Is Social Security a Ponzi Scheme?

There’s been a lot of talk about Rick Perry calling Social Security a Ponzi Scheme. He did it in his book and at the September 7th GOP debate.

News orga­ni­za­tions and politi­cians are outraged by the comments. They hope to “save social security” not call it a scam! Charles Ponzi went to prison for his scheme and that thought more than any other seems to be the driving force behind Perry’s back lash.

I’m no Perry supporter, but before you make too many decisions about his comments, it’s important to under­stand what a Ponzi scheme is and why people are scared to put Social Security in that category.

What is a Ponzi Scheme?

A Ponzi scheme is a surpris­ingly simple scam that plays upon our inherent greed. It goes like this:

  • An investor tells you he can get you massive returns on your invest­ment, making you 10 times what you invest in a couple of weeks!
  • You’re hesitant, but he’s wearing an Armani suit, has a gold watch, drives a Lexus, and seems convincing. You give him $500 to test out the theory.
  • Three weeks later, Mr. Investor returns with a $5,000 dollar check. He smiles as he tells you he’s found the secret that no investor wants you to know.
  • Your eyes grow dollar signs and you hand the $5,000 back to him. A few weeks later $50,000 shows up on your door and you invest it back in to get even more money!

Unfor­tu­nately, the money is a lie. There was no sudden growth in the stock market, and no special method to guar­an­teed results.

The $500 you invested went to someone who invested $50. That person then put in $5,000 which Mr. Investor gave to you. When you put that money back in, Mr. Investor used it to get hundreds more to invest their money which was the $50,000 thousand he showed you. There was never any invest­ment or real money; just clever accounting, fast rhetoric, and a scam that will even­tu­ally lose all your savings.

Why Ponzi Schemes Fail

The problem with Ponzi Schemes is people. There are only so many people in the world, and even­tu­ally the scamer runs out of money.

At that point the scamer can keep it going for awhile, but at some point the investors will want their money, the govern­ment will want their taxes, or some jour­nalist will uncover the scheme. Either way, the show is suddenly over and the ponzi scheme fails.

This leaves the investors with nothing. It’s rare that ponzi money is found and even when it is, it won’t even cover the invest­ments made — that was spent on the car, watch, and suit.

Is Social Security a Ponzi Scheme?

The short answer is yes. Social security takes money from the young and gives it to the old. It works for two reasons:

  1. Social Security is a law. Without the legal require­ment, Social Security would have collapsed long ago.
  2. It is done on a massive scale. Since Social Security is a law, it can be forced upon every gener­a­tion. Instead of convincing new investors, the govern­ment forces us to invest into the program.

This worked great when the program was started. The baby boomers were starting their lives and there were a dozen Americans paying in for every person drawing. In addition, when Social Security started, life expectancy was in the mid 60s. Since you start pulling at 59 and a half the people drawing from the fund only used it for a couple of years.

Now? There are 2 workers for every person drawing. In addition, life expectancy is now in the 80s! This is why Social Security is getting so much press and why Rick Perry doesn’t like it. There are too many people drawing from Social Security and not enough babies to cover the workers. By the time 40-year-olds hit 59 and a half the scheme will have failed.

Why Are We Scared?

The negative reaction to Rick Perry’s statement makes sense. When a Ponzi Scheme is uncovered it is imme­di­ately shut down and those involved go to prison. No one wants Social Security to end. Millions of people depend on it to survive. I have friends who need those checks to eat. It’s scary to think they might suddenly be without any money.

The reaction makes sense, but shows a misun­der­standing of what Perry proposes. Any politi­cian who ends Social Security is creating political suicide. Perry doesn’t want to end social security, he wants to replace it.

Perry, (much like Bush a few years back) wants to replace social security with a mandatory retire­ment savings account. It would shift from paying for someone else to paying for your future. The system does not end social security nor leave our friends and family without their needed income.

Under­standing is Key

Social Security needs to be completely done away with. It won’t withstand another generation.

But, as voters and human beings we need to stay away from phrases like “Social Security is a Ponzi Scheme” or “Rick Perry wants little old ladies to go broke and die”. They want us to be manip­u­lated by our emotional reaction. They hope we’ll join them in their hatred of the other side. Don’t play their game.

Stay informed. Know what’s happening. And vote wisely.

16 Responses to “Is Social Security a Ponzi Scheme?”

  1. Arny September 22, 2011 at 7:34 AM #

    Nicely put sir!

    Very well explained…

    And i like rick perry.…im from Texas…so sue me! lol…j/k…

    Very insightful my friend..

    • Alex September 22, 2011 at 8:40 AM #

      Thank you, Arny!

  2. Don Sartain September 22, 2011 at 9:07 AM #

    Lol, Alex is from Texas too…or at least he lives here now. I feel I should be more confident in my knowledge of this…

    • Alex September 22, 2011 at 4:49 PM #

      Be confident, Don! I have lived in Texas my whole life.

  3. JeniferR September 22, 2011 at 9:29 AM #

    Mitt Romney wants to be up in arms about Perry’s statement when Romney himself called Social Security a criminal enterprise!

    • Alex September 22, 2011 at 4:49 PM #

      Yeah. Conflicting sound bites…

  4. Timothy Davis September 22, 2011 at 1:54 PM #

    Supporters of Social Security will argue that it is a pay-as-you-go scheme, kind of like how pensions are ran. Of course, how many pensions are left that are solvent? (As an aside, the USPS pension is over­funded; part of the reason they’re going broke otherwise.)

    To me, this is the biggest limit of the defined-benefit scheme. At least defined-contribution is more math­e­mat­i­cally honest. Social Security is running up against a demo­graphic wall and it will either mean higher taxes or reduced benefits or both; there’s no other way about it in my mind…

    • Alex September 22, 2011 at 4:51 PM #

      You’re probably right in the short term, but what if we replaced SS with something completey different? Obviously, it would have to have a cut-off date or an opt-in ability, but I think it could be really good.

      As I think about this, SS is only 100 years old; is it really a necessity?

      • Kyle September 22, 2011 at 6:46 PM #

        Well, so are things like elec­tricity, new medicines, and the concept of women voting, they’re only a century old, I’m sure that’s just rubbish that can be thrown away due to its lack of age.

        Heck, let’s get rid of things like inte­gra­tion and inter­ra­cial marriage, those are less than a century old as well.

        Just because an idea is newer than another, does not mean it is not as good or less in value than another one.

        • Alex September 23, 2011 at 9:00 AM #

          Your response is a logical fallacy. Because something is young does not mean it needs to go away and reducing my response to that is falla­cious and proves nothing.

          The prevailing idea behind keeping social security (as mentioned in several comments here on the blog) is that if we got rid of it or changed it in any way everyone (espe­cially sweet little grandmas) would suddenly die upon retirement.

          And that, my friend, is absolute rubbish. People survived before Social Security and we’ll survive after it (and there will be an after, the debating point isn’t if, it’s when).

          As you rightly pointed out, the world has changed a lot since Social Security came into existence and we need a financial program (whether private or govern­ment sponsored) that reflects what the world looks like today, not what it once looked like or what we hope it looks like.

          Thanks for joining the conver­sa­tion, Kyle!

          • Kyle September 24, 2011 at 1:26 AM #

            Where did I say grandmas would die upon require­ment? Do not put words in my mouth. And yes, people survived before social security, but much less of them did and at a much lower quality of life. That’s like saying people survived without fire. Well yeah, they did, but it wasn’t a life worth envying.

            There’s a big differ­ence between survival and living, and depriving people of resources edges them away from the latter and more towards the former.

            Does Social Security need reform? Yes. Does it need to be snipped in the bud and replaced with something that banks on stocks doing well? No.

            • Alex September 24, 2011 at 6:57 AM #

              Kyle, please pay attention to what I write. I never said you claim grandmas would die, I said that’s the prevailing idea (and the one the current admin­is­tra­tion is pushing so it doesn’t have to deal with social security issues).

              I also never said that stock options were the only part of the plan, nor did I say we should hand it over to the banks. And I never said we should completely oblit­erate SS (at least not in the near future).

              From the beginning I have said there needs to be other consid­er­a­tions outside of retire­ment (disables, elderly, etc). SS does a lot more than retire­ment, but as a retire­ment plan it utterly fails.

              What do you do for people like Colonel Sanders who gets his first SS paycheck and it’s $105 dollars? That’s not quality of life.

              I have friends who are capable of making WAY more than they get on Social Security (they are disabled and in their 20s) but they are afraid to do anything because if they make too much money and lose their job they also lose the SS!

              Or the guy making several thousands of dollars a month, but because he’s disable and on medicaid (he’s paralyzed from the neck down) he can’t keep more than $700 dollars for all his living expenses. http://bit.ly/pYXcs1 < –(that is a story worth reading, he gave up medicaid and moved to Mexico!)

              What is your answer to these and other issues? What changes should be made to social security? How would it deal with these issues? What restric­tions would you put in place to help eliminate the abuses in the current system (drug dealers, increases don’t match inflation, etc)?

              I’m inter­ested to hear your plan, friend. :)

  5. Pastor Matt September 22, 2011 at 2:29 PM #

    I agree BUT, as a former political hack, I think it was a foolish way for Perry to put it. In a soundbite culture, you cannot count on a vigorous and fair debate. A week after Perry said it, 1/3 of inde­pen­dents said they would NOT vote for him. When you’re running for president(and you want to do more than just make a statement), that’s stupid! It is fine for pundits to call it a ponzi scheme but someone who wants to defeat Obama has to watch his verbiage.

    • Alex September 22, 2011 at 4:51 PM #

      Very true. Sounds bites don’t work and this one has been hitting Perry hard.

  6. Loren Pinilis September 22, 2011 at 2:59 PM #

    When Bush was trying to push for private accounts in Social Security a few years ago, I actually got to debate the senior lobbyist for the AARP at my college. It was a shame that we really kinda ran out of time before either one of us got going. One of the solutions the AARP offered as a potential fix to the Social Security solvency problem was to change the 75-year horizon of eval­u­a­tion to only 37.5 years. In other words, it changed absolutely nothing except that we only worried about our ability to pay Social Security for the next 37 years instead of the next 75. It’s like someone having a problem with meeting expenses for the month, so they just decide to only pay attention to expenses for the next two weeks.
    The fact that they could even bring that up as a solution just floored me. It’s politics and nothing more than politics.

    • Alex September 22, 2011 at 4:52 PM #

      Very true, Loren. Very, very true.

      Unfor­tu­nately, most people don’t under­stand that and we’re stuck seeing this stuff over and over and over again.

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