Rick Perry says Social Security is a Ponzi scheme. What would happen if we got rid of it?

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Sept. 8 2011 5:32 PM

What Would Happen if Social Security Disappeared?

An Explainer thought experiment.

Rick Perry. Click image to expand.
Rick Perry

GOP presidential candidate Rick Perry repeated his characterization of Social Security as a Ponzi scheme in Wednesday night's debate, and insisted that the retirement program is unfair to young workers. If Perry is right, maybe we should end Social Security immediately. What would happen if we did?

Bad things, at least in the near term. As Jackie Calmes of the New York Times points out, the difference between Social Security and a Ponzi scheme is that people who have paid into Social Security will eventually collect their money. If the program ended tomorrow, they wouldn't, and Social Security really would become a Ponzi-like system. The results would be the same as when any massive economic fraud collapses—a calamity. Poverty among retirees would surge. The program represents 41 percent of the income for elderly Americans, and almost all of the personal income for a significant proportion of single retirees.

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Current workers and employers would see an immediate benefit, in the form of a 6.2 percent increase in income, because the tax that funds Social Security would disappear. But the economy as a whole would suffer for several years. The young are more likely to save and invest. That's good for the economy, but its salutary effects take longer to materialize than the immediate demand that the elderly create, since they spend their money as fast as it comes in.

The immediate redistributive effects of ending Social Security wouldn't be limited to young versus old—there would be geographic winners and losers as well. Since Social Security checks keep coming in no matter what happens to the local economy, the program tends to stabilize aging and struggling locales. If it disappeared suddenly, havens for the elderly (PDF) like Florida, the slow-growing farm belt, and shrinking cities such as Detroit would suffer badly. Major urban centers teeming with youth would fare relatively well.

Floridians and Midwesterners needn't lose sleep. Social Security isn't going to end tomorrow, because even its most vehement opponents realize the shock of abolishing it would damage the economy. Perry supports replacing Social Security with state programs. (He hasn't said whether states would be required to offer retirement insurance. Presumably, some might wash their hands of the whole eldercare business.) Others favor phasing the program out gradually, often as part of a transition to individual retirement accounts.

Regardless of how the transition were to occur, the long-term effects of ending Social Security are in dispute. Supply-siders argue that investment spurs the economy. Since Social Security takes money from likely investors (young working people) and hands it to those who will spend it immediately (retirees), they believe that ending Social Security would cause a permanent 5-percent increase in GDP. Keynesians, in contrast, think consumer demand grows the national economy, so transferring money to people who are more likely to spend is a good thing.

Social Security proponents argue that this theoretical debate is irrelevant, because people won't actually save for retirement unless they have to. They point out that workers with pension plans—another mandatory savings system—are unlikely to become poor during their golden years, while many people who were supposed to be socking away cash in 401(k)s and IRAs find themselves at risk. Some withdrew money for personal emergencies, others suffered from market swings, and a few simply didn't participate in the savings programs. Voluntary retirement plans also lack the risk-pooling benefits of Social Security.

There's a separation-of-wealth angle as well. Social Security opponents argue that the program prevents poor families from climbing the economic ladder, because money paid into the program can't be passed to future generations (PDF). (Poor people, and especially poor black people, are the most likely to die before collecting any benefits, so their payments into Social Security vanish.) Program advocates argue that this ignores Social Security's survivor and disability benefits.

Got a question about today's news? Ask the Explainer.

Explainer thanks Teresa Ghilarducci of the Schwartz Center for Economic Policy Analysis at the New School and author of When I'm Sixty-Four: The Plot Against Pensions and the Plan To Save Them, and Michael Tanner of the Cato Institute.

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