Right-wing media have continued to claim that Social Security is a "Ponzi scheme." However, experts say that people who make this claim "are very wrong."
"Ponzi! Ponzi! Ponzi!" Right-Wing Media Attack Social Security
Stossel: "Ponzi! Ponzi! Ponzi! There, I Said It. ... People Need To Hear It." In a September 13 Washington Examiner op-ed, Fox Business host John Stossel wrote that "[t]o the extent people believe there are trust funds with their names on them, Social Security is absolutely a Ponzi scheme." From the Examiner:
Ponzi! Ponzi! Ponzi! There, I said it. To the extent people believe there are trust funds with their names on them, Social Security is absolutely a Ponzi scheme. So is Medicare. People need to hear it.
Many people think that when the government takes payroll tax from their paychecks, it goes to something like a savings account. Seniors who collect Social Security think they're just getting back money that they put into their "account." Or they think it's like an insurance policy -- you win if you live long enough to get more than you paid in. Neither is true. Nothing is invested. The money taken from you was spent by government that year. Right away. There's no trust fund. The plan is unsustainable. Medicare is worse.
What sustains a Ponzi scheme is deception. If people really knew how it worked, they wouldn't sign on.
Social Security and Medicare are different. You could say no to Ponzi. I wouldn't advise saying no to the government. Not if you want to stay out of prison.
Social Security is nothing more than a promise from politicians. The next gang can break the promise. [The Washington Examiner, 9/13/11, via Media Matters]
Wash Times' Miller: "It Is A Ponzi Scheme." In her September 13 Washington Times column titled, "It is a Ponzi scheme," senior Times opinions editor Emily Miller wrote:
Texas governor [Rick Perry] is under attack for telling the unpleasant truth. At the GOP debate in Florida on Monday, CNN's Wolf Blitzer asked presidential contender Rick Perry whether he was changing his tune after other Republicans and pundits slammed him for saying Social Security is a "Ponzi scheme." The Lone Star State chief executive stood his ground: "It has been called a Ponzi scheme by many people long before me."
Mr. Perry is correct in his assessment, but Republicans shouldn't waste air time arguing semantics.
As the [SEC] defines the practice, "Ponzi-scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk." That's exactly what the Social Security law does when it guarantees seniors the full amount in benefits, no matter what happens with the markets.
The SEC adds, "With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue." Thanks to the baby boomers hitting retirement, Social Security has more retirees receiving benefits than workers needed to meet payments. Consequently, Social Security was in the red last year -- $49 billion more than came into the fund.
A Ponzi scheme always collapses. The question is whether the American people will elect a president who has the courage to rebuild FDR's Ponzi scheme into something that can last. [The Washington Times 9/13/11, via Media Matters]
Hannity And Gasparino Agree: Social Security "Is A Ponzi Scheme." During the September 13 broadcast of Fox News' Hannity, host Sean Hannity and Fox News contributor Charles Gasparino claimed that Social Security "is a Ponzi Scheme." From the broadcast:
GASPARINO: I don't know. I mean, Social Security is a Ponzi scheme. I mean -
SEAN HANNITY (host): It is a Ponzi scheme.
GASPARINO: It is not illegal, right? You know, technically, a Ponzi scheme has -- like Madoff, has to be an illegal scheme. But there's no doubt that you're not -- you are paying as you go. It is not like the money is invested, and you get what you put in based on some --.
HANNITY: No, they stole the money. Basically --
GASPARINO: It is an irrational system. And I think if you are ever going to come out and say this is a Ponzi scheme, now is the time, because people are starting to understand the issue. [Fox News, Hannity, 9/13/11, via Media Matters]
CNN's Loesch: "A Ponzi Scheme Isn't As Bad As What Social Security Is, Because Social Security Is Mandatory." During the September 11 edition of CNN Newsroom, CNN contributor Dana Loesch stated, "A Ponzi scheme isn't as bad as what Social Security is, because Social Security is mandatory." [CNN, CNN Newsroom, 9/11/11, via Media Matters]
Bolling: "It Is A Ponzi Scheme." During the September 9 edition of Fox News' The Five, co-host Eric Bolling stated of Social Security: "It is a Ponzi scheme, and that's all [Rick Perry] said. He didn't say it has to go away, and he didn't say we need to fix it. He simply said -- he stated fact." [Fox News, The Five, 9/9/11, via Media Matters]
Wash. Examiner : Social Security "Sounds Like A Textbook Definition Of 'Ponzi Scheme' To Us." A September 8 Washington Examiner editorial stated:
"They've called it 'insurance' to us in a hundred million pieces of literature. But then they appeared before the Supreme Court and they testified it was a welfare program. They only use the term 'insurance' to sell it to the people," Ronald Reagan said about Social Security in his landmark 1964 speech, A Time for Choosing. "There is no fund," Reagan continued, "because Robert Byers, the actuarial head, appeared before a congressional committee and admitted that Social Security is as of this moment $298 billion in the hole. But he said there should be no cause for worry because as long as they have the power to tax, they could always take away from the people whatever they needed to bail them out of trouble. And they're doing just that."
Reagan's description of Social Security is as true today as it was then. And conservative Republicans have been making the same case for almost 50 years. The election victories in 2010 of Republican Sens. Ron Johnson in Wisconsin and Marco Rubio in Florida show that the American people are increasingly open to this message.
Now here is Merriam-Webster's definition of a "pyramid scheme," which they note is also called a "Ponzi scheme" in the United States: "A dishonest and usually illegal business in which many people are persuaded to invest their money and the money of later investors is used to pay the people who invested first." To recap, Social Security was dishonestly sold as "insurance" when really it is no such thing, and the funds Americans pay into the program today are really paying for the benefits of those who contributed to the program years ago. Sounds like a textbook definition of "Ponzi scheme" to us. [The Washington Examiner, 9/8/11, via Media Matters]
Experts: People Who Call Social Security A Ponzi Scheme "Are Very Wrong"
SSA Historian: Social Security's "Structure, Logic, And Mode Of Operation Have Nothing In Common With Ponzi Schemes." From a January 2009 post by Social Security Administration (SSA) historian Larry DeWitt:
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. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.
If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security). During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems.
Social Security is and always has been either a "pay-as-you-go" system or one that was partially advance-funded. Its structure, logic, and mode of operation have nothing in common with Ponzi schemes or chain letters or pyramid schemes. [Social Security Administration, January 2009]
Former BusinessWeek Chief Economist: "On A Fundamental Level," People Who Call Social Security A Ponzi Scheme "Are Very Wrong." From a December 8, 2008, post by former BusinessWeek chief economist Michael Mandel:
Superficially, these critics have a point, and there is a parallel between Social Security and a Ponzi scheme. But on a fundamental level, they are very wrong, and it's worth explaining why.
First, the parallel. Social Security taxes current workers to pay Social Security benefits for current retirees. In other words, the new entrants into the Social Security system, the young workers, pay off the previous entrants, the older workers. And despite the fact you have a Social Security "account", there is no necessary link between what you paid into the system in taxes, and what you receive.
That's very similar to the structure of a Ponzi scheme, where new investors pay off the original investors. As long as enough new 'victims' are brought into the scheme, it keeps growing and growing. But when the new investors runs out, the Ponzi collapses. Analogously, the slowdown in population growth puts pressure on Social Security finances.
But there is one enormous difference between Social Security and a Ponzi scheme: Technological change. Over the past century, new technologies have enabled the output of the country to grow much faster than its population. To be more precise, the U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times.
This long track record of technology-powered growth has enabled the enormous rise in living standards in the U.S. and other developed countries. In fact, this increase in productivity -- output per worker -- is the key fact which gives us our way of life today. [BusinessWeek, 12/28/08]
For more experts explaining why Social Security is not a Ponzi scheme, SEE HERE.
Unlike A Ponzi Scheme, Social Security Discloses Its Finances
Ponzi Schemes Rely On Fictional Accounting To Pretend That Contributors' Money Is Being Invested. From the Securities and Exchange Commission:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity. [Securities and Exchange Commission, accessed 9/8/11]
But Social Security's Finances Are Fully Disclosed To People Paying Into The System. The SSA publishes an annual report on the finances of the Social Security trust fund. The latest 235-page report was published on May 13 and is available on the SSA website. [Social Security Administration, 5/13/11]
Social Security Trust Fund Is Invested In Government Bonds. From Dean Baker's "Letter to Gov. Rick Perry on Social Security Comments":
Dear Governor Perry,
When asked about Social Security during a recent campaign stop in Iowa, you said:
"It is a Ponzi scheme for these young people. The idea that they're working and paying into Social Security today, that the current program is going to be there for them, is a lie," Perry said. "It is a monstrous lie on this generation, and we can't do that to them."
With all due respect, this is not true. The recommendations of the National Commission on Social Security Reform in 1983 led to the growth of a large surplus in Social Security. This surplus was used to buy bonds and now Social Security holds more than $2.6 trillion in government bonds. As a result, the Congressional Budget Office's projections show that the program will maintain full solvency through the year 2038. [Center for Economic and Policy Research, 8/29/11, emphasis in original]
Unlike A Ponzi Scheme, Social Security Is Not At Risk Of Not Having Enough Investors
A Ponzi Scheme Inevitably Collapses When The Organizer Runs Out Of New People To Defraud. From the Securities and Exchange Commission (SEC):
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. [Securities and Exchange Commission, accessed 9/8/11]
But The Government Can Continue To Collect Taxes To Pay For Social Security Indefinitely. From a CNNMoney piece by professor Mitchell Zuckoff:
Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed on their incomes to pay benefits, with no promises of huge returns. (Of course, it's true that if Madoff had the power to require participation, he would have had an easier time keeping his alleged scheme rolling.)
Second, Social Security isn't automatically doomed to fail. Played out to its logical conclusion, a Ponzi scheme is unsustainable because the number of potential investors is eventually exhausted. That's when the last people to participate are out of luck; the music stops and there's nowhere to sit.
It's true that Social Security faces a huge burden -- and a significant, long-term financing problem -- in light of retiring Baby Boomers. (The latest projections anticipate Social Security tax revenues to fall below costs in 2017 and the Social Security Trust Funds to be exhausted in 2041.) But Social Security can be, and has been, tweaked and modified to reflect changes in the size of the taxpaying workforce and the number of beneficiaries. It would take great political will, but the government could change benefit formulas or take other steps, like increasing taxes, to keep the system from failing. [CNN.com, 1/7/09]
Unlike A Ponzi Scheme, Social Security Will Be Able To Pay Earned Benefits For The Foreseeable Future
Ponzi Schemes Can Pay Investors "So Long As There Is An Ever-Increasing Number Of New Investors Coming Into The Scheme." From an article by SSA historian Larry DeWitt:
The essence of the Ponzi scheme was that Ponzi used the money he received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to place their money with him in the false hope of realizing this same extravagant rate of return themselves. This works only so long as there is an ever-increasing number of new investors coming into the scheme.
To pay a 100% profit to the first 1,000 investors you need the money from 1,000 new investors. Now there are 2000 "investors" in the scheme, and in the second round of payouts to pay the same return to these 2,000 investors in the next round, you need the money from 2,000 new investors -- bringing the number of participants to 4,000. And to pay these 4,000, you will end up with 8,000 "investors," then 16,000 -- and so on.
If all the investors stay in the scheme, the number of participanats [sic] would double after every round of payouts. Even starting with only 1,000 "investors," by the 20th round of payouts you would need more new investors than the entire population of the U.S. Eventually, the number of new investors that would have to be found would exceed the population of the earth. Typically, however, Ponzi schemes collapse long before they reach their theoretical limit as an ever-increasing number of new participants cannot be found.
The first modern social insurance program began in Germany in 1889 and has been in continuous operation for more than 100 years. The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi's scheme lasted barely 200 days. [Social Security Administration, January 2009]
Social Security Has Been Paying Benefits For Decades And Will Pay Full Benefits Until 2036, Even If No Changes Are Made To The Program. The 2011 annual report on the Social Security trust fund states:
The combined OASI and DI Trust Funds are projected to increase through 2022, and then to decline and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036. [Social Security Administration, 5/13/11]
Even After 2036, Social Security Will Be Able To Pay "Three-Quarters Of Scheduled Benefits Through 2085." From the summary of the 2011 annual report on the Social Security trust fund:
After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085. [Social Security Administration, accessed 9/8/11]
Economist Baker: Social Security Is "Close To Being Sustainable For The Infinite Future." From an e-mail to Media Matters by economist Dean Baker:
A Ponzi scheme requires ever expanding number of participants with the current participants being paid from new members of the scheme. The deal is that people are getting paid far more back than what they paid in. In fact, participants in [Social Security] get a real return that averages around 2.0 percent. It is close to being sustainable for the infinite future. The projected shortfall is equal to a bit more than 10 percent of the programs costs (by the CBO projections -- the [Social Security] trustees have a somewhat higher figure). With a relatively modest tax increase (equal to one third of the cost of the Iraq-Afghan wars or roughly 5 percent of the wage growth projected over the next 3 decades) the program would be solvent indefinitely.
Ponzis don't work this way. [E-mail to Media Matters, 9/8/11]