Monday 19 September 2011

Why Rick Perry is wrong about Social Security

Republican presidential candidate Texas Gov.  Rick Perry apparently has backed off his assertion Social Security is a Ponzi scheme, saying now the entitlement program just needs fixing, not scrapping.




In the California debate of GOP presidential candidates earlier this month and in his book before that, Perry charged Social Security is a Ponzi scheme and those who want to maintain the status quo are lying to young workers just starting to pay into the system.


But last week in a USA Today commentary and during a debate in the battleground state of Florida, the governor modified his stance: "We must have a frank, honest national conversation about fixing Social Security to protect benefits for those at or near retirement while keeping faith with younger generations, who are being asked to pay."


Not exactly sticking to his Ponzi scheme comparison.


Social Security taxes current workers to fund the benefits of current retirees. Retiring baby boomers can begin collecting 75 percent of benefits at age 62 but cannot collect full benefits unless they wait until they hit 66. Currently, the top earners receive a monthly payout of $2,366. Complicating the finances, the disabled become eligible for benefits at any age.


A Ponzi scheme relies on new money to pay off old investors who were promised high returns. During last week's debate in Tampa, Perry refused to rise to the Ponzi bait raised by the moderator.


After reassuring current and soon-to-be recipients they would still get Social Security payments, Perry said no one's had the courage to say it's "a broken system."


Except that Gornto's figures assume that a worker retiring with a $75,000 salary made that very amount every year for 40 years, which obviously would not be the case.


If one assumes instead that the worker reached $75,000 after receiving raises averaging, say, 2% a year, my back-of-the-envelope calculation yields a nest egg closer to about $463,000, which would yield a monthly payout of less than $2,800, using Gornto's formula.


Moreover, Gornto's projected payout lasts only 20 years. After that, the worker receives nothing. Social Security, by contrast, pays for life.


"What happens after those years are up and you still want to have a roof over your head?" asks Robison, the Galveston retired court clerk.


Unlike Social Security recipients, Galveston retirees don't have inflation protection. (Inflation has been quiescent over the last few years, so there haven't been cost-of-living increases for Social Security lately, but plainly that's not a permanent condition.)


That's a huge drawback of the Galveston plan. After 15 years of inflation at 3% annually our sample retiree's $4,470 would have the buying power of about $2,830; after 20 years it would be down to $2,431 — a reduction by nearly half.


Run into a period of double-digit inflation, such as what prevailed in the early 1980s when the Galveston plan was created, and the impact would be even more devastating.


All these niceties help explain why the two most detailed comparisons of the programs, performed in 1999 by the General Accounting Office and the Social Security Administration, concluded that the Galveston plan would be a poor substitute for Social Security for the vast majority of workers and their families. That's especially true when you factor in survivor and dependent coverage.

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