Speaking at a town hall meeting in Nevada last week, freshman Rep. Joe Heck earned groans from a group of his constituents when he called Social Security "a pyramid scheme." A YouTube video has brought the remarks additional attention, much of it critical.
"What I was trying to bring across was the fact that since 1955, we've seen a steady decline in the number of people paying in versus the number of people collecting," Rep. Heck told a Las Vegas TV channel. "Eventually that's going to become a crisis because Social Security will have more money going out than coming in." Rep. Heck added that it would be "irresponsible not to take the estimates of Social Security's financial challenges seriously."
Perhaps "pyramid scheme" was a poor choice of words. "Ponzi scheme" -- an enterprise in which the operator promises unrealistic returns which never occur, funneling money from new investors directly to earlier marks -- would be more accurate. But regardless, Rep. Heck's only real mistake here was telling senior citizens something many of them don't want to hear.
Economist Noel Sheppard notes, "Much as in the original Ponzi scheme, Social Security also paid huge returns to its first investors who, whether intentionally or not, led Americans to believe the plan worked marvelously, thereby engendering the support of an exceedingly grateful nation."
The first recipient of a monthly Social Security check, retired Vermont legal secretary Ida May Fuller, received $22,888.92 in payments from Jan. 31, 1940, to her death in 1975. The amount she had paid in before retirement? $24.75.
Although Social Security was devised to have the appearance of an insurance or annuity plan, the U.S. government doesn't invest incoming Social Security "premiums" in any trust. The so-called trust fund holds only non-negotiable IOUs. The "premiums" of today's retirees were spent long ago, and retirement benefits are paid from money currently flowing in from younger workers. That's why politicians can't allow younger workers to opt out.
Not wanting to hear such things doesn't mean they're not so.
Now, Mr. Sheppard writes, "Seventy years after our government implemented a Ponzi scheme of its own ... the real investors (a.k.a., the baby boomers who have paid into this program since they received their first paychecks, while absorbing numerous increases to the required contributions) are concerned that there won't be enough money available to fund their own retirements."
Those fears are warranted -- especially if nothing is done.
Politicians including Rep. Heck shouldn't back down for correctly analyzing the problem, no matter how unhappy such frankness makes the beneficiaries. That's the necessary first step if we're going to unwind this thing without leaving future retirees entirely in the lurch.