Congress' Ponzi scheme

Some good could come out of the Bernard Madoff Ponzi scandal if it finally leads Americans to do something about the Old Age, Survivors and Disability Insurance (OASDI) program otherwise known as Social Security.

Mr. Madoff alledgedly has confessed to running a "giant Ponzi scheme" for a small pool of wealthy investors, reportedly losing $50 billion (see Eric J. Weiner's column on today's Commentary Page). Charles Ponzi gave his name to this kind of scam in the 1920s when he was caught paying off old investors with funds deposited by new ones.

The last time we heard the term "giant Ponzi scheme" was during the debates about "saving Social Security." Advocates of the current system dismiss the phrase as a slur. But the essence of Social Security is paying past investors from current investments. Workers who made payroll tax contributions during their employment years are entitled to Social Security checks when they retire. Those checks are drawn on funds being deposited by the current work force. They are known in government accounts as "transfer payments."

Given inexorable demographic trends, we all know that the number of retirees is growing faster than the work force, which ought to raise a question about the long-term viability of this transfer scheme. The point at which a Ponzi scheme breaks down is the point at which its newest investors fail to put in enough to satisfy the claims of all the shareholders.

There is another wrinkle to this transfer scheme that also ought to raise questions. For the past 15 years, the government has collected more payroll tax revenue than it needs to meet current demands. The extra revenue is "saved" to meet future demands when the number of retirees will increase. The unspent OASDI funds are used to buy special Treasury bonds that will, with interest, be repaid in due time. But the Treasury uses the receipts from bond sales to meet current expenses. And future taxpayers will have to come up with the funds to cover the bonds. In short, current investors in the OASDI fund are being asked to cover not only current transfers to Social Security beneficiaries, but also a part of the general federal deficit. Even with the bonds there won't be enough money in the fund to meet future demands. Although the date of this collapse is uncertain, it is inevitable unless there are serious changes.

Not enough people have complained about the risks in this fiscal sleight-of-hand, possibly because collapse seems a distant worry. Maybe seeing the pain caused by Bernie Madoff will make a difference.