Discuss as:

Of Social Security and Ponzi schemes

During Wednesday's Republican debate, Gov. Rick Perry reiterated his belief that Social Security is a "Ponzi scheme."

By John Schoen and Allison Linn

In the Republican debate Wednesday night, Presidential candidate Rick Perry again called Social Security a Ponzi scheme.

“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,” Perry said during the debate.

A Ponzi scheme, named after investing fraudster Charles Ponzi, is a type of investment fraud in which someone convinces people to invest their money in a product, usually promising very high returns.

In a Ponzi scheme, however, there is no investment. Instead, the fraudster is using the new client’s money to pay off the old clients, and often for personal use as well. The scheme usually falls apart when people try to cash out and realize that there was no real investment in the first place.

The major marker of a Ponzi scheme is that the person running it was lying about how the money was invested. The most famous recent Ponzi scheme involved Bernie Madoff, who is currently in jail after swindling people in a multibillion-dollar scam.

Social Security is much like many other public and private pension systems that operate throughout the country, and the world.

It works like this: People pay a percentage of their earnings into the fund throughout their lifetime, with the promise of getting a consistent payment back when they retire. Millions of Americans rely on Social Security payments for expenses in retirement

Social Security has drawn criticism because it is at risk of becoming underfunded. That’s because the general population is aging, leading to worries that the system will fall short as more Baby Boomers retire and start drawing Social Security checks.

There have been overhauls before, such as under President Reagan.

Much like that 1980s-era overhaul, most people agree that Social Security now needs to be updated to account the fact that people are living longer.

One simple way to get the program back on track would involve raising the age of eligibility for future retirees -- whose longer projected lifespan means they’ll be collecting longer than previous generations. (The age of eligibility already rises gradually based on your birth year.)

Another proposed change would slow the future cost of living adjustments -- which some economists have argued currently rises faster than wage growth. These two changes -- which would not cut current benefits by a dime -- would go a long way to fixing the projected shortfall decades from now.

Critics of the Social Security system also argue that the government is “borrowing” money from the trust because it holds a large surplus of Treasury bonds. But any pension fund, insurance company or other financial entity with future obligations has to set aside money for future claims. U.S. Treasuries are one of the safest places to put that surplus. Some have argued that the trust fund should invest in stocks, but the money has to go somewhere.