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What Would Happen If Social Security Disappeared?

GOP presidential candidate Rick Perry repeated his characterization of Social Security as a Ponzi scheme in Wednesday night’s debate, and insisted that the retirement program is unfair to young workers. If Perry is right, maybe we should end Social Security immediately. What would happen if we did?

Bad things, at least in the near term. As Jackie Calmes of the New York Times points out, the difference between Social Security and a Ponzi scheme is that people who have paid into Social Security will eventually collect their money. If the program ended tomorrow, they wouldn’t, and Social Security really would become a Ponzi-like system. The results would be the same as when any massive economic fraud collapses—a calamity. Poverty among retirees would surge. The program represents 41 percent of the income for elderly Americans, and almost all of the personal income for a significant proportion of single retirees.

Current workers and employers would see an immediate benefit, in the form of a 6.2 percent increase in income, because the tax that funds Social Security would disappear. But the economy as a whole would suffer for several years. The young are more likely to save and invest. That’s good for the economy, but its salutary effects take longer to materialize than the immediate demand that the elderly create, since they spend their money as fast as it comes in.

The immediate redistributive effects of ending Social Security wouldn’t be limited to young versus old—there would be geographic winners and losers as well. Since Social Security checks keep coming in no matter what happens to the local economy, the program tends to stabilize aging and struggling locales. If it disappeared suddenly, havens for the elderly (PDF) like Florida, the slow-growing farm belt, and shrinking cities such as Detroit would suffer badly. Major urban centers teeming with youth would fare relatively well.

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