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June 1st, 2014 Is Social Security a Ponzi Scheme? I think I originally posted this as a regular post. Later, the worthy news bot published it. However, it definetly qualifies as one of my rants, so I am republishing it in my blog, Also, if you read it, and want to reply, you might want to do so in the regular part of the forum, where some have already replied. Is Social Security a Ponzi Scheme? Reading a lot of forum comments, I see that when Rick Perry referred to Social Security as a Ponzi Scheme, that many people took exception to that characterization. I will give my opinion on that topic in this thread, because I did not want to hijack another thread where this topic is incidental, not the main point. I will give my opinion on that topic in this thread, because I did not want to hijack another thread where this topic is incidental, not the main point. First, let me say up front that I do not think Social Security is a Ponzi Scheme, and I will give a few reason why in a moment. It would be helpful if we had a working definition of a Ponzi scheme, but I cannot help you there. Looking for a definition on the web, was not that helpful, as the term in general, come from a specific case of fraud perpetrated by one Charles Ponzi, but the term has grown to include many schemes that have some of the same characteristics, so the definitions can vary somewhat. Since we are talking about a government program, it might be best to find out what some of the characteristics of a Ponzi scheme are, from the U.S. government itself. From the U.S. Securities and Exchange Commission website, I learned that Ponzi schemes have the following characteristics: 1.They involve the payment of purported returns to existing investors from funds contributed by new investors 2.They focus on attracting new money to make promised payments to earlier-stage investors instead of engaging in any legitimate investment activity. 3.They divert funds from the investors to other purposes, besides the generation of return on investment So far, we can see why Perry (and others before him) refer to S.S. as a Ponzi Scheme, because: Social Security involves the payment of purported returns to those “investors” who are now retired, from funds contributed by “investors” still in the workforce Social Security focuses on collecting new money to make promised payments to earlier-stage “investors” instead of engaging in any legitimate investment activity. Social Security diverts funds from the “investors” to other purposes, besides the generation of return on investment for retirees etc. Now, with such striking similarities, you might ask: “Why do you say that Social Security is NOT a Ponzi Scheme”? That is a good question. Let’s look at some of the differences instead of the similarities, and we will see a few reasons why. Does a working person have the choice to not join? Ponzi scheme yes, Social Security no. Is there an upper limit on how much you can get back? Social Security yes, Ponzi scheme no. If you are collecting your return on installment payments and you die, can you will your balance to your descendants? Ponzi scheme yes, Social Security no. Is there a huge, inefficient, expensive bureaucracy that guarantees the investors money is wasted on overhead, so that much of the money is not available for the investors later? Social Security yes, Ponzi no. (although most Ponzi schemes have dishonest operators who do siphon off funds) When there are too few new investors to pay the early investors, will the plan collapse? Ponzi yes, S.S. no, the govt. just mandates more and more money to be taken from paychecks, increases the retirement age of earlier investors, and reduces their benefits, and possibly declares a needs assessment in order to qualify for benefits. Does the law prosecute systems that seek to knowingly and intentionally fleece victims by taking more from them that they will get back? Ponzi yes, S.S. no, it is immune to this sort of prosecution. Does the system increase the required contribution over time? S.S. yes,: 2.25% of pay between 1935 and 1953 to 4.5% by 1960, 6.9% by 1970, 8.1% by 1980, and 15.3% by 1990. Ponzi, no, all investment is voluntary. So, now you can see for these reasons, that I do not consider Social Security to be a Ponzi Scheme. I feel it is an insult to the memory of Charles Ponzi, a criminal, cheat and crook, to compare the more abusive and lame-brained Social Security system, to his particular fraud.