Ronald Reagan Wasn’t a Ponzi Schemer
And Social Security isn’t a scam. Why Reagan supported and improved Social Security.
At a recent WisPolitics luncheon, Senator Ron Johnson told the audience that Social Security should be privatized because “it is a legal Ponzi scheme.” Moreover, the bonds in the Social Security Trust Fund are worthless because one branch of government owes money to another branch; “it cancels out to zero.” In doing so, he joins fellow Republicans Marco Rubio and Chris Christie in demonstrating a misunderstanding of both Social Security and Ponzi schemes. When such false claims are made by leaders of this stature, it is no wonder that young people fear that the program will not be there for them despite a lifetime of paying into the system. That fear was stoked by David Barnes in a recent op ed for the Milwaukee Journal Sentinel, “Millennials deserve a better deal than Social Security.” Barnes is the Policy Director of Generation Opportunity, an organization supported by the Koch brothers, who have long favored privatization.
A Ponzi scheme attracts investors by the promise of very high returns. It works in a sequence: early investors receive their returns from the money invested by later investors. As the high returns get paid, the news travels fast, and round after round of investors gleefully invest. As long as each successive round of investors is sufficiently larger than the one preceding it, the promised returns can continue to be paid, with the scheme organizers reaping huge profits as well. Eventually, however, the laws of arithmetic catch up with this ruse. It becomes impossible for each succeeding investor group to be ever larger; the scheme collapses into lawsuits by disappointed investors and, as in the cases of Bernie Madoff and Charles Ponzi, with prison terms.
By contrast, Social Security is remarkably solvent; the system is going strong after 80 years, never having missed a payment. It is an insurance program that most workers are forced to participate in by paying a payroll tax as their contribution to insure against poverty in their old age. It is designed as a “pay-as-you-go” system: current workers pay for current retirees in the expectation that, when they retire, future workers will pay for their Social Security benefits.
The boomers’ forced savings were invested in special issue US Treasury bonds that can only be traded between the US Treasury and the Social Security Administration. These bonds constitute the Trust Fund. During the years that Social Security holds these bonds, Treasury has the cash to invest in growth-enhancing assets like roads, bridges, broadband, and port facilities. During the years when payroll tax revenue is insufficient to pay retirement benefits, either due to the large number of retirees or setbacks such as the Great Recession of 2008-09, the bonds can be traded in for cash. The bonds are definitely not worthless; they represent money loaned to the general public by boomers during their work years to be repaid later during the boomers’ retirement years. If the bonds were worthless, as Senator Johnson believes, then the Reagan plan would have been massive theft. Fortunately, Ronald Reagan was no Charles Ponzi!
In the original 1985 plan, the payroll tax rate was calibrated so that the bonds would run out around 2060 after all but the most persistent boomers will be dead. However, the combination of slower-than-projected economic growth plus the blessing of longer life will exhaust the bond fund around 2034. At that point, the payroll tax revenue will be about 79 percent of what is required for scheduled benefits. Consequently, just like a private insurance plan adjusts to changing demographics and returns on endowment, adjustments will be required to Social Security. Small changes, such as an increase in the eligibility age or raising the top end of the taxable income range, can be phased in to make up for the shortfall. This hardly constitutes a crisis. But privatization is impossible: there is no money to privatize unless some generation wants to pay twice, once to pay retiree benefits and once to set up a private fund. That’s why Franklyn Delano Roosevelt was confident in saying, “no damn politician can ever scrap my Social Security program.”
William L. Holahan is emeritus professor and former chair of the Department of Economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke is retired dean of the College of Business at UWM. They are co-authors of “Economics for Voters.”