Ethics & Public Policy Center

Perry and the Ponzis

Published in National Review Online



Is Texas governor and Republican presidential candidate Rick Perry a courageous and welcome truth teller for calling Social Security a Ponzi scheme, or is he being needlessly provocative instead? Or maybe you think Perry’s Ponzi comparison is just plain wrong. I favor the truth-teller option, but the debate will surely go on.

In any case, it’s certain that Perry’s Ponzi-scheme claim is in no way original. Not only have a raft of conservatives called Social Security a Ponzi scheme over the years, quite a few very respectable liberals have done so as well. It is clearly wrong either to treat the Ponzi-scheme analogy as unprecedented or to rule it altogether out of legitimate public debate. A historical tour of the use of the Ponzi-scheme metaphor will make the point.

Jonathan Last has already identified a 1967 Newsweek column by liberal economist and Nobel laureate Paul Samuelson as perhaps the earliest use of the Social Security/Ponzi-scheme comparison in public argument. Samuelson was actually drawing on the Ponzi analogy to defend Social Security. His claim was that the perpetual succession of human generations establishes the conditions for a sustainable Ponzi scheme. Regardless of whether Samuelson was the first commentator to use the Ponzi analogy, he has clearly been the most influential. Policy briefs and books churned out by conservative think tanks such as Heritage and Cato have cited Samuelson’s Ponzi column for years. This is likely how the comparison made its way into public debate.

Samuelson’s idea that Social Security could best be understood as an enduring and rational Ponzi scheme grew out of his “overlapping-generations model,” introduced in a seminal 1958 paper. Samuelson’s model implied that public debt in general, and Social Security in particular, could be financed over successive generations without major tax increases. In the 1980s, Samuelson’s overlapping-generations model was seized upon by Keynesian economists to serve as a microeconomic foundation for their favored theories and plans.

The unfortunate weakness of Samuelson’s model is its assumption that a growing economy will produce continual population increase. In an April 1978 follow-up in Newsweek to his original 1967 column, Samuelson acknowledged that demographic reality was disproving this assumption. Samuelson repeated his use of the Ponzi analogy and continued to defend his hopes for Social Security as best he could. While Samuelson hung onto some slim indications in 1977 that U.S. fertility might be on the upswing, it grew increasingly clear to critics that the post-Baby Boom decline in births was not going to be reversed. Increasingly, Samuelson’s Ponzi-scheme analogy was seized upon by those who doubted Social Security’s long-term soundness.

In an April 1999 Los Angeles Times op-ed titled “Ponzi Game Needs Equitable Solution,” for example, Stanford University economists Victor Fuchs and John Shoven hark back to Samuelson’s 1967 column, noting that his demographic optimism had proved wrong. While turning the Ponzi analogy into a criticism of Social Security’s soundness, Fuchs and Shoven nonetheless argue against private investment accounts—a favorite solution of conservatives. Fuchs is hardly a rightist; for instance, he co-authored an ambitious and controversial universal-health-care proposal with Obamacare architect Ezekiel Emanuel. Apparently, Samuelson’s Ponzi analogy has shaped the Social Security debate for figures across the political spectrum.

A watershed moment in the public realization that low population growth spells trouble for Social Security was the 1987 publication of Ben Wattenberg’s book The Birth Dearth. Wattenberg, who once worked for Lyndon Johnson and Hubert Humphrey, was by the late 1980s a centrist Democrat, hawkish on defense and otherwise alternately allied with the right or left, depending on the issue. Although many rejected Wattenberg’s claim in The Birth Dearth that a crisis of population decline loomed, time has vindicated his warning.

In a U.S. News & World Report cover story excerpting The Birth Dearth, Wattenberg sums up his argument by saying: “In short, Social Security is a Ponzi game, a pyramid scheme, a chain letter.” In a December 1995 column, Wattenberg makes the point again, calling both Social Security and Medicare “chain letter games.” Implicitly echoing Samuelson, Wattenberg adds, “There’s nothing inherently wrong with a Ponzi game. Life itself is such a game.” The problem, Wattenberg continues, is that the success of the Ponzi game called life hinges on higher birth rates than we’ve been able to produce.

We’ll see more examples of liberals and Democrats calling Social Security a Ponzi scheme, but let’s first note that from the mid-1980s on, the Ponzi analogy became a staple for conservatives. In an August 1985 editorial commenting on Social Security’s 50th anniversary, the Wall Street Journal says the system was designed like a Ponzi scheme. A July 1994 Chicago Tribune column by Cato Institute head Edward Crane dubs the offices of the Social Security Administration “home of the world’s largest Ponzi scheme.” A 1995 piece by conservative columnist Michael Barone argues that “…many more voters under 50 realize that Medicare and Social Security are Ponzi schemes in which the benefits they’re paying for today will be impossible to collect in the future without unthinkable tax increases.” There are a great many more examples of conservative and libertarian columnists and editorial boards calling Social Security a Ponzi scheme.

Politicians and their aides, on the other hand, even conservatives, have been much more cautious. There are rare exceptions; invariably they prove the rule. In December of 1988, Ronald Reagan’s budget director, James C. Miller III, made news when he called Social Security a Ponzi scheme before an audience at the National Press Club. Miller, however, had just left the Reagan administration and acknowledged that he would not have spoken as frankly while still in government—especially not before an election. In September 1994, conservative columnist Jeff Jacoby made the same point: “Not being a politician, I can say anything I like about Social Security—even the truth. And the truth is that Social Security is an immense Ponzi scheme that is slowly bankrupting young Americans in order to enrich their elders.”

The continuing popularity of the Ponzi-scheme claim has provoked some pushback. In a January 1997 op-ed in the Washington Post, left-liberal Robert Kuttner wrote: “Critics of the system call it a giant Ponzi scheme. But as long as the economy and its tax base keep growing, there is nothing wrong with taxing current workers to finance current retirement.” Kuttner’s very large economic and demographic “ifs” have not panned out, of course.

In June 1996, Pensions & Investments ran an opinion piece headlined “Social Fund Isn’t Really a Ponzi Scheme of IOUs.” The column argued that Social Security was not a “swindler’s scheme,” but “openly and fully debated public policy.” As we’ll see, however, not only the financing, but the deceptive character of Ponzi schemes have clear echoes in our Social Security debates—and commentators know it.

A surprising number of those commentators are liberal. In the fall of 1995, Robert J. Shapiro published an article called “Rethinking Social Security: The New Deal’s Crowning Achievement Has Fallen and It Can’t Get Up,” in The New Democrat, a forum for the centrist Democratic Leadership Council. Shapiro was a co-founder and vice president of the Progressive Policy Institute, an undersecretary of commerce in the Clinton administration, and the principal economic adviser to Bill Clinton’s 1991-92 presidential campaign. Shapiro was also a senior economic adviser to the presidential campaigns of Al Gore and John Kerry, and advised the presidential campaign and transition of Barack Obama as well.

Shapiro’s 1995 article complains that Social Security, as currently structured, is crowding out funding for young children, who suffer poverty at twice the rates of the elderly. Shapiro proposes reforms including mandatory private savings accounts, and calls on Americans to “end our long collective silence about the character and problems of Social Security.” The first section-heading in Shapiro’s piece reads “National Ponzi Scheme.” There Shapiro recalls Samuelson’s 1967 Ponzi comparison and suggests that, given today’s demographics, Social Security is”fiscally unsustainable” without major restructuring.

In January of 1996, just a few months after Shapiro’s article appeared, Pulitzer Prize-winning Washington Post columnist William Raspberry published a piece on Social Security titled, “Numbers That Won’t Go Away.” Although he’s no conservative, Raspberry argues that “[Social Security] is, in important ways, like a massive Ponzi scheme in which early participants are paid off with money put up by later ones.” Raspberry then asks if Social Security will collapse, “as Ponzi schemes inevitably do.” The piece makes it clear that Raspberry fears just such a collapse. He ends his column by asking: “Why aren’t the White House and congressional negotiators talking about these things?”

A bit later that year, in May of 1996, liberal columnist Jonathan Alter published a piece in Newsweek suggesting that former Democratic Colorado governor and erstwhile Clinton supporter Richard Lamm might run for president as the candidate of Ross Perot’s Reform party. Cynics might suspect that Alter’s glowing treatment of Lamm was motivated by an interest in damaging Republicans by puffing up a third-party bid. In any case, Alter lauds Lamm for his “straight talk” on Social Security. Lamm is praised as a “truthteller” by Alter for being willing to say, among other things, that Social Security is a “well-meaning Ponzi scheme.” Today, of course, the very liberal Alter is a sympathetic biographer of Obama and one of the president’s most supportive media cheerleaders.

Around the same time, Matthew Miller, a senior writer for The New Republic, published a long piece on the future of Social Security. Miller begins his TNR article by recounting the U.S. Senate hearing on Social Security at which he and others had just testified. Miller praises Republican Sen. Alan Simpson for treating social security commissioner Shirley Chater at the hearing as though she were peddling “an audacious hoax.” Miller goes on to say: “Only a grinch could grumble about the most effective anti-poverty program in history; but only a fool would fail to ask whether the Ponzi scheme is sustainable, and at what price.” At another point Miller calls Social Security’s actuarial troubles “Ponzi’s revenge.”

In his piece, Miller advocates what he calls a “sensible middle ground” between Social Security privatizers (mostly libertarians and conservatives), on the one hand and leftist social democrats on the other. Miller calls his preferred position “progressive” and associates it with the bipartisan reform efforts of Republican senator Simpson of Wyoming and Democratic senator Bob Kerrey of Nebraska. At the time, Simpson and Kerrey were proposing changes such as mandatory savings accounts, means testing, and raising the retirement age. Miller ends by bemoaning the refusal of politicians to be honest about the issue, especially during presidential campaigns.

Widely admired for his blunt and folksy language, Senator Simpson was making news at just this time by garnering attention for his proposed Social Security reforms with aggressive use of the Ponzi-scheme point: “This is a Ponzi scheme, and people don’t know that,” said Simpson in August of 1996. Earlier that year he’d told an interviewer, “But everybody is asleep. Young people are paying more in Social Security than they are in income tax, and it’s going down a great big rathole—a Ponzi scheme.” Simpson’s plainspoken willingness to face our debt crisis, and his proven ability to work on the issue with Democrats, led to his eventual appointment as co-chair of President Obama’s debt commission. Apparently, at least some Republicans honest enough to call Social Security a Ponzi scheme have been rewarded—by Democrats, no less.

In December of 1996, liberal Michael Kinsley published a piece at Slate titled, “Social Security: From Ponzi Scheme to Shell Game.” Kinsley’s article is critical of Social Security privatization, but he’s more than willing to concede that the program’s troubles are real. According to Kinsley, “the essential truth about Social Security” is that “it is a Ponzi scheme.” Demographics, Kinsley adds, mean that “the Ponzi scheme cannot go on.” The only remaining question, Kinsley says, is exactly how and when the Ponzi scheme will collapse. Later in the piece, Kinsley affirms (for the fourth time, not counting the title) that “Social Security is a Ponzi scheme.”

Two years later, in March of 1998, then former New York Times executive editor Max Frankel turned one of his regular columns in The New York Times Magazine to the subject of Social Security. The piece was a scathing attack on “fraudulent” SocialSecurity accounting by both political parties. Frankel called the bipartisan happy talk about Social Security an “elegant lie.” Said Frankel: “For more than 30 years, Presidents and Congresses have pretended that the Social Security Ponzi scheming between the generations will never explode in their lifetimes.” Argued Frankel, “…the majority of voters have been misled.”

Remarkably, Frankel ends by chastising the media—including his own paper—for failing to challenge false claims by politicians for the system’s soundness. Frankel seems to crave nothing so much as a politician or reporter courageous enough to boldly make the Ponzi-scheme point.

Our historical tour of the claim that Social Security is a Ponzi scheme confirms what we already knew: Rick Perry’s remarks are uncharacteristically bold for a politician, most especially a candidate in the midst of a presidential race. Yet Perry’s Ponzi-scheme claim is in no way unprecedented. On the contrary, the Ponzi comparison has been a staple of conservative warnings about Social Security’s financial soundness for decades. More intriguing, the Ponzi scheme analogy was popularized by a liberal Nobel Laureate economist, who initially offered it as a defense of the system, acknowledging only later that his defense was at least partially flawed. In the decades that followed, many honest liberals have made the Ponzi scheme comparison in the course of calling for systemic reform. Those liberals have bemoaned bipartisan deception and timidity on the Social Security issue, and praised those rare and courageous political souls, such as Alan Simpson, who were willing and able to call a Ponzi scheme by its real name.

So the question today is not simply whether Rick Perry will be punished or rewarded for showing the honesty even many liberal commentators once pined for. The more interesting issue raised by this historical investigation may be the fate of the Democratic party and the media. Where today are the liberal and centrist Democrats who only yesterday called Social Security a Ponzi scheme and supported bold reforms? Where now are the columnists and editors at Newsweek and the New York Times willing to reward truth-tellers and to criticize reporters who cover for cowardly politicians? The fate of Rick Perry’s blunt talk may tell us more than we want to know, not only about Social Security, but also about who we are and what we have become.

Stanley Kurtz is a senior fellow at the Ethics and Public Policy Center, and the author of Radical-in-Chief.

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