Charles Ponzi Mug Shot Circa 1920's

Texas Governor Rick Perry recently made headlines by calling the Social Security system a “Ponzi scheme.” CNN issued a “verdict” on Perry’s statement, which called it “false” and asserted: “Contribution levels will have to be raised in order to avoid future benefit cuts, but it is not a “monstrous lie” to say the program will continue even if nothing is done.”

Who’s telling the truth?

Websters defines “Ponzi scheme” as follows: “An investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.”

According to the U.S. government’s Securities and Exchange Commission website, ”With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”

If Governor Perry is right, then we would expect the SEC’s scenario to play itself out. To see if that’s happening, let’s look at the numbers.

According to the report at the CNS link above, in 1945 there were 41.9 “covered workers” for per beneficiary. Now, according to data recently released by the U.S. Government’s Bureau of Labor Statistics and the Social Security board of trustees there are only 1.75 full time workers in the U.S. private workforce for every American “covered” by Social Security payments. In other words, for each person receiving Social Security, there are fewer than two people paying into the system.

How much are they paying in?

In 2011, American workers must pay 4.2% of their first $106,800 of income as Social Security tax. Their employer pays another 6.2%, for a total tax per worker of 10.4%.

So if each worker and his or her employer pays 10.2% of their pay into the system, and there are 1.75 workers paying for each Social Security beneficiary, that means beneficiaries must live on 1.75 x 10.2%, or 17.85% of an average American worker’s pay. If more than that is paid out to them, then the system is performing exactly as the SEC said Ponzi schemes tend to do just before they collapse.

How likely is it that a person could live on 17.85% of your pay?

In the words of Webster’s Dictionary and SEC . . .

“Early investors” in the Social Security system have been “paid off with money put up by later ones.” Now the system “require[s] a consistent flow of money from new investors to continue,” yet it has “become difficult to recruit new investors” and “a large number of investors [are asking] to cash out.”

It seems Governor Perry has the math firmly on his side, and CNN should take a course in basic arithmetic, not to mention ethics. They would have us believe that a Ponzi scheme is not a Ponzi scheme if one can “raise” the “contribution levels.” In other words, it’s not a Ponzi scheme so long as we can keep finding enough rubes to pay into the con.

Charles Ponzi is probably smiling in his grave.