Reforming the ‘Ponzi Scheme’: How Herman Cain, Bernie Sanders Would Fix Social Security

Texas Gov. Rick Perry says Social Security is a Ponzi scheme. Craig Ruttle/AP Photo

Social Security has become a punching bag of sorts within the Republican presidential field after decades as the untouchable third-rail of politics.

Texas Gov. Rick Perry called it a “monstrous lie” and a “Ponzi scheme.”  Mitt Romney said in his book that the government was “defrauding” the American people and in a 2010 interview with Fox News Michele Bachmann said it was a “tremendous fraud.”

But while there is broad agreement that the retirement program needs reforms, there is little consensus on how to fix it. According to Congressional estimates, the Social Security trust find will run out of cash in 2037 — the disability program in 2017.

One proposal, which businessman Herman Cain suggested during Monday’s CNN/Tea Party Express debate, is to model the federal plan on one used by county employees in Galveston, Texas.

“The city of Galveston, they opted out of the Social Security system way back in the ’70s and now, they retire with a whole lot more money,” Cain said at the debate. “Why? For a real simple reason — they have an account with their money on it. What I’m simply saying is we’ve got to restructure the program using a personal retirement account option in order to eventually make it solvent.”

Galveston County was one of three counties to successfully opt-out of Social Security in 1981. Instead of paying into the federal retirement plan, county workers now pay into a private fund that is managed by the county.

Galveston County Judge Mark Henry said he thinks the plan works “fantastically.” He said Galveston’s system gives employees a peace of mind at a time when the long-term solvency of Social Security is in question because they know their retirement benefits are secured in private investment accounts.

“The benefits are much better and we are not at the mercy of a diminishing fund,” Henry said. “It is working excellently for our country so I do not see why it couldn’t work nationwide.”

A major difference between the Galvestonplan and Social Security is that the benefits a county employee receives are directly proportional to the contribution he or she paid in while working.

Social Security pays proportionately more to lower-income workers under the rationale that people earning near minimum wage have less money to invest in personal retirement accounts.

For example, under the Galveston system, very high income earners would bring in about $1,400 more a month than if they participated in Social Security, but low-income workers receive about $33 less under the Texas plan, according to a 1999 report by the Social Security Administration.

Paul Van de Water, a senior fellow at Center on Budget and Policy Priorities, said the Galveston plan is “not desirable” on a national level.  ”The most likely result is you’d have a wider disparity of income among elderly people and higher instances of poverty in old age,” he said.

Another difference between the two plans is that the Galveston plan doesn’t address inflation while Social Security increases benefits over time to account for inflation.

“Twenty years out you’ve lost almost half of your benefit [under the Galveston plan], that’s how critical the cost of living adjustment is in Social Security,” said Eric Kinson, co-chair of the Strengthen Social Security Campaign and a professor of social work at Syracuse University.

Kinson argues that the Galveston Plan favors higher-income earners who work for the county most of their lives, are unmarried, have no children and do not live very long after retiring.

“There are some winners,” Kinson said. “But there are a lot of losers.”

Congressional Democrats offered a vastly different plan to tackle Social Security’s long-term funding issues by expanding payroll taxes.  Sen. Bernie Sanders, I-Vt., introduced a bill Wednesday that would require people earning more than $250,000 to pay the Social Security payroll tax on all of their income, not just the first $106,800, as is required by current law.

Sen. Barbara Boxer, D-Calif., said the tax increase would provide Social Security with enough funding to maintain current benefits through 2086.

“This is a simple fix,” Boxer said at a Wednesday press conference. “This bill will secure this program and it will save for a child born right now.”

The bill leaves in place the $106,800 income cap, so households who earn more than $106,800 but less than $250,000 would see no change in their payroll tax burden.

Kingson said the gap was left in place to protect the families who fall within that pay range and “do not think of themselves as all that rich” from having their payroll tax burden essentially double overnight.

“It’s an effort to protect those folks from being, from basically being hit with a huge increase all at once,” Kingson said.

But in terms of fairness, the Sanders plan raises the question of whether it makes Social Security “excessively redistributive” by forcing wealthier Americans to foot the bill even more disproportionately than they already do, Van der Water said.

“It means that relationship between benefits and payroll tax contributions would be further skewed so upper-income people would pay more and it would make the system more redistributive,” he said.

The Sanders plan is unlikely to make much headway with Congressional Republicans who have adhered firmly to their “no new taxes” stance. But Cain’s Galveston-like proposal is unlike to gain much traction either.

A June Pew Research poll found that 18 percent of respondents favored “completely rebuilding” Social Security, as Cain is suggesting, while 41 percent favored just “minor changes.”