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Perry's Real Social Security Gaffe

State pension systems suggest there may not be an easy 10th Amendment solution to Social Security woes.

2:38 PM, Sep 29, 2011 • By BILL MCMORRIS
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Rick Perry has been catching some flak for calling Social Security a Ponzi scheme. Some conservative purists defended the former frontrunner for “telling it like it is.” Maybe. But Perry’s 10th Amendment solution — which he slightly backed away from at the Fox/Google debate — could be even more disastrous.

Rick Perry photo portrait, August 28, 2004

Social Security is on a self-acknowledged path to insolvency. Its Board of Trustees says the fund will run dry by 2036, meaning the retirees of 2037 will not recover any of the tax dollars they contributed to the fund over a lifetime of work.

But the state retirement systems aren't better off. With the exception of Utah and Delaware, every state government pension system will go bankrupt before Social Security does, according to Prof. Joshua Rauh, a Northwestern University pension expert. Five states — Oklahoma, Louisiana, Connecticut, Illinois and New Jersey — will run out of money by 2018, and Perry’s Texas will follow suit in 2029.

All government-sponsored retirement plans suffer from neglect at the hands of lawmakers, but state pensions are destined for failure.  

When the federal government borrows from its funds, Social Security eats the loss. When state legislators fail to contribute, investment managers take the money they have to the track. Federal law mandates that Social Security invest its funds in low-risk Treasury bonds; states pour taxpayers’ billions into the stock market, venture capital and hedge funds with calamitous results.

On average, state pension funds lost more than 25 percent of their value during the Great Recession. In a report for the Pew Center on the States, Barry Kozak, an actuary at Chicago’s Center for Tax Law and Employment Benefits, found that states would need five years of 16 percent market returns — eerily similar to Madoff — to make up for a one-year 24 percent loss. In pursuing such returns, state pension systems are putting money right back into the stock market.

In his 2010 book Fed Up!, Perry advocates turning retirement issues over to the states. He softened that position during the debate, saying, “we ought to have as one of the options the state employees and the state retirees, they being able to go off of the current system, on to one that the states would operate themselves. As a matter of fact, in Massachusetts, (Romney’s) home state, almost 96 percent of the people who are on that program, retirees and state people, are off of the Social Security program.”

There is a reason for that: state pension plans are more generous than Social Security. In 2011, the average Social Security recipient took in $1,177 per month, or $14,124 per year, with a maximum monthly payout of $2,366, or $28,392 per year. According to Massachusetts’s pension benefit calculator, an average teacher retiring at 60 — six years before Social Security eligibility — would draw an annual pension of $65,133. Such overwhelming costs forced Massachusetts’s labor-friendly Democrats to enact pension reform rivaling Wisconsin Gov. Scott Walker’s austerity. If you thought that fight got ugly, imagine if those receiving over-generous pension benefits were not a small, driven minority of government workers, but your entire populace.   

Perry’s turn-it-to-the-states solution is either a knee-jerk reaction to a foundering federal program or he is unaware of the pension folly going on in statehouses, including his own, across the country.

Perhaps Perry thought crying Ponzi would help establish his anti-Washington credentials, and there’s a strong argument for overhauling Social Security. But state retirement systems don’t suggest an easy 10th Amendment solution to Social Security's problems.

Bill McMorris is a staff writer for the Franklin Center for Government & Public Integrity and a 2011 Phillips Fellow.

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