Social Security is Not a Ponzi Scheme

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Top Ten Reasons Why Social Security is not a Ponzi Scheme:

1.  Ponzi scheme participation is voluntary, unlike Social Security where participation is mandatory for most citizens.

2.  Ponzi scheme participants usually receive brightly colored reports telling them how much illusory interest their investments are earning.  Social Security participants make do with drab annual reports.

3.  When a Ponzi scheme goes bust the perpetrators can be sued for damages.  Good luck suing the Feds after Social Security goes belly up!

4.  Participants in a Ponzi scheme do not lose their claim against the perpetrators upon death, unlike people who die prior to receiving a check from Social Security.

5.  Ponzi schemes usually have few to no solid assets that can be seized by participants.  Social Security has endless IOUs signed by Uncle Sam.

6.  Ponzi schemes are devised by criminal con artists.  Social Security was passed by Congress.

7.   No one has ever gone to jail for not paying funds into a Ponzi scheme.

8.   Ponzi schemes do not require contributions for the entire working life of the participants.

9.   No Ponzi scheme on record has taken 661 billion out of the pockets of the American people, as social security did in 2010.

10.  Ponzi schemes are illegal, while Social Security merely should be illegal.













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  1. Pingback: | Terry's Blog
  2. Joe,
    First, I don’t think SS is really a Ponzi scheme as such (because the government can always insure payment by raising taxes or printing money), but it is a very poorly designed defined benefit plan in that it is not funded by what retirees paid into it but by what current workers can afford to pay. This can be workable if the commitments are fairly modest since demographic changes such as the number of workers, life expectency, etc. can be accommodated for modest committments, but our committments are not remotely small. Also, for many decades we have consistently enriched benefits for those who paid in amounts that were actuarily based on smaller benefits. Most retirees today are receiving present value benefits with far in excess of their present value payments. That is nothing more than a redistribution of wealth from workers to retirees. There is no moral basis for this whatsoever. It’s just a money grab from by the politically powerful.

  3. Well, Mike, when you get to be my age you look at things differently. I worked full-time nearly 50 years and it was the only way I could “save” toward retirement. I, along with millions of others and their employers, was forced to contribute. Had the money been invested wisely, like a private plan, it would have paid dividends and been able to make a profit and sustain itself. SS is not broke. That is a myth. It’s been raided over the years and mismanaged but there is enough in the kitty to pay everyone entitled even with an aging population.

  4. Raise the retirement age! When SS was started life expectancy was about 63. Retirement age should be raised to 70+. If you want or need to retire before then, it’s up to your own savings and/or family. This is going to create some extreme inter-generational bad feelings if folks my age (32) have our taxes raised to keep SS solvent when we’re trying to raise our families. Most of my friends under age 45 don’t think SS will be there for them when they retire. I give as much credence to those “statements” that come in the mail from SS as I do to sweepstakes junk mail.

  5. “I paid in, now collect. What’s wrong with that?”

    For you it is doubtless a good deal Joe. For my kids it is a very bad deal indeed. The essence of any Ponzi scheme is that the first in line reap a fairly good return and the last in line end up with the empty sack. Of course my kids will do far worse than the empty sack since they will have huge bills to pay for the privilege of holding the empty sack, something that does not happen in regular go-to-jail Ponzi schemes.

  6. “SS is not broke. That is a myth. It’s been raided over the years and mismanaged but there is enough in the kitty to pay everyone entitled even with an aging population.”

    There is nothing in the “kitty” Joe. Social Security taxes go into the same pot as regular income taxes, and is paid out from the same pot. Social security is broke because the federal government is broke. All the talk over the years about social security lock boxes and investments is the sheerest blue smoke and mirrors.

  7. Pacem, Joe and Mac,

    I think SS yet brings in more FICA tax receipts than it pays out in benefits. Today, it is not “broke.” OTOH, if the gubmint had to comply with ERISA . . .

    Soon enough, SS will need to pay out of liquidating its “assets”, i.e., nonmarket US Treasury debt. In order to pay from that source, our congress of baboons will need to tax someone or print money (inflation is a tax).

    And, there just aren’t enough millionaires!

  8. Don, et al…When have you ever heard a government — national, state or local — say that it had too much money? Or a surplus? Practically never. We are always being told that we’re “broke” and “can’t afford” this or that, but there always seems to be money there for foreign aid, fighting dubious wars, pork projects, you-name-it. It’s the same old mantra designed to keep the hoi polloi in a state of perpetual fear or distracted from other problems.

    Secondly, the implication that somehow those who paid in early are now reaping unfair benefits is bogus because the dollars that went in were worth a lot more than they are now. The dollar I put in the kitty in 1960, factoring in inflation and devaluation, is probably worth 20 cents today. No one ever got rich collecting SS, believe me. It’s a safety net and an essential one. Would I have been wiser to invest that money on my own? Probably. Would I have done so regularly? Probably not.

    The “government” is supposed to be We the People, not some separate entity. It is all of us, acting collectively for the common good and “general welfare.”

    Years ago, when I was walking the streets of NYC one day, I had three dollars in my pocket and was approached by a bum asking me for a dollar. I gave it to him because I had 3 and he had none. So, even with 2 in my pocket, I still had one more than him. To me that was an act of charity. I didn’t ask him what he was going to do with the dollar. Isn’t Christianity about compassion? I don’t see much when it comes to taking care of either the very old or the very young in America any more.

  9. “It’s a safety net and an essential one.”

    It’s a welfare program Joe, plain and simple. The average recipient today makes about $60,000 more in benefits, after adjusting for inflation, over the dollars paid in. Earlier generations reaped a much larger bonanza. Future generations will pay in far more than they ever receive back, and this generational unfairness will utlimately lead to the repeal of social security. People simply will not stand for paying 17 cents on the dollar which is what will be the social security rate be around 2035, probably much earlier due to Social Security using rosy economic projections.

    “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. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.

    Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are projected to increase gradually to 6.2 percent of GDP in 2035 and then decline to about 6.0 percent of GDP by 2050 and remain at about that level. ”

    Anyone who is below 35 and who thinks social security will be there for them when they retire is very much mistaken.

  10. “Secondly, the implication that somehow those who paid in early are now reaping unfair benefits is bogus because the dollars that went in were worth a lot more than they are now. The dollar I put in the kitty in 1960, factoring in inflation and devaluation, is probably worth 20 cents today. No one ever got rich collecting SS, believe me. It’s a safety net and an essential one. Would I have been wiser to invest that money on my own? Probably. Would I have done so regularly? Probably not.”

    First, you are dead wrong in your present value assumption. Since you are retired, you should have the time to look it up — this stuff is hardly a secret and has been true for a long time. In fact, that is the true “raiding” of the system.
    And it is wrong to tax hard-working young people trying to raise their families simply because you were not wise enough to save. I know one young man who makes $29.5K per year and is saving $5K. He lives very frugally, and does not have much, but he would be insulted at the suggestion that he was impoverished.
    As far as a safety net is concerned, that is the key. The dirty little secret is that Social Security is not a forced savings system at all. It is simply a transfer of money from the currently young to the currently old. Do you seriously think that the first recipients got back the money they had paid in? Not a chance. They had hardly had the chance to pay in anything before they promptly retired and received a wonderful return funded by the then current workers. This system works nicely if (i) the number of workers per retiree is stable and (ii) the payouts are enriched only if the payroll taxes are increased to pay for it. We have done the latter why the tax is so much higher today than it used to be when you first started paying in, but we have not accounted for the latter.
    And Joe, your charity toward the “bum” was no doubt well-intentioned, but it is pretty weak compared to what many other people who participate on this forum have done and do all the time — I would not brag about it if I were you. Folks who want government to take the lead in dealing with poverty almost always use that as a way to justify their intention that “other people” pay for it. Read “Who Really Cares” by Brooks. It will open your eyes.

  11. Mike, I wasn’t holding myself as a model of charity. I was never any good at handling money as everyone else on this forum appears to be.

  12. I think a lot of the issue with the “ponzi scheme” description has to do with how the Social Security program actually works versus how it was sold to the American People.

    The original sale was based on the idea that it was a forced savings/social insurance regimen in which people “payed in” and “got back” their benefits later. This is the way my grandmother (intensely loyal to the Democrats up through JFK and then to the Republicans starting with Nixon) always described the system, and no argument could shake her basic conviction that it was like a good, old fashioned savings account with the money safely in the government’s “lock box”.

    The problem is that the government “saves” the money by lending it to itself. It then goes off and spends the money in the happy assurance that it’s promise to pay itself back is “savings” sitting in the bank.

    The way people my age (30s) tend to look at social security is, to my mind, a lot more realistic. It’s a system whereby the government takes money from those who are working and pays it out to those who are retired. Given that most of us don’t want to live in a society in which many of the old are indigent, this seems like a relatively good idea. Though if one accepts the idea that it’s basically a welfare scheme it seems like one would heavily means test it. Why should Warren Buffett be drawing a Social Security check?

    The trick is, to those who think that Social Security works the way my grandmother did, it really is a Ponzi scheme. After all, the definition of a Ponzi scheme is pretty much that it pretends to be a savings/investment program while in fact it’s using the contributions of new “investors” to pay out distributions to earlier ones.

    If, on the other hand, one simply accepts it as a welfare program, it simply is what it is and a few tweeks would probably make it a lot more sustainable than it is — though the demographics of the country are going to make it more and more painful as the decades pass.

    After all, a Ponzi scheme wouldn’t be a fraud if people understood that their money was going to be used to pay off earlier members that that their future pay offs would rely on finding future investorys to “pay in”.

  13. If you remove social security, you’ll simply have more people on welfare. Last year the average social security check nation wide was $1177 a month which is $14,124 a year….or the budget of an abstemious Carthusian monk who does not have cable or internet or property taxes or a car and it’s insurance.
    If you could find stable 5% bonds (and you cannot) a person would have to save $282,480 to earn that income in those bonds on their own if social security ended. There are numerous job holders who will never save that and don’t have pensions….unless society pays them more: diner waitresses, janitors, parish receptionists, small factory assembly workers, retail non owners (like people who work in bakeries, flower stores etc.), auto parts delivery men, small business truckers etc., dish washers in restaurants.
    The Amish take no social security because grandparents live with the younger generation who have many children who help with the farm….and they have no cable, internet or autos with insurance….nor do they have medical insurance but the community chips in for hospital stays.
    Heck….they’re like our Carthusians as to budget.

  14. Good post, Darwin, but I’d clarify an important distinction between two phenomena. First, there never was a lock box system. People who retired right after SS was made effective received payments even if they had only paid into it for a single paycheck. The only way that can happen is for the current workers to pay for current retirees. The system was never designed to allow for workers to build up savings sufficient for defined benefit payouts. Accordingly, the system resulted, quite predictably, in huge current surpluses for many years simply because the number of workers was so much greater than the number of retirees who had paid in. The federal government, quite sensibly perhaps, invested that surplus in federal government bonds, which is the same thing as saying it loaned the surplus to the federal government (itself) to pay for operating expenses (i.e., the deficit). It is this latter practice that many folks (Joe presumably) consider “raiding” SS, but in truth no other investment would have been safer. The idea that the surplus would have been invested in the private sector was never seriously considered to my knowledge. SS currently holds huge IOUs from the US gov’t, which will almost certainly be paid one way or another, but it still won’t be enough simply because the money being paid in is not sufficient to cover current obligations, which means we are eating away at the surplus which eventually will disappear, at which point SS will not be able to pay its obligations unless it is restructured. In addition to Mrs. Zummo’s option (which is very sensible of course), other options include reducing benefits, means-testing benefits, and increasing taxes. All have political and economic risks. Delaying benefits would be politically palatable only if its effect is phased in well into the future, I think, unless the delay is just a year or so. Reducing benefits would present genuine hardships for many people who depend on SS for getting by, regardless of the fact that in many cases these persons have no one to blame but themselves for their situation. Means-testing would risk the viability of the system to the extent it becomes exposed as a welfare program rather than a forced savings program. It would also be somewhat counter-productive in that it would encourage workers to save less in order to make sure they qualify. Increasing taxes on current workers in order to pay for retirees who failed to save (because they were not good at handling money — gheesh) creates huge political and moral issues, especially since demographics will not allow current workers to participate in the system in a meaningful way when they retire. The system was terribly designed, and we should phase out of it over time the best we can.
    There are no easy answers. The system was poorly designed from the beginning.

  15. Bill, you are right in that eliminating SS would mean more folks go on welfare, but make no mistake — that would be a much cheaper option. It just would not be especially fair for all the folks who have been paying in believing that they were earning a defined benefit and who also have been responsibly saving for retirement. Also, it should be remembered that flawed as it is and was, SS was never designed or even marketed as anything other than a *supplemental* retirement income program. The idea that it is supposed to be enough to live on is and always has been nonsense believed only the irresponsible who rationalize not saving. In addition, I take issue with your sense of who can save. Most households in the US are saving far less than they could or should. Their neighbors who are saving are choosing to delay gratification, and those who choose otherwise should not be expected to eat their cake and still have it.

  16. Mike
    But in the occupations I named, those are people who live on the edge and probably are going bare on medical insurance which in NJ for example is about 7K for a single and 12K for a family.
    Once they are hit with an unusual bill, they finance that on their credit card and probably pay the minimum monthly for a decade. Let’s say a Bodega owner in Hoboken with a family of four has medical at 12k a year with a $2500 deductible and as a result nets 29k yearly after medical in an area with $1300 a month rents to live in danger crimewise.
    One robbery at his Bodega or on the street in which he gets shot but lives but then has engine trouble two months later….and he and his family are behind the 8 ball for years paying Chase
    over 20% on the credit card he used for the deductible and the engine job. Will he save $282K in his context? No. You are thinking of the baby boomers making 60K a year and buying wave runners and such and saving an average amount that is half of their yearly if we are to believe some figures. And we should be alarmed if those people have no pensions but if many of them have pensions, we should look at the savings equivalent of those pensions (which pensions I know are vanishing outside government for younger workers).
    Which would you rather have if your family has 90year old longevity in their genes….a pension of 30K a year or an IRA of 1 million dollars during a two percent stable principal time period? The 1 million IRA at 2% is $20,000 income per year and if you touch the principal, that
    declines. I’d take the IRA but you can see how incredibly good the old private pensions were and still are for a myriad of government workers. Teachers getting 60K a year pensions now is the equivalent of an IRA of three million dollars at 2% wherein the older person doesn’t touch the principal because now he fears nursing home costs taking what he wanted to leave to children and grandchildren.
    The Hoboken Bodega owner is just hoping to get through the day without three thugs with hoodies and glocks turning over his “We’re Closed” sign.

  17. Bill,
    As you suggest few workers today have pensions outside the government. And government pensions are generally woefully underfunded due both to being too rich and to poor investment performance, just like everyone else this decade. The reason that corporations stopped giving pensions is simply that they could not accept the risk of underfunding. The only way to manage that risk was to overfund, but tax laws make that difficult for sound reasons, and over-funding makes US workers massively expensive. The more sensible option is for each family to accept its own financial responsiblity, but the reality is many don’t. For reasons beyond my understanding, many people are not as smart as squirrels, who notwithstanding their tiny squirrel brains manage to save nuts for each winter. There is some logic therefore in having a forced savings system, but such a social contract decision is best effectuated by government rather than private employers. Social Security could have been such a system, but it wasn’t because such a system would not have allowed for payouts to be made to workers who functionally never earned them. Your assumption that payouts for today’s retirees would have been better had employers retained our old defined benefit plan system (i.e., pensions) is false. Those payouts must be funded by the savings set aside by the companies, and such savings would be no more actuarily sound today than those set aside for state and local government workers, and for the same reasons. Like states and cities, companies would be stuck with massive underfunded liabilities and facing insolvency, except without the power to tax.
    It is true that some families do not make enough money to save for retirement, but studies confirm that the vast majority of families with inadequate savings are simply over-consuming. In most cases they will be fine in retirement (at least by sensible standards), though with a considerably reduced standard of living.
    And don’t get me started on our so-called underpaid teachers ….

  18. Hmmm… in four middle aged men in the US right now are below the poverty level. I just think you might be overstating the size of the spendthrift wave runner crowd. We just had thousands of flooded homeowners from hurricane Irene incur large bills in NJ to repair homes they cannot sell because the hurricane showed their homes to be vulnerable beyond their expectations. It boggles my mind that government zoned these areas for residences….and then people like new Chinese friends of my daughter in law bought there/ repaired their house once already and now must do it again. And they are up the creek because they believed in the zoning wisdom of Caesar and they were new here from Taiwan. Now they have a permanent cross unless they take a Fed offer of buyout if their town is included. I agree with your values but we differ on the number of people who fall behind from prodigality. But stats cannot really answer the nuances. I hear stories of men who were divorced by their wives and fall very far down financially or women who were deserted with four children and receive no help thenceforth from the man. Stats may report them someday as insufficient savers without mentioning the descents they suffered. Near me by two miles on a subway station platform, a Merrill Lynch manager with a wife and three children at home waiting… stood waiting for a train and a schizophrenic ran up behind him and stabbed him multiple times with a kitchen meat cutting knife to death and poor people from that area chased the man down and held him for police. Think of the financial descent of the widow aside from the existential personal bereftment even if he had life insurance. She most probably had a large mortgage and large property taxes. Stats may one day report her as not having saved….without telling us she had three children to send to college alone.

  19. We all have our stories and experiences, Bill, and while I have some responses to yours I have not the time. I’ve wasted too much today, which is why I’m still at work and will be for another couple hours. But I’m very skeptical of your one in four datum though. And by the way, I have a property in a hurricane zone and buy flood insurance (expensive!) since most hurricane damage is flood rather than wind. It would never occur to me to do otherwise.

  20. Don

    Interesting facts about Social Security.

    The constitutionality of Title II of the Social Secury Act per se, the operating title, has never tried. Reportadly some one challenged it seriously enough that the government offered settlement so large the judge required them to accept it.


    The Social security commission that is in charge of the Social Security System consists of the Secrataries of Treasurey and Health and Human Services and the Commissioner who is also the executive head of the agency. All serve at the pleasure the President.

    There are multiple conflicts of interest in that arrangement. It is hjard to see how directors of a private fund with similar arrangements would not be continually fighing off civil suits and possible fraud and failure of duty criminal charges.


    SS was sold as a social Insurnce plan like a life insurance policy or non government retirement benefits.

    However it was set up form the beginning with no legal connection between the FICA tax and SS benefits. Paying FICA taxes does not give a property right to benefits. Legally benefits are an entitlement like welfare.


    When it was set up the interst rate paid to the SS trust fund was 0. In the fifties the Republicans forced and amendment to pay interest. But the interest rate is always below the average rate the government pays on it’s debt.

    One of the reasons I started blogging was to improve my writing. If you promise not to laugh to hard one of my first effors was on
    Saving Social Security.

    Hank’s Eclectic Meanderings

  21. SS is a Ponzi scheme in the same way that taxation is theft. If it were done by a private citizen, it would be illegal but it’s a legitimate government function. The “Ponzi scheme” designation does help to highlight the system’s poor design though.

    Talk of whether it’s technically “broke” isn’t very helpful. It’s unsustainable without reform. There are no easy solutions. Raise the retirement age? You want 69-year olds to find jobs? Their old job let them go at 65 because they’re hurting productivity. That life expectancy has increased doesn’t mean people can work that much longer. Never mind the fact that increasing the retirement age hurts the young as they’re crowded out of a job thanks to seniors working longer.

    I would roll all welfare programs including SS into a single means-tested tax credit. Reforming SS shouldn’t plunge anyone into poverty.

  22. After reading these posts, I better start shopping for a good brand of dog food. Let’s use that SS money for a few more star war weapons. That will make the ultra-conservatives happy.

  23. Classic Joe. You are going to be eating dog food because people realize social security is a scam. No Joe, you will get your welfare checks from the Government until you die, and it will be left for future generations to clean up the mess. You didn’t set the policy, you had no choice but to pay in, and you would be a fool not to take the money, but please do not deny the problem simply because you have the long end of the stick.

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