The major controversy right now in the GOP presidential primaries is over Rick Perry’s contention that Social Security is a Ponzi scheme that can’t deliver on its promises under its current structure. Mitt Romney doesn’t exactly dispute this – in fact, Romney himself said the same thing in his book, but then Romney always did like to attack other Republicans for things he himself has said or done – but Romney’s argument is that you can’t say these things out loud and win elections.

Well, President Obama last night handed Perry a huge gift, by providing a vivid illustration of how Perry is right about Social Security.

Here is what the President said:

[The American Jobs Act] will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services…

Pass this jobs bill, and starting tomorrow, small businesses will get a tax cut if they hire new workers or raise workers’ wages. Pass this jobs bill, and all small business owners will also see their payroll taxes cut in half next year. If you have 50 employees making an average salary, that’s an $80,000 tax cut. And all businesses will be able to continue writing off the investments they make in 2012.

This proposal is an extension of a prior temporary payroll tax cut that was part of the extension of the Bush tax cuts passed by the lame-duck session of the last Congress at the end of 2010:

The cut affects the 46 percent of all Americans who pay payroll taxes but do not qualify to pay federal income taxes. In the bipartisan deal last December to keep the Bush-era tax cuts in place for another two years, lawmakers signed off on a proposal to reduce the percentage of taxes that workers pay towards Social Security from 6.2 to 4.2 percent. That rate is set to go back up to previous levels on Jan. 1, unless Congress acts.

Now, as an initial matter, the problem with temporary cuts in the payroll tax is that they don’t provide much incentive to hire new permanent workers. This is a recurring issue with Obama’s proposals, like how he tried to use temporary stimulus payments to induce states to take on more permanent obligations under Medicaid, a deal a number of Governors rejected. If I’m a business owner, this sort of payroll tax cut may persuade me to hire more temporary or seasonal workers, but I’d be leery of creating new permanent positions knowing that the tax will pop back up as soon as we’re past the 2012 election. There’s certainly a good case to be made for slashing the payroll tax in the long haul – which would require fundamentally reworking how Social Security is funded – but as an economic matter a temporary payroll tax holiday is mostly a gimmick that will offer only a very limited bang for its buck.

Which brings us to the fiscal impact. If you take at face value the defenders of the Social Security status quo, their theory is that Social Security is not supposed to be a welfare program but a pension plan: workers pay into the system, which places their wages in a “trust fund” and later pays them back a defined benefit. As Perry – and Romney, in his book – notes, the system doesn’t actually run that way. The only “assets” in the trust fund are “I owe me” bonds reflecting that the taxpayers will be asked to come up with revenues in the future, the same kinds of “my own debts are my assets” accounting that got Enron in trouble; meanwhile, the government spends the money as soon as it comes in, and hopes that it will continue getting enough future payroll tax revenue to pay future benefits. This is the textbook definition of how a Ponzi scheme operates and precisely why such schemes – as we saw with Bernie Madoff – inevitably go bust when they can’t keep expanding.

Social Security already has that problem, as the most recent Trustees Report makes clear:

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years.

With retirees living longer and benefits having been expanded in various ways over the years, the number of current workers supporting each current retiree has plunged dramatically since the program was established, a problem that will only get worse with declining birthrates and the Baby Boom generation entering retirement age. In other words, the conditions for ever-widening Social Security deficits are upon us already and will, by design of the current system, only get worse. The bill for the longstanding pattern of both parties on Capitol Hill raiding the program’s surplus income to spend on other things has come due.

And with this crisis upon us and only designed to grow, what does President Obama propose? An even bigger bite out of the income of a program already in deficit:

Obama plans to cut revenues by $245 billion, or 36%, of the entire annual revenue (projected at $687 billion) of the so-called trust fund. Being that he will ostensibly slash half of payroll taxes, that number is surely too low…

This is the point in the storyline where a guy like Madoff gets led out in handcuffs. Let Obama make the argument that extending the temporary payroll tax cut is an economic necessity; we can have the argument about whether this is the best way to cut tax burdens on businesses and workers. But what he can’t do is pretend is that Social Security is sacrosanct when just last night he went before the nation and proposed gutting its only source of funding just as it’s plunged into the red. The next time Governor Perry lays out his case against the flim-flam accounting behind Social Security and its manifest inability to pay for its own promises, he will have fresh ammunition direct from the man he hopes to face in the general election.