Rick Perry’s latest stumble in the polls largely seems to stem from his fumbles in Thursday night’s GOP debate. However, even before tea partiers began to fear he was a tongue-tied Sarah Palin in the making, doubts about his viability had bubbled up over his frequent dismissals of Social Security as a Ponzi scheme.
Indeed, it was under probing on this subject from Mitt Romney on Thursday night that Perry’s smooth-talking ways began to falter. And it’s easy to see why: a quick look through the history of the actual Ponzi scheme reveals just how inaccurate Perry’s claims are.
Let’s start with the original, from which all others bear their name. It may come as a surprise to some, but the original scheme by Charles Ponzi did not make its money by providing seven decades of benefits to retirees before folding up shop and leaving town with a suitcase full of cash.
The whole thing actually lasted less than a year. It began in late 1919 in Boston, where Ponzi, a young immigrant from Italy, came up with a cleverly sociopathic plot to defraud investors. The old saying goes that “you can’t cheat an honest man,” and Ponzi took it to heart by convincing thousands of marks that they were actually part of a separate shady scheme to buy international postage stamps in at a low price in one country and redeem them for a higher price in another. He promised huge profits on bonds in his company: 50% returns in only 45 days.
The problem? There were no profits. Ponzi was hoarding the investors contributions and using them to fund a lavish lifestyle, which in turn helped boost his image as a big time financial player and attract more victims to his scheme. When some tried to cash out, he would use money from other investors to pay them. The operation netted millions within weeks, but eventually he was fingered by his own publicist, William McMasters, who confirmed things were amiss by snooping around his office for evidence. He ended up writing a Boston Globe article exposing Ponzi’s investments as a bust, leading to Ponzi’s arrest and conviction for his crimes.
“My business was simple,” Ponzi told a reporter. “It was the old game of robbing Peter to pay Paul.”
The most notable — and costliest — modern incarnation is Bernie Madoff’s investment firm which defrauded people out of as much as $65 billion before the financial crash made it impossible to sustain any further. In Madoff’s case, the fraud was achieved by doctoring financial reports retroactively to make it appear as if he had made legitimate investments year after year when in truth he was sticking all of the money in a separate bank account.
Nowadays the Ponzi scheme label is misapplied so often to Social Security that the Social Security Administration posted a detailed history of the Charles Ponzi simply to explain the difference.
So what is Social Security then, by contrast? On a basic level, Ponzi’s famous con and its many successors relied on deception — their finances were hidden in order to conceal their true nature and enable massive theft. Social Security’s finances are completely out in the open and no one is making any kind of illicit profit off the tax contributions that finance it. And while Ponzi schemes quickly become unsustainable, Social Security has worked as planned for more than 70 years. Which is apparently not long enough for Rick Perry, who called it a “failure” in his book and strongly suggested it should never have been passed at all.
Social Security’s detractors apply the Ponzi label based on superficial similarities between their financing. In both systems, it’s true that people who “cash out,” don’t receive the same money they put in themselves. In the case of Social Security, young workers’ taxes pay for retirees’ benefits. But they’re hardly getting ripped off, because they’re working under the premise that — just as their predecessors did — they’ll one day receive benefits from the next generation’s taxes in their old age. So long as workers pay enough in taxes to fund the system, retirees get their checks just fine and the cycle continues as it has for decades.
But there’s a problem: workers aren’t projected to pay enough taxes in the coming decades to finance full benefits because a glut of retiring Baby Boomers are set to collect too much money, retirees are living longer, and birth rates aren’t as high as they used to be. That means that workers today would not get the same amount of money they’re entitled to based on their own payments if things continue.
There’s nothing sinister or fraudulent about this, however. In a Ponzi scheme, any imbalance in withdrawals versus collections would collapse the entire system. But since Social Security is a legitimate enterprise that actually is designed to do its stated purpose, Congress can make changes to its funding and benefits to keep the entire thing running in perpetuity. In fact, they have before: in the 1980s they passed laws revamping the program to prepare for the Baby Boomers by generating a surplus and putting it in a trust fund, a move that makes it much easier to fix the remaining shortfall today. And the changes that would be required to once again ensure future retirees get their benefits aren’t even particularly drastic.
Nick Baumann at Mother Jones summed up the differences between a Ponzi Scheme and Social Security in a Venn diagram, reproduced below.
This story has been updated.
Benjy Sarlin is a reporter for Talking Points Memo and co-writes the campaign blog, TPM2012. He previously reported for The Daily Beast/Newsweek as their Washington Correspondent and covered local politics for the New York Sun.