Why Social Security IS NOT a Ponzi Scheme

The Dish

[Here’s the counter to conservative bullshit. See also: The Real Ponzi ~DS]

A reader writes:

What a silly argument made by Indiviglio. If a Ponzi scheme is “an economic arrangement where the money paid into the system by later entrants is paid right back out as benefits to earlier entrants,” that pretty much describes any form of insurance. The defining characteristic of a Ponzi scheme is that it is unsustainable, because it requires, like a chain letter or Amway, a geometrically increasing number of participants to deliver the promised returns.  (Amway stays afloat because most participants pay in a little – or a lot – but withdraw without ever receiving any return.) Neither insurance nor Social Security requires a geometrically increasing number of participants so long as the system is funded based on sound actuarial principles.

Another parses further:

Having represented the victims of actual Ponzi schemes in court, I feel compelled to point out an important distinction between Ponzi schemes and Social Security: a Ponzi scheme is just that, a scheme. The definition provided in Zaid Jilani’s dictionary omits this important component. The participants are kept in the dark about how the benefits are obtained. Thus, a Ponzi scheme is not really an economic “arrangement” in the sense that the participants have agreed to it. By contrast, we all know (or should know) how Social Security works. It is more akin to something else, namely an insurance program where the insured event (reaching the retirement age) is guaranteed (barring premature death).


So if Social Security were a Ponzi scheme, Michael Astrue, current head of the SSA, would take from current payers, skim off a huge amount, live lavishly, pay earlier investors outrageous returns, and then go bankrupt at the next downturn.  I’m sure Astrue makes a decent salary, but the administrative cost of Social Security is 0.39% (see how many mutual funds have expense ratios that low), and the returns to retirees are modest.


The problem with a Ponzi scheme is that, at the sorts of exorbitant rates of return that are generally promised in a successful Ponzi scheme (see Madoff, Bernie), Ponzi schemes are unsustainable on a long-term basis.  They require the investment base to grow much, much faster than the population which inevitably becomes impossible at some point.

Yet another:

In a Ponzi scheme, the organizers of the fund don’t have the power of taxation and don’t have any actual vehicle to earn money. But the government has both; they can increase taxes to pay for Social Security, and they can adopt measures to make the economy grow, such as by increasing immigration. Notice that there is no difference between the populace paying for its retirement through private investment and paying it for it through taxes for Social Security; either way assumes that there will be enough growth to support a group of non-working people in addition to supporting the working people.


Even if you think that the “fund as you go” approach somehow made Social Security a Ponzi scheme, it hasn’t been that way since the 1980s.  The 1980s reforms specifically adopted a model in which a surplus was built up to help cover expenses in the future.  In other words, and unlike a Ponzi scheme, a lot of the money being paid out today and for the next 30 years will effectively be returned to the people who put it into the fund.

One more:

It is time to step back and do some rational thinking on this topic. There is in the neighborhood of $2.5 trillion in the Social Security “Trust Fund,” although this fund is roundly skewered by critics. Yet there have been huge surpluses in the past that have built up this value, so the basic Ponzi assumption of money coming in barely keeping ahead of money going out is false on its face.

So let’s think about this.  If you had a trust fund backing up your private pension, where would you invest it to best insure that you will have it when you need to retire?

1. In the stock market? Many people do, but many also saw their trust fund drop in half in value very recently. Not very secure. Plus, what would be the value of the U.S. stock market if the U.S. government collapsed, and was unable to pay it’s bills? It would surely drop by even more than half very quickly.

2. In gold?  Gold lost half of its value during part of the Reagan administration, and it may well do that again now that Glenn Beck is less able to pump the fear of global collapse required to keep the price up.

3. In foreign investments? Maybe for you, but I doubt any Tea Party Republican would stomach that.

In reality, if you really want to be as safe as one can reasonably be in this world, you would do exactly what the international markets did the day after the debt downgrade. Invest in the safest securities in the world: U.S. Treasury debt, which is where the Social Security Trust Fund is currently invested.