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September 12, 2011

Perry Defends Social Security Reform

This is a political article, not a policy one, however, all policy responses rely as a first step on marshaling the political will to address the problem at all.

As they say of alcoholics, you can't do something about your drinking problem until you first recognize the problem.

These are the hard facts: Social Security's unfunded liability is calculated in the trillions of dollars. Last year, annual Social Security outlays exceeded annual revenues for the first time since 1983. The Congressional Budget Office projects that outlays will be roughly 5% greater than revenues over the next five years, worsening as more and more Baby Boomers retire. By 2037, retirees will only get roughly 76 cents back for every dollar that is put into Social Security unless reforms are implemented. Imagine how long a traditional retirement or investment plan could survive if it projected investors would lose 24% of their money?

I am going to be honest with the American people. Our elected leaders must have the strength to speak frankly about entitlement reform if we are to right our nation's financial course and get the USA working again.

For too long, politicians have been afraid to speak honestly about Social Security. We must have the guts to talk about its financial condition if we are to fix Social Security and make it financially viable for generations to come.

USAToday responds with its own editorial opinion:

A Ponzi scheme? A failure? A lie? Really?

Yes, Social Security has major funding problems. It pays out more in benefits than it takes in, and the gap will grow steadily worse as Baby Boomers retire. To that extent, Perry has a point. Congress, under both Republican and Democratic control, has been negligent in making necessary adjustments to bolster Social Security's balance sheet for the long term. But the program's problems are largely the result of people living longer, and therefore collecting more in benefits, rather than some inherent structural shortcoming or constitutional failing.

People have been living longer for as long as people have lived in America. The problem was recognized with particular acuteness in the 80s, and payroll taxes raised in order to create a funding pool when needed later. (Of course, Washington spent this money as if it were current operating revenue.)

This is pretty quibbly on the part of USAToday -- whining that while everything Perry says it's true, it's not an "inherent structural problem."

It seems to me that if the government does not take into account actuarial facts and builds in a permanent revenue/spending imbalance into a program, that's sort of "inherent."

USAToday speaks as if just in the past couple of years a new anti-aging Wonder Drug began extending people's lives by 12 years. Not so.

Social Security is most certainly not a Ponzi scheme, which is an undertaking designed to swindle people out of their money by using incoming revenue to produce bogus investment returns to attract more money (see Ponzi, Charles and Madoff, Bernard).

A Ponzi scheme also relies on a permanent supply of new investors to always pour fresh money into the scheme, and cannot actually work unless the investor pool is always growing. It can never be self-sustaining (let alone profitable) if there is not an expanding pool of dupes.

It has long been known that the Baby Boom generation was a huge cohort, and that we would have severe demographic problems with Social Security due to the fact that the generations that came after the Baby Boom were so small, by comparison.

Politicians expanded benefits to the smaller pre- Baby Boom generations, and could get away with doing so, because the Boomers were so numerous in comparison to their elders.

But they always knew that when the Boomers stopped paying into the system and began taking money out of the system, there was going to be a problem.

And yet the program was not modified at all-- the politicians assumed that somehow we would simply create millions of new young taxpayers to pay the costs of the Boomers' retirement, even though not enough children had actually been born to satisfy this revenue requirement.

Seems kind of worse than a Ponzi scheme -- in a Ponzi scheme, at least, it is hypothetically possible you can find new suckers and keep the boondoggle running. In the case of Social Security, it has long, long been known as an absolute mathematical fact that there were not enough new suckers in existence to make it work.

Others continue whining about the term.

“The critical thing that makes a Ponzi scheme despicable to me is the fraud, and Perry’s exaggerating a little bit if he’s implying that there is fraud,” said Harvard Law professor Mark Roe.

The Democrats, and now their spirit squad, the Media, all insist that there is no problem at all here; is that not a fraud?

While Perry’s choice of words may not be completely accurate, they are not entirely off-base either. Young people are paying into a system with the promise of receiving retirement benefits later in life when, in fact, the system in its current form may not be able to pay those benefits starting in 2036. “I think it’s more true than not,” said Michael Tanner, a senior fellow at the conservative CATO Institute. “You rely on the next generation of taxpayers who will pay into the system to pay your benefits.”

I thought Perry's blunt talk would get him into more trouble than it seems to have actually gotten him. He may have placed a bet that the public was in the mood for some Chris Christie-like bluntness; so far, at least for the Republican primary electorate, he hasn't lost that bet. Yet.

The most interesting part of tonight's debate will be how Perry deals with Romney's (and now Bachmann's) claims that he plans to "abolish" Social Security. They seem to have simply made this up, and are just relying on the public accepting their say-so on the claim. Perry could, and just might, call them liars to their faces; that would be high drama.

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posted by Ace at 12:40 PM

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