Friday, September 9, 2011

Perry, Ponzi Schemes, and Social Security

Rick Perry's comments labeling Social Security a Ponzi scheme have generated a lot of unflattering attention from many liberals (not surprising) and from other Republicans (a little surprising). In particular, Governor Perry's principal rival for the Republican presidential nomination, former Massachusetts Governor Mitt Romney, has argued that a political attack on Social Security would be a major electoral liability for the GOP in next year's elections. In an interview with Sean Hannity, Romney said:
If we nominate someone who the Democrats can correctly characterize as being opposed to Social Security, we will be obliterated as a party.
As someone who is on record defending the Ponzi scheme label for Social Security, it is probably not surprising that I come down on Governor Perry's side of this spat:
Social Security works by paying cash benefits to retirees and the disabled from taxes contributed by those currently working who are, int turn, promised benefits when they retire or should they become disabled. Neither a Ponzi scheme nor Social Security use contributions from "existing investors" to purchase assets that might provide returns to those investors. Instead, both a Ponzi scheme and Social Security depend on the contributions of new "investors" to redeem promises made to "existing investors." As a result, both a Ponzi scheme and Social Security will continue to make good on promises to "existing investors" so long as a sufficient stream of "new investors" are brought into its system. However, both a Ponzi scheme and Social Security will ultimately fail to pay promised returns if inputs from "new investors" are insufficient to cover the payments due "existing investors."
Social Security is especially egregious in its self-representation as some sort of investment plan. It even sends out annual statements of "contributions" that  Americans have made into the Social Security system and the "credits" that workers have earned. Of course, unlike an actual investment, Americans have no proprietary claim to Social Security benefits and the government has no contractual obligation to pay benefits that anyone has "earned."

Whether "Ponzi scheme" is a fair description of Social Security is one thing, but whether it is good politics for a presidential candidate, like Governor Perry, to employ it is another question. The conventional wisdom, of course, is that this is a bad idea. Americans, as a group, like Social Security, and older people, who are especially likely to vote, are apt to punish politicians who are perceived as a threat to Social Security. So, the thinking goes, denigrating the program, especially in a way that suggests an openness to reductions in benefits in the foreseeable future, is politically dangerous.

I will freely admit that there are risks to an aggressive stance on Social Security, but there are some big potential rewards, too. Social Security *is* in trouble, and every payroll tax holiday just makes that trouble just a little bit bigger. Sooner or later, the Social Security status quo has to be changed: benefits will have to be cut or means-tested, eligibility ages will have to go up, payroll taxes will have to be raised, or some combination of these things. Pointing out that Social Security is not an earned asset, but a program of taxing and spending that is not actuarially sound, is both true and a potentially a good political posture.

*If* voters see that Social Security is in trouble, then the politician who pulled the fire alarm can get some traction. Politicians who defend the status quo can be painted as the threat to Social Security. Those who are aggressive about criticizing the status quo and proposing reforms can make reasonable claims to be the program's savior.

Getting voters to buy the notion that Social Security is in trouble shouldn't be that hard. It is, and the recent deficit debates should help emphasize the general theme of Washington's irresponsibility and the unsustainablility of our fiscal policies. Moreover, the president and his record of deficit, debt, stimulus, bailouts, and paying for policies on layaway is, in some ways, the personification of Social Security's problems. President Obama did not create the seriously underfunded federal entitlements, but he has been utterly unwilling to deal with them.

The more difficult part is putting together a reform plan that cannot plausibly be portrayed as an effort to undermine the progam. Some combination of means-testing benefits, slowly raising retirement ages, and further incentivizing private retirement savings, so fewer people will draw out of the (means tested)  system later, wouldn't fundamentally change the nature of the Social Security system, but it would make it more sustainable and help more people become independent of the federal government during their retirement in the future.

So long as Governor Perry's tough talk on Social Security is a prelude to offering a plan for seriously reforming it (and hopefully, other federal entitlements), he call call it whatever he wants and leave those telling him to play it safe safely behind, too.

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