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Texas Gov. Rick Perry said at a September 7 MSNBC presidential debate that "it is a Ponzi scheme to tell our kids that are 25 or 30 years old today, you're paying into a program that's going to be there. Anybody that's for the status quo with Social Security today is involved with a monstrous lie to our kids, and it's not right." The "Ponzi scheme" label was also discussed during Monday night's CNN/Tea Party Republican presidential debate.

A Ponzi scheme as defined by the Securities and Exchange Commission, and why they collapse.

is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Why do Ponzi schemes collapse? - With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

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user1873
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    Unlike a Ponzi scheme, no one will be put in prison when it fails. – Paul Apr 25 '12 at 07:06
  • You quoted very small part of SEC's definition. Looking at only that fragment, for example any kind of insurance would be a Ponzi. – vartec Apr 25 '12 at 14:36
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    Nothing to do with skepticism, everything to do with politics. – DJClayworth Apr 25 '12 at 16:01
  • I have to say that "defenses" of the program against the charge that are interesting are ones that purport to show who the program is sustainable, and given the way it has been systematically looted I can't see how they apply aside from the semantics of being "not a Ponzi scheme". Note that I don't claim that borrowing against the fund is looting, but that borrowing against it to pay for on-going expenses with no plans for ever *being able to quit borrowing* much less actually pay anything back certainly is. – dmckee --- ex-moderator kitten Apr 25 '12 at 19:21
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    I dislike the purposefully unwritten implications that are present in this question. This smells a lot like you're fishing for a *technical* "yes" -answer for political purposes, and will use that answer to associate the same negative connotations that a Ponzi Scheme has to the social security model. I'm betting if you get any sort of "yes" answer, you'll proceed to ignore or downplay any factors outside a technical similarity, where those factors would actually differentiate the two models in ways that the negative connotation shoudn't be rationally applied, whether techically similar or not. – Ilari Kajaste Apr 26 '12 at 06:07
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    **I acknowledge what I said in my comment above was speculative and very accusatory, and I also acknowledge that it's possible your question is instead an honest inquiry.** If that is the case, you should be aware in the future that it, and others like it, happen to fit a well known model of politically motivated dishonest discussion. – Ilari Kajaste Apr 26 '12 at 06:11
  • @user1873 The question: "Is social scurity a ponzi scheme?" The question implicitly expanded: "Does social security fit the same techical model as ponzi schemes?" The unwritten implication: "If social security fits the techical model with ponzi scheme, then it can be said it's a ponzi scheme, and therefore it's also just as bad as a ponzi scheme, and we all know they're just big bad hoaxes to fool money from people -> therefore, social security is just a big bad hoax to fool money from people. – Ilari Kajaste Apr 26 '12 at 06:18
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    @IlariKajaste `happen to fit a well known model of politically motivated dishonest discussion.` Isn't all politically motivated discussion inherently dishonest? ;-) – maple_shaft Apr 26 '12 at 13:26
  • @Paul - Actually throughout history the leader in charge when the system finally fails does either pay the price himself or forces his predecessor to pay the price... the only exception I can think of would be Nixon. – Chad Apr 26 '12 at 16:13
  • @maple_shaft My wording doesn't exclude that possibility, not indeed. :) – Ilari Kajaste Apr 26 '12 at 16:22
  • This question is interesting, but IMO it misses the wider point: [Our entire economy is a Ponzi scheme](http://www.youtube.com/watch?v=jqvKjsIxT_8), according to the somewhat loose definition of "Ponzi scheme" being applied here. That's worthy of far more attention than Social Security is, but nobody talks about it. – Mason Wheeler Aug 04 '12 at 21:55

3 Answers3

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No, there are some parallels, but it's not a Ponzi scheme.

In the Ponzi scheme, you have a hierarchical, most often pyramid like structure. These at the top of pyramid make lot of money, at expense of the people at the bottom. Another difference between the illegal Ponzi scheme, and the somewhat legal Multi-Level-Marketing, is that Ponzi scheme is always based on investment from bottom people, while MLM might mean constant stream of revenue. Ponzi scheme is bound to collapse when there no more people willing to join (i.e when the structure is not a pyramid anymore).

Also, Ponzi scheme is a type of fraud (as quoted in definition in the question). Fraud by definition requires element of deception. Workings of social security system are well known and transparent. Thus it cannot be considered a fraud.

US Social Security and some of European state retirement systems are based on pay-as-you-go, also called Bismarck scheme (as it was first introduced in Germany in 1889 by Otto von Bismarck). One parallel to the Ponzi scheme is that contribution from new joiners (currently working people) are used as for benefit payout to old joiners. Unlike the Ponzi scheme, it's currently not a pyramid and wasn't for quite some time already. However, with life expectancy being drastically higher than when the scheme was originally invented, it became unsustainable, as it becomes inverted pyramid. It's imminent collapse is another reason why it's being compared to the Ponzi scheme. However, the reason for collapse is quite different from the Ponzi scheme. State retirement schemes are unsustainable because of demographic transition in developed countries. Life expectancy is growing (currently aprox. 80 in developed countries), which means there are more people eligible for retirements benefits, and for a longer period of time. Thus the pension burden is growing. At the same time fertility rate is dropping, meaning that in each of next generations there are less people to contribute to this growing burden.

Most developed countries already are making the transition to sustainable systems, where an individual's contributions are not only taken into account when calculating the pension, but actually invested and protected. However, during the transition period there are hybrid systems in which you have to contribute to both PAYG and capital systems. So yes, in a sense having young people contribute to PAYG is unfair.

vartec
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    I purged all comments (to be fair). Please use comments to ask *specifically* about this answer - use the [chat] for more general discussion. – Sklivvz Apr 26 '12 at 13:07
  • +1, after the edit to reduce the connection between Ponzi and pyramid schemes. – Oddthinking Apr 27 '12 at 12:45
  • Perhaps this is too much of a tangent, but the entire financial system seems to be a PAYG system... so these "sustainable systems" are a bit of smoke and mirrors. They just nominally eliminate their uncertainty by attributing any uncertainty to another part of the financial system. – adam.r Aug 25 '14 at 04:30
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The definition provided by the SEC is according to the disclaimer on the bottom of their page: "neither a legal interpretation nor a statement of SEC policy." Still, we can work with it. The first point is of course that faud is a legal term that is likely not to apply to the present issue. If the police is cathing criminals, it is not necessarily kidnapping.

I think the question has three parts to it:

  1. Has social security characteristics of a Ponzi scheme? The answer is certainly yes. In a pay-as-you-go (PAYG) system, there is a constant flow of new people financing social security. There is an implicit debt that never gets payed back.

  2. Are there legitimate reasons why social security works differently from a "usual" Ponzi scheme? The answer is again yes. The problem with Ponzi schemes is, as was pointed out on the SEC page, that one runs out of contributors eventually. In a PAYG system, a government can force people to contribute and the time scale is such that new contributors get actually born. This guarantees a constant inflow of new money, especially when the economy is growing. Of course, it could still be possible that this inflow is insufficient. But a PAYG system can, theoretically, allow for more consumption for everyone. This point was made in the very influential paper An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money (1958) by Paul A. Samuelson, that created the standard framework for economists discussing social security, the so called overlapping generation models (OLG). It should be noted though that this is a theoretic possibility.

  3. Is social security sustainable? This question is actually much less clear than it seems to be. The real issue is what menu of sacrifices allows for social security to be sustained in which form. This includes changes in how much gets payed in and how long, and how much gets payed out. Since the time span is very large and effects of growth, demographics and other factors matter over a long period, exact answers are not possible. Something that one should bear in mind is that any change of the system will bring a transition cost that has to be borne by someone. Also, valuing accumulated social security benefits involves highly nontrivial economics.

Michael Greinecker
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Maybe.

Fraud must be proved by showing that the defendant's actions involved five separate elements:

  • (1) a false statement of a material fact,
  • (2) knowledge on the part of the defendant that the statement is untrue,
  • (3) intent on the part of the defendant to deceive the alleged victim,
  • (4) justifiable reliance by the alleged victim on the statement
  • (5) injury to the alleged victim as a result

(1) the lockbox or the Trust Fund.

If it isn't the politicians who make the laws lying to you, it is the bueracrats in the Social Security Administration lying to you. There is no lockbox, there is no Trust Fund.

Q27: Do the Social Security Trust Funds earn interest? - A: Yes they do. By law, the assets of the Social Security program must be invested in securities guaranteed as to both principal and interest.

(2) knowledge on the part of the defendant that the statement is untrue.

The SSA argues that they aren't a ponzi scheme, but they know what one is.

In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called "pay-as-you-go" system. Some private pension systems, as well as Social Security, have used this design.

The SSA is aware that Social Security is no longer a Pay-As-You-Go system. Social Security is currently running a $2.6 Trillion deficit, although they would refer to this as an Asset. It isn't an asset in any normal sense.

  • (3) intent on the part of the defendant to deceive the alleged victim,

The government is intent on deceiving the victim (taxpayers paying the payroll tax) of their property to pay for current retirees and to loan itself money to pay for other obligations.

  • (4) justifiable reliance by the alleged victim on the statement

It isn't patently absurd that social security won't be available to you in your old age, a normal person who has been told all their life about SS probably still believes it will make up a majority of their retirement, or at least a minor part of it. The SSA notes that income has exceeded costs in 2010, and will remain so for the next 75 years.

  • (5) injury to the alleged victim as a result

A 15.3% reduction in income is a serious injury. Based on 2010 Census data, a Per capita money income of $27,334 would result in $4,182 per annum. If invested with a modest rate of return (8%), over 46 years (age 21-67), would result in a return of $1.9 million dollars (2010 dollars).

user1873
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    This answer attempts to draw an analogy between a US legal definition of fraud and social security. It fails to satisfy all the the legal requirements of a crime, but more importantly, *it doesn't address whether it is a Ponzi scheme* which was the subject of the question. – Oddthinking Apr 26 '12 at 06:12