• Seventy percent of workers are not too or not at all confident that Social Security will continue to provide benefits of at least equal value to the benefits retirees receive today.
• Three-quarters of workers express concern that the age at which they become eligible for Social Security retirement benefits will increase before they retire.
• Today’s workers are less likely to expect Social Security income in retirement (77 percent total major and minor source of income, down from 88 percent in 1991) than today’s retirees are to report having Social Security income (91 percent total).
• Workers are half as likely to expect Social Security to provide a major share of their income in retirement (33 percent) as retirees are to say Social Security makes up a major share of their income (68 percent). However, EBRI research found in 2009 that 60 percent of those age 65 or older received at least 75 percent of their income from Social Security.
• Workers who are closer to retirement are more likely to expect Social Security to be a source of income in retirement than are younger workers (92 percent of workers age 55 and older vs. 63 percent ages 25–34).

The message here is clear: The unsure long-term status of Social Security coupled with the significant decline of defined benefit plans mean that working Americans must shoulder an increased responsibility to fund a financially secure retirement.