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Editor's Letter

Social Security: Not a Ponzi Scheme

It has been around for 76 years and is a model for private pension systems

When he signed the law creating Social Security, Franklin D. Roosevelt believed the program was so well insulated that "no damn politician" could tinker with it.

He was right to worry.

The linchpin was the payroll tax demanded of all workers. Once they paid into the Social Security system, he calculated, they would have a stake and never abandon it.

See also: Older Americans rely on Social Security, Medicare.

For decades now, his foresight has been vindicated. Beneficiaries hail the system, and still, the damn politicians can't stop trying to tinker.

Over three generations, a smattering of politicians and economists, from libertarians to liberals, have blasted the system as wasteful and dishonest and more recently have trivialized it as little more than a Ponzi scheme.

You could fairly ask which Ponzi scheme are they talking about, because the dapper Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi had lots of them.

Always promising high returns, he hatched land, banking and postage stamp scams whose early payouts were financed by funds from later investors. The schemes spiked in value in a matter of weeks and collapsed just as quickly. His biggest scheme, for example, exploited differing exchange rates of the dollar and European currencies and collapsed so suddenly that six Boston banks failed with it. That left later investors looking for cash and sent Ponzi to jail for the third time.

The reasons Social Security is not a Ponzi scheme, or even close, are numerous. Most importantly, it has endured — for 76 years and never missed a monthly payment. Its characteristics make it a model for private pension systems: Contributions are mandatory. You can't dip into your savings until you're eligible. Benefits are pegged to inflation. The financing is secure. There are no fees, and administrative costs are practically nothing.

So why the fuss? Politics, mostly, plus simple math and demographics. A soaring federal deficit, a declining number of workers per Social Security beneficiary and the growing number of older people living longer put new pressures on the Social Security trust fund. But instead of making the minor adjustments that would strengthen the system, the budget critics have a different agenda. They hope to raid it or privatize it or end it.

The most important challenge facing our nation is finding a balance between our desire for our government's services and protection and our willingness to pay for them. Strengthening Social Security is a fair test. Anyone doubting its value need only check the latest national poverty statistics. More Americans slid into poverty in the past year than at any time in the past four decades. Most vulnerable were people 55 to 64, one in 10 of whom now live below the poverty line. Over 800,000 people 45 to 64 lost health insurance. By contrast, the economic turmoil of the past year drove far fewer Americans over 65 into poverty. No surprise. That's the segment of the population protected by Medicare and by Social Security — the Ponzi scheme that isn't.

Also of interest: Latinos rely on Social Security. >>

Jim Toedtman is editor and vice president of AARP Bulletin.

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