Is Social Security a Ponzi Scheme?

MAKING SENSE -- February 10, 2012 at 10:40 AM EDT

Is Social Security a Ponzi Scheme?

Social Security cards. Photo via Wikimedia Commons.

Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here's Friday's query:

Gwynn Pealer: I thought I understood Social Security, but all this political [baloney] has me confused. I thought Social Security was like other pension funds where contributions were invested in a way so that it was not a Ponzi scheme. I understood that Social Security funds were invested in government bonds and that the taxpayers were expected to pay them back with interest. What else is the Social Security fund invested in?

Paul Solman: No, Gwynn, Social Security was originally designed as a "pay-as-you-go" system in which each succeeding generation of workers is supposed to take care of the last. But, of course, all workers are charged a "payroll" tax of 6.2 percent up to $110,100 in earnings (an increase of $3,300 from the 2011 max), as are their employers. (The employee half has been suspended again until Feb. 29.) That money is supposed to provide for today's retirees, as their Federal Insurance Contributions Act (or "FICA") taxes were supposed to pay for those who preceded them. To the extent that more money was collected than paid out in any given year, it was ostensibly set aside in a "fund."

But there is no escrow account. In fact, the money has been used to purchase U.S. Treasury securities -- to be blunt, loaned back to the U.S. government to cover its annual deficits. So the "Social Security Trust Fund" is nothing more nor less than roughly $2.6 trillion of U.S. bonds (IOUs), sold off to raise cash to the extent that benefit payments exceed payroll tax revenues in any given year. The problem: When Treasury bonds are sold off, the government has to refinance -- to again borrow the equivalent amount by issuing more U.S. bonds, dollar for dollar. Our best explanation of this, including a trip to the legendary Social Security Trust Fund "lockbox," aired back in 2001.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions.
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