A Philosopher's Blog

Is Social Security a Ponzi Scheme?

Posted in Business, Ethics, Philosophy, Politics by Michael LaBossiere on September 21, 2011
Charles Ponzi (March 3, 1882–January 18, 1949)...

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While Social Security has stood up to many challenges, it has often been compared to a Ponzi Scheme. In some ways the comparison is apt and in some ways it is not.

Crudely put, a Ponzi scheme works in the following way. First, a con artist gets people to “invest” in his scheme by promising a (usually very good) return on their investments. Second, to pay off his initial investors, the con artist recruits more investors and uses their money to pay the previous investors. Third, the con artist then repeats the recruitment process to get the money needed to pay off each level of investor. As long as the con artist can continue to recruit enough new investors, he can keep paying the previous investors. However, to keep this system going an ever increasing number of investors will be needed since they are the primary (or only) source of money for the investors (who are typically ignorant of this fact).  In theory, such a scheme could expand to include a vast population, but they typically end before then-usually due to the con artist fleeing with his money or getting caught by the authorities. In any case, a Ponzi scheme has the seeds of its own destruction built into it: eventually it would reach the point when it would not be possible to gain enough new investors to sustain the scheme.

On the face of it Social Security does seem to be Ponzi like. After all, the people who are paying into the system now are providing the money used by the people who are getting the payout now. Also, the system is sustained by new “investors” entering the system. Of course, on these grounds a bank would be Ponzi like: in order to have money to loan out banks need to take in money. As such, they need a constant influx of new money to stay in operation. Of course, banks also get revenue from fees and interest-as such they have a way to avoid the Ponzi fate. In theory, Social Security could operate in a bank like way, perhaps by generating interest on the money and investing it. If so, Social Security could avoid the Ponzi fate.

One major difference between Social Security and a Ponzi scheme is that Social Security does not seem to be operated like a scam: its mechanics are not hidden, it does not seem to be aimed at making a con-artist money, and it is aimed at what is typically regarded as a social good. These seem to be factors worth considering.

Another difference is that Social Security does not offer the sort of returns that schemes typically promise. Rather, people pay into the system and then get back from the system based on their contributions. There is no promise of great returns. Rather, the promise is that people who pay in will get some modest amount back over the years in return for paying into the system. While the money that is paid out now comes from the people paying in now, they will have their turn when they retire. Provided that there continue to be new generations of Americans, the system can be sustained in a way that Ponzi schemes cannot.

Yet another critical difference (which was noted above)  is that while a Ponzi scheme is aimed at bilking everyone involved (aside from the con man), Social Security is intended to provide people with a form of retirement security. That is, its purpose is to provide a social good. As such, it is no more a Ponzi scheme than any other government expenditure, such as defense. Naturally, people can be opposed to this sort of spending (be it Social Security or defense), but calling it a Ponzi scheme is inaccurate in many key ways.

 

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21 Responses

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  1. T. J. Babson said, on September 21, 2011 at 6:53 am

    I think the point to these “Ponzi scheme” comments is that current retirees will receive far more in benefits that they put in, and future retirees will receive far less in benefits than they put in.

    For years the dominant trend has been a massive transfer of wealth from young to old, but this can’t continue forever.

    • Michael LaBossiere said, on September 22, 2011 at 4:08 pm

      It can go for as long as there are enough youth to support their elders. Since the elder folks paid in when they were young, that should be factored in when considering whether or not wealth is being transferred in a meaningful way.

      • T. J. Babson said, on September 22, 2011 at 10:16 pm

        What happens when there are more retirees than workers? 2.1 worker to retiree by 2035.

        • Michael LaBossiere said, on September 24, 2011 at 4:50 pm

          Depends: are the workers putting in enough to pay the benefits and are there other sources of revenue? Social Security is cast as a social good (like defense, police, fire protection and so on) and it is not merely a matter of an investment/retirement system. I think the main focus should be on whether or not we wish to preserve this (alleged) social good. After all, spending on defense does not give us an actual profit (aside from the defense contractors and those employed directly in defense).

          • T. J. Babson said, on September 25, 2011 at 8:52 pm

            You can’t argue with the math. Is it fair for a small number of young people to support hordes of elderly folk? Especially poor young people vs. rich seniors?

            But in the future it will be the exact opposite. The U.N. now projects that over the next 40 years, more than half (58 percent) of the world’s population growth will come from increases in the number of people over 60, while only 6 percent will come from people under 30. Indeed, the U.N. projects that by 2025, the population of children under 5, already in steep decline in most developed countries, will be falling globally — and that’s even after assuming a substantial rebound in birth rates in the developing world. A gray tsunami will be sweeping the planet.

            http://www.foreignpolicy.com/articles/2011/08/15/the_world_will_be_more_crowded_with_old_people

            • WTP said, on September 25, 2011 at 9:37 pm

              While I would not put much credence in such projections going out more than 5-10 years, let alone 40, this is yet another flaw in the design. Some huge assumptions were made initially in FDR’s time frame. It amazes me the hubris of the kind of people who would commit a citizenry to such a perpetuity. While I’ve personally made donations to institutions as perpetuities, I certainly doubt they will last a century. Easy for me to dismiss the obvious risk as I was making the decision for myself in the context of my own understanding. I wasn’t committing anyone else’s money, time, or effort. What right did FDR and his cronies have to commit all future generations of Americans to this plan?

  2. T. J. Babson said, on September 21, 2011 at 7:02 am

    The fiscal pressures are due to demographic trends, where the number of workers paying into the program continues declining relative to those receiving benefits. The number of workers paying into the program was 5.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2035.[15] Further, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial “pig moving through the python.”

    http://en.wikipedia.org/wiki/Social_Security_debate_%28United_States%29

  3. WTP said, on September 21, 2011 at 8:41 am

    Yet another difference is that a Ponzi scheme is voluntary. Investors CHOOSE to invest in the scheme. Social Security takes money from workers without their consent, unless you count working as a form of consent.

    “One major difference between Social Security and a Ponzi scheme is that Social Security does not seem to be operated like a scam” – critical think much? “Provided that there continue to be new generations of Americans, the system can be sustained in a way that Ponzi schemes cannot.” – No, provided new generations continue to go along with the plan. If they, as a group, change the law and opt out, there will be a generation (two?) of workers who will not recieve their end of the deal. Plus you gloss over those who will pay more into the system than they will ever get out. At least with most Ponzi schemes, as long as the scheme exists it is an “asset” that can be passed on in a trust or will. And there are those who enter into a scheme early enough that they collect nearly as much as the originator. They certainly get more out of it than they put in.

    You really didn’t think too deeply about this, did you?

    • Michael LaBossiere said, on September 22, 2011 at 4:12 pm

      “One major difference between Social Security and a Ponzi scheme is that Social Security does not seem to be operated like a scam” – critical think much? <

      Yes, I do. Every day in fact. You need to show that I am wrong, rather than merely offering a minor insult.

      “Provided that there continue to be new generations of Americans, the system can be sustained in a way that Ponzi schemes cannot.” – No, provided new generations continue to go along with the plan. If they, as a group, change the law and opt out, there will be a generation (two?) of workers who will not recieve their end of the deal.<

      Well, obviously. If people refuse to go along and fight against it, then it would fail. The same is true of the entire state.

      Plus you gloss over those who will pay more into the system than they will ever get out. At least with most Ponzi schemes, as long as the scheme exists it is an “asset” that can be passed on in a trust or will. And there are those who enter into a scheme early enough that they collect nearly as much as the originator. They certainly get more out of it than they put in.<

      Early enough? Are you talking about the folks who got in just as it started?

      You really didn’t think too deeply about this, did you?<

      You haven't offered any substantive argumentation showing that I am in error.

      • WTP said, on September 22, 2011 at 4:25 pm

        “You need to show that I am wrong” – well, I thought it was rather obvious from “does not seem to be operated like a scam”

        “The same is true of the entire state” – That would be different. The entire state would affect those in that generation. Ending their contribution to SS could very well benefit them. Ending the state would be a different matter. Do you understand the diffence between these two entities?

        “Early enough? Are you talking about the folks who got in just as it started” – Yes. I don’t understand your not understanding.

        And again, you ignore the fact that SS takes money from people without their consent. A Ponzi scheme is voluntary. If you don’t like my arguments, see AJ Mac Jr’s and Michael Atchison’s arguments below.

        • Michael LaBossiere said, on September 22, 2011 at 6:08 pm

          >You need to show that I am wrong” – well, I thought it was rather obvious from “does not seem to be operated like a scam”<

          That is no argument.

          “The same is true of the entire state” – That would be different. The entire state would affect those in that generation. Ending their contribution to SS could very well benefit them. Ending the state would be a different matter. Do you understand the diffence between these two entities?<

          Yes, it would be different. However, ending a state could benefit people as well.

          “Early enough? Are you talking about the folks who got in just as it started” – Yes. I don’t understand your not understanding.<

          So, you mean the folks who retired around/before 1937 and hence got benefits in 1940 without paying anything in?

          And again, you ignore the fact that SS takes money from people without their consent. A Ponzi scheme is voluntary. If you don’t like my arguments, see AJ Mac Jr’s and Michael Atchison’s arguments below.<

          Given that this is supposed to be a democracy and has voting, it would seem that we are apparently consenting to this. True, people are forced to go with the majority of votes, but that seems to be an unavoidable problem in a democratic state.

          You can, of course, start a movement to change the system or, alternatively, leave the state if it is too onerous.

          • WTP said, on September 22, 2011 at 9:45 pm

            “That is no argument” – Funny, I would say that how something “seems” is not an argument. Alas, we digress again to a Monty Python sketch.

            “So, you mean the folks who retired around/before 1937 and hence got benefits in 1940 without paying anything in?” – No, I mean people who retired in 1942 who got benefits without paying enough into it. Just like people who got into the Madoff scheme in the 1970s and got far more out of it than they paid in.

            Again, don’t like arguing with me? Argue with AJMJr & MA below.

            “Given that this is supposed to be a democracy and has voting, it would seem that we are apparently consenting to this.”- Mike, this is an argument far below your level of stature in society. I would expect such from one of your students, maybe. Do you value freedom? Do you understand it? Do you not grasp why it’s a bad idea to have so many of life’s options tied to what the majority wants?

            Have you ever studied design? Have you studied the relative merits of loosely and tightly coupled design?

            This is piece is not a philosophical consideration as to whether or not SS is a Ponzi scheme. This piece is not an effort to look at what exists in reality and determine truth. This piece is an effort to take individual truths and fabricate a reality. This post is sophistry.

  4. ajmacdonaldjr said, on September 21, 2011 at 9:02 am

    One, crucial difference you’re forgetting: A Ponzi scheme is made up of people who fall for the scheme and choose to invest in it (so that they reap big returns, due to greed), whereas with Social Security our money is seized from us, by the government, before our employer can give us our pay (as is our employer’s share of their money).

    Ponzi schemes are voluntary, which is why they run out of investors, but Social Security has a never ending pool of “contributors”: every 16 year old who gets their first job is in, whether they want to be or not.

    If Ponzi had the force of government to make every worker in America give him their money he wouldn’t have been a criminal, he would have been a government politician or bureaucrat. In this sense Social Security is far worse than a Ponzi scheme.

    By the way, the Social Security trust fund was fixed, recently, by law, during the George H W Bush administration and had a huge surplus during the 90’s, as it should of had. This surplus has been spent (i.e., stolen and squandered by the feds) on the wrong-headed wars, since 9/11, which is why it’s foolish to speak of finding ways to fix it today. The feds will only steal it again if it is ever fixed, again.

    See: http://www.youtube.com/watch?v=kunJaPcfOAg

    See: http://blog.alexanderhiggins.com/2011/07/22/social-security-money-stolen-25-trillion-surplus-2-39061/

    • WTP said, on September 22, 2011 at 4:38 pm

      Heh…just saw this: “every 16 year old who gets their first job is in”…I’ve been in it since I was 11 or 12.

  5. Michæl Atchison said, on September 21, 2011 at 9:15 am

    Long-time listener; first-time caller.

    I agree strongly with the insightful comments above about a Ponzi scheme being, in some cases, less frightening, because it can only take advantage of those who fall for the scam—whereas participation in Social Security is mandated by threat of force. I also want to point out that your definition of the Ponzi scheme has an error—a Ponzi scheme doesn’t require an “ever increasing number of investors” like a pyramid scheme does. Since victims of a Ponzi scheme are often receiving statements showing how much their ‘investment’ is growing, they are often comfortable waiting long periods before withdrawing, and even often convinced into investing more and more as time goes on. Some Ponzi schemes hardly grow beyond the initial number of investors at all.

    http://en.wikipedia.org/wiki/Ponzi_scheme

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  8. magus71 said, on September 23, 2011 at 1:01 am

    Calling it a Ponzi scheme is a rhetorical technique that points out SS weakness. Like a Ponzi scheme, eventually a point is reached where people want to get their money and it’s not there. Eventually, this will be the case with SS.

    • Michael LaBossiere said, on September 24, 2011 at 4:47 pm

      Only if the amount of money going out exceeds that coming in and this can not be made up in other ways. The same is true of the general economy: it must constantly grow somehow or, so the experts say, there will be trouble.

      • Anonymous said, on September 25, 2011 at 12:54 am

        Biggest problem is the significant change in how long people are living but little change in how long they are working. People will just have to work later in life, there’s no way around it.

        Magus


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