Here’s the real Social Security Ponzi scheme

September 28, 2011

Gov. Rick Perry wants to have a conversation about means-testing entitlements. This is a softer, gentler version of the governor’s earlier assertions that Social Security is an un-Constitutional Ponzi scheme.

And Perry is hardly the only conservative floating the idea that wealthy seniors should get less Social Security — or none at all.

Last week, we looked at the means testing of Medicare, where wealthy seniors have paid higher premiums for nearly a decade. Now, let’s get going on that conversation about means testing Social Security — starting by untangling some badly twisted political language.

The phrase “means testing” has always referred to a measure of financial adequacy to determine eligibility for welfare — that is, a test of inadequate means or poverty — not wealth. That’s an important distinction because Social Security’s retirement and disability programs aren’t welfare at all — they are entitlement programs that we pay into, and they are made available to seniors up and down society’s spectrum of wealth.

Just to be clear, when I talk about Social Security as an entitlement, I’m referring to the Old-Age, Survivors, and Disability Insurance program (retirement) and also the disability insurance program. In order to qualify for either, you must have paid FICA taxes into the system and worked long enough to be eligible. (Note to Social Security conspiracy theorists: Yes, I know about Supplemental Security Income, which is run by the Social Security Administration and doesn’t require beneficiaries to have paid into the system; instead, it relies on general tax revenue to assist the disabled, blind and some elderly who have little or no income to meet basic needs for food, clothing etc.)

Perry and others who hope to take down Social Security like the phrase “means testing” because it sounds so much more reasonable than calling Social Security a Ponzi scheme (which it is not) or a “bad disease,” the description Perry used in his recent book Fed Up! Our Fight to Save America from Washington. That book gives us Perry’s full-blast view of Social Security:

Social Security is something we have been forced to accept for more than 70 years now. Because of that, as Nobel laureate economist Milton Friedman wrote, the program is one of those things on which the tyranny of the status quo is beginning to work its magic. Despite the controversy that surrounded its inception, it has come to be so much taken for granted that its desirability is hardly questioned any longer.

And there stands a crumbling monument to the failure of the New Deal, in stark contrast to the mythical notion of salvation to which it has wrongly been attached for too long, all at the expense of respect for the Constitution and limited government.

Now on the campaign trail — facing actual seniors and older baby boomers — Perry uses more sugar-coated language. Here’s what he said in response to coaching from Sean Hannity on Fox News:

Do we need to means test it? Do we need to talk about phasing in, if you will, the age upward? So that, I mean, obviously, we are going to live into substantially older age than what was expected when Social Security was first put into place.

Perhaps someone has now told Perry what the book fact-checkers did not: The U.S. Supreme Court affirmed the Constitutionality of Social Security in 1937 (Helvering vs. Davis). Or that Social Security keeps 20 million out of poverty annually, including one million children. Some failure!

The notion that means testing would only hit the super rich also is very dubious.

When Washington proponents talk about means testing Social Security, they usually refer to the report written by the co-chairs of President Obama’s bipartisan commission on deficit reduction (I describe it in this awkward way because the report didn’t get enough votes from its bipartisan members, under its own rules, to be reported out to Congress. Most journalists refer to it anyway as the “fiscal commission report,” although it is not).

Among several other changes, co-chairs Alan Simpson and Erskine Bowles suggest making Social Security more progressive by whacking benefits for those with above-average income.

This would be accomplished by changing the formula used to figure benefits — the so-called “bend points.” These are the three brackets used in formulas that calculate how much of your average lifetime income will be paid out in benefits. Simpson and Bowles recommend transitioning to a four-bracket formula that reduces the income replacement rates.

Simpson and Bowles argue this change would particularly target high earners. They also recommend a new special minimum benefit that would increase benefits for some workers with long careers at low pay, and a longevity increase for the very old, which would raise benefits after 20 years of eligibility.

But the new bend points wouldn’t impact only the very wealthy. A NASI analysis of Simpson-Bowles notes that, once full implemented in 2070, nearly half of middle-income seniors would have their benefits reduced by 20 percent or more under the plan.

Those 62 and older in 2070 who would have benefits cut below those scheduled in current law include 97 percent of seniors in the top income quintile and 81 percent of those in the bottom quintile. On the other hand, 17 percent of those in the bottom quintile would experience a net benefit increase. Beneficiaries with benefit cuts of 20 percent or more include 7 percent of those in the bottom income quintile; 27 percent of those in the next-to-lowest income quintile; 45 percent of those in the middle income quintile; 54 percent of those in the next-to-highest income quintile; 73 percent of those in the top income quintile.

Remember, too, that the adjective “wealthy” doesn’t carry the same meaning when applied to the Social Security system as it does in the broader debate about taxes, class warfare and such. Social Security taxes only the first $106,800 of income, and benefits stop at that point of “covered” earnings. That makes this debate completely different than, say, the one about ending the Bush tax cuts for taxpayers earning more than $250,000 per year.

“Social Security isn’t equipped to distinguish between those who make $200,000 or $300,000” says Virginia Reno, vice president for income security at NASI. “The system can’t even see that much income.”


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Not that I am fond of the over dramatic rhetoric, but I think we all can recognize a large degree of truth in that statement – Social Security is Ponzi Scheme. No, not literally, but it is a system that relies on an ever increasing base of new ‘buyers’ to support the older ‘buyers.’ Without this (as it stands currently) it is not sustainable, and very unlikely that a 25 year old paying into the system will get much out of it…unless we start have LOTS of kids.

Posted by rbhandler | Report as abusive

Wait a minute… the wealthy pay more SS taxes during his lifetime and then gets almost nothing in the end?

Is not going to work.

Posted by robb1 | Report as abusive

Nice attempt to rip old people off, to pay the nations irresponsible debts off. Nice try no cigar. Mr. (I use religion as a political tool) Perry….

Posted by NiteRyder | Report as abusive

The real retirement ponzi scheme is Bernanke not paying interest on savings to older Americans who worked hard, lived simply and put their life savings in banks.

Posted by minipaws | Report as abusive

My guess is the top 1% that pay 30% of our taxes will be looking for another country to park their wealth in! What happens then? The wealthy are the target for endless taxes!51% of us pay no Fed taxes and government is now 40% of US GDP! Can you spell tipping point!

Posted by DrJJJJ | Report as abusive

The $2.7 Trillion social security has in a “lock box” is an IOU (bonds) from our government and not counted as debt! 80 million boomers lining up and it’s unfunded-medicare too! Doesn’t include all the other liabilities either! I call that one big fat ponzi scheme if I’ve ever seen it!

Posted by DrJJJJ | Report as abusive

You say “wealthy seniors have paid higher premiums for nearly a decade”, which is not true on two accounts. First, payments to the account are not a premium, they are a tax.
Second, everyone pays the exact same percentage of tax making that part equal.
The whole thing falls apart because lower income producers are in effect paying a GREATER share of their income because the tax stops for those with income above $106,800 resulting in a net reduction of effective tax rate as they make more and more during any year.

Posted by dgpgrove | Report as abusive