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Is Social Security a Ponzi Scheme? Yes.

Monday, September 12, 2011
By Dan

Rick Perry keeps saying Social Security is a Ponzi Scheme. It is almost as if he believes that social security is a fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. To be fair, that SEC definition is from it’s criminal enforcement division.  A more neutral definition, from Merriam Webster:   an investment swindle in which early investors are paid with sums obtained from later ones in order to create the illusion of profitability.

There seem to be two main objections to Perry’s comments: first, “but we like Social Security!” and second, it’s not a criminal enterprise.   The first point is a non sequitur.  Maddoff’s clients loved their returns too, until they scheme collapsed.  The second point is also unhelpful.   This is like saying it’s not fair to call a Russian mobster a mafioso because he’s not Italian.

So let’s have an honest look at the claim, and give it’s critics (Social Security’s defenders) the benefit of the doubt.  Let’s deconstruct the definition of a Ponzi Scheme:

  1. It is a fraud–the “investors” are unaware of the truth.
  2. Early investors are paid by the later ones.
  3. To create the illusion of profitability.

Point 1: A Fraud.  To the first point, it is hard to say whether, today, Americans are unaware of the truth of Social Security.  When it was passed in1935, Congress made clear that current retirees would be paid from existing workers.  In fact, one of the main objections to Social Security was that it’s burden on current employees and employers would cause more hardship and unemployment.  It would be hard to argue that Americans are not (or should not be able to easily figure out) that current employees pay for current retirees.

But on another aspect, Governor Perry has a point.  If you are paying into Social Security today, you are not very likely to receive benefits in the future–certainly not at the level at which you are promised.  The latest government report estimates that the Social Security program will be unable to meet its obligations, starting in 2036–100 years after its inception .  So, under current law, those who were born in or after 1969 (i.e., who will turn 67 in 2036 or after) are being lied to.

Point 2: Existing Investors Paid from New Investors.  This is manifestly the case with Social Security.  The major difference is that investment is involuntary (in fact, compulsory), and the only way to avoid the scheme is to not work–not quite a viable option.  In addition, withdrawal from Social Security is not voluntary and only occurs at age .  Unlike a traditional Ponzi scheme, retirees cannot create a run on the manager–though the baby boomers are the closest thing to that.

It is worth noting that the reason most Ponzi schemes collapse is not that the fraud is uncovered, but that people begin to demand their money back in larger amounts than new investors invest.  The two events are, of course, connected, but if mass hallucination allowed people to ignore the inevitable, the scheme could last indefinitely–until withdrawals outpaced investments.  It could even last for 100 years.  Withdrawals outpacing deposits is an exact parallel with the baby boomer crisis: in 1950, there were 16 workers supporting each retiree.  Today, there are about 3.

Point 3: The Illusion of Profitability.  Here, again, the point should be conceded.  The government has spent the better part of a century siphoning off the excess funds collected as workers vastly outnumbered retirees.  In lieu of investment or even holding those funds in a static account, the government used it for its own purposes, and is now finding itself nearly empty handed when the largest bills are coming due.

So yes, Social Security is a Ponzi scheme, but it is also legal.  But it is only legal because the government runs it.  Ask yourself this: if your employer came out with a new pension plan that promised guaranteed benefits for every worker, and used today’s employee wages to pay for current retirees, how fast would the FBI and Department of Labor raid his offices?


Tags: , fraud, , , ponzi, Rick Perry, social security

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