Senate candidate Ron Johnson likens Social Security to Bernie Madoff style Ponzi scheme

It’s not often that a key platform of Franklin Delano Roosevelt’s New Deal is compared to Bernie Madoff’s $65 billion Ponzi scheme.

But 2010 is anything but a typical election year.

Like numerous Republicans, U.S. Senate candidate Ron Johnson has been likening Social Security -- created 75 years ago to provide retirees with a steady income -- to a Ponzi scheme. It’s an eye-catching comparison that has been made by Senate candidates Rand Paul in Kentucky and Sharon Angle in Nevada, among others.

Where does Johnson fit in?

In a move to head off criticism from his opponent, Democratic U.S. Sen. Russ Feingold, Johnson put his Ponzi comparison at the center of TV and radio ads that began running Sept. 15, 2010.

"I'm going to tell you what Senator Feingold and his allies' next attack against me will be," Johnson says in the radio ad. "They're going to tell you I said Washington politicians have run Social Security like a Ponzi scheme.

Johnson goes on to say: "I did say that, and it's true. During his 18 years in the Senate, Russ Feingold and politicians from both parties have raided $2 trillion from the Social Security trust fund. They spent your savings. The money is gone. And what did we get? Bigger government, wasteful spending and an IOU."

The television ad is similar, with Johnson instead saying "Washington treats Social Security like a Ponzi scheme."

A  $2 trillion Ponzi scheme?

Now that would be a big-time crime, especially since Social Security affects virtually every American. Indeed, at that size, even Madoff would be green with envy.

Let’s start with what the phrase "Ponzi scheme" means.

The scheme was named after Charles Ponzi, the Boston con man who in 1920 bilked investors out of about $10 million by promising returns of up to 100% in just 45 days. Ponzi invested little of the cash. Instead, he used it to finance his lavish lifestyle. He kept the scheme afloat by using new money to pay off older investors

Think robbing Peter to pay Paul.  

The U.S. Securities and Exchange Commission offers a simple definition:  "A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors."

On one level, that sounds like Social Security, which uses taxes on today’s wage earners to fund the retirement checks of millions of Americans. But remember: The SEC also notes that a Ponzi is an "investment fraud."

Let’s look deeper, at how Johnson applies the characterization to the Social Security system. Is he going beyond superficial similarities?

Here’s what Johnson said at a July 26, 2010  luncheon sponsored by Wispolitics.com, when he was asked about the Ponzi comparison.

"What is the most famous Ponzi scheme we most recently heard of?" Johnson asked.

Audience members responded Madoff.

Johnson went on to say:  "What did Bernie Madoff  do? .... He took money in from investors. He paid some of the older investors off and he spent the rest of the money. The money was spent, it’s gone."

In the next breath he moved on to Social Security and said:  "You just tell me how that’s different from a Ponzi scheme."

So, Johnson takes it beyond simply saying Social Security is a pay-as-you-go system. He’s invoking Madoff’s name to make his point.

Johnson’s campaign manager, Juston Johnson, said neither he nor his boss is "saying the Social Security Administration is a fraud" -- pointing out the candidate wants to fix the system. Asked why the candidate used Madoff’s name, if it wasn’t meant to imply criminal wrongdoing, the spokesman declined to answer.

The issue, according to Juston Johnson, is the more than $2 trillion the Senate candidate says was raided from the Social Security Trust Fund.

While the Social Security Administration objects to politicians saying the trust fund was raided, spokeswoman Dorothy Clark said in an e-mail that "The Social Security Trust Funds currently holds over $2.5 trillion in interest bearing Treasury securities backed by the full faith and credit of the United States government."

In other words, a giant IOU.

The IOU part echoes what Johnson said, but the candidate misses a huge point -- and one that undermines his own statement. A Ponzi scheme is based on a lie. There is a promise that participants will get their money back plus a whole lot more.  But the bulk of the money isn’t invested -- it’s generally blown by the swindler.

The IOU to the fund, on the other hand,  is backed by the full credit and faith of the U.S. government.  It must be repaid, with interest -- though doing so may cause the government to borrow even more.

Eugene Steuerle, a Social Security expert at the Urban Institute, a nonpartisan economic and social policy research think tank, said the $2 trillion in debt came about because the Social Security system used to run a surplus -- which helped encourage bigger spending by the rest of the government.

Said Steuerle: "To the extent that the candidate is arguing (that Social Security) is run like a Ponzi scheme, in the sense that there’s really no significant savings in the system, that’s right."

To combat the Ponzi comparisons, the Social Security Administration created a web page in 2009 that looked at Ponzi’s scheme and its own operation.

The site  acknowledges "a superficial analogy" between a Ponzi scheme and pay-as-you-go programs such as Social Security. But, it argues the "structure, logic, and mode of operation (of Social Security has) nothing in common with Ponzi schemes or chain letters or pyramid schemes."

The agency’s conclusion: "The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi's scheme lasted barely 200 days."   

We figured there were two people who could truly sort out the comparison.

Unfortunately, Ponzi died in 1949. And the Federal Bureau of Prisons does not expect the 72-year-old Madoff to be available for public appearances until Nov. 14, 2039.

So, we went to the next best person -- Mitchell Zuckoff, who, in 2005, wrote the book "Ponzi's Scheme: The True Story of a Financial Legend."

He doesn’t buy the comparison.

"The important difference and the fundamental difference is that there is no secret to how Social Security is run,"  said Zuckoff, who researched the question for a 2009 article in Fortune Magazine. "No one is being misled, no one is taking the money and running,  which are fundamental aspects of a true Ponzi schemes."

Comparing the two "is a common, and I  think deeply misleading suggestion, that is openly used more as scare tactic than to truly illuminate the real issues," Zuckoff said in an interview.

In his Fortune piece, Zuckoff wrote:  "Social Security is morally the polar opposite of a Ponzi scheme and fundamentally different from what Madoff ... did."

So, let’s come back to Johnson’s original statement.

The candidate says politicians "run Social Security like a Ponzi scheme." On a superficial level, that is true -- money is taken in from current workers (new participants) and used to pay off obligations to retirees (old participants). The operative word is "superficial."

Unlike a Ponzi, Social Security is obligated to pay benefits, a commitment the shysters who run Ponzi schemes do not share. As for those IOUs, the government is required to make good on the money borrowed from the fund -- and to pay it back with interest.

What’s more, participants are aware of how the system is operating. It’s all public. In a Ponzi, investors have no clue where their money is going and are told lies by the promoters.  

We rate Johnson’s claim Barely True.

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Derrick Van Orden

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Editor's note: This statement was rated Barely True when it was published. On July 27, 2011, we changed the name for the rating to Mostly False.