Is Social Security a Ponzi Scheme?
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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