Posted on 25 September 2011
By Mark Miller
Words matter. And as the presidential campaign kicks in to high gear, some terms are being tossed around in ways that could be dangerous for current and future retirees. Those words and phrases include “entitlements” and “Ponzi scheme.”
The future of Social Security and Medicare, two critical lynchpins of retirement security, are shaping up to be critical issues in the race for the White House. As a columnist focused on retirement, I’ll be tracking what the politicians say about these programs from now through the 2012 election, and you’re welcome to follow along.
But this week, let’s straighten out the talk about Social Security, entitlements and Ponzi schemes.
An entitlement is not a bad thing by definition. In the context of Social Security and Medicare, entitlements are benefits that you are granted by law. You are entitled to the benefit not because it is welfare, but because you have paid into it over time. You can count on an entitlement because it’s a form of insurance, and it isn’t subject to the judgment of a caseworker or the spending priorities of budget makers.
This original — and accurate — meaning has been under attack since the days of the Reagan Revolution. One of the first shots was fired by David Stockman, the Reagan Administration budget director who famously called Social Security closet socialism and a “coast-to-coast soup line.” The word entitlement has been under sustained and successful assault ever since, with the result that most Americans now understand it as a four-letter pejorative term connoting welfare–handouts for people who don’t pull their own weight. It’s used that way by most Republicans, many Democrats and nearly all Beltway media.
One of the ironies here is that the architects of Social Security took great pains to distinguish it from welfare. Instead, it was designed to be social insurance, which pools risk broadly. You pay for protection while you’re working, so that you and your family will be protected when you can’t work.
When pollsters ask the public about Social Security or Medicare, the response is clear: Keep both programs intact. These responses are consistent across party lines and age groups. For example, a survey by pollster Celinda Lake for the National Committee to Protect Social Security and Medicare shows that Americans overwhelmingly reject the suggestion that Social Security contributes to the national deficit, or that benefits should be cut to reduce the debt.
But ask the public about entitlements, and you get a negative response. “Americans are less group-oriented and more individually oriented,” says Lake. “And entitlement sounds like something that is given to a group. When you describe this as an ‘earned benefit or a guaranteed benefit that you paid into,’ that sounds like something that is individualistic.”
Meanwhile, Gov. Rick Perry of Texas said this about Social Security at a recent GOP debate: “It is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you’re paying into a program that’s going to be there. Anybody that’s for the status quo with Social Security today is involved with a monstrous lie to our kids, and it’s not right.”
The Merriam Webster dictionary defines a 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.”
Social Security and a Ponzi scheme are as different as night and day. The perpetrators of Ponzi schemes lie to their investors; Social Security is an open and transparent system that issues an annual report every year prepared by trustees who project the program’s future 75 years into the future. Suggesting that the program is an unethical fraud or swindle is irresponsible.
What’s more, Social Security has never missed paying a dime’s worth of benefits, and it will be there 25 or 30 years from now. This year’s annual report of the Social Security trustees states that the program has sufficient funds to pay all benefits through 2036, when its Trust Fund is exhausted.
At that point, current revenue would allow it to pay about 77 percent of promised benefits — absent any changes or reforms.
If no changes were made, benefits relative to pre-retirement income for the average worker would fall from 36 percent to 28 percent. And that wouldn’t be the first time income replacement has changed; the 1983 reforms gradually reduced the rate from 41 percent to 36 percent, according to the Center for Retirement Research at Boston College.
I don’t expect that to happen; a far more likely outcome is reform that will keep Social Security on track to meet all its commitments. But even without changes, it’s not accurate to say that the program won’t be there.
Despite what you may have read, Social Security isn’t allowed to spend money it doesn’t have. And from the beginning, it was designed to be a pay-as-you-go system, in which each generation of workers supports themselves, their predecessors and those who come later. The program has lifted millions of seniors out of poverty — often easing or eliminating the need for young people to support aging parents. In fact, Before Social Security was created, many of the elderly poor went to the proverbial poor house –literally, alms houses or “poor farms” with abysmal living conditions and a lack of privacy.
So, Social Security is an intergenerational compact, not a Ponzi scheme.
Underlying the Ponzi scheme rhetoric is the notion that the baby boom generation is somehow putting something over on younger generations. The opposite is the case; the last set of reforms to Social Security in 1983 set the program on a path to build up its enormous Trust Fund surplus, which will peak at about $3.7 trillion in 2022. In other words, we temporarily diverted from the pay-go approach, and boomers already have paid in advance for their own benefits. That was done because the aging of the giant boomer generation was a fully foreseeable development, and policymakers took steps in 1983 to cushion the system.
Social Security adds pressure to our deficits only in the sense that its surplus is invested, by law, in a special form of Treasury note that is owed back to the fund by the U.S. Treasury. Those notes are full faith obligations of the government back to the SSTF, no different than any other Treasury debt. Politicians often refer to these bonds derisively as “IOUs,” but we don’t hear them talking that way about Treasury bonds held by the Chinese government.
All of which brings to mind a quote I’ve always liked that often is attributed to the late New York Senator Daniel Patrick Moynihan: “Everyone is entitled to his own opinion, but not to his own facts.”