Social Security Is Not A Ponzi Scheme

››› ››› ADAM SHAH

Right-wing media outlets have rushed to defend Gov. Rick Perry's false claim that Social Security is a "Ponzi scheme." In fact, experts agree that Social Security's "structure, logic, and mode of operation have nothing in common with Ponzi schemes."

Right-Wing Media Push Falsehood That Social Security Is A Ponzi Scheme

Fox's Johnson: "On Social Security, This Notion Of A Ponzi Scheme, A Lot Of People Do Believe That It's A Ponzi Scheme." From the September 8 edition of Fox News' Fox & Friends:

PETER JOHNSON, JR. (Fox News legal analyst): On Social Security, this notion of a Ponzi scheme, a lot of people do believe that it's a Ponzi scheme.

STEVE DOOCY (co-host): Where's the money going to come from?

JOHNSON: And a lot of the economists and professors that have studied it said, that based upon the way we're going, it doesn't work. It is not dollar for dollar. The dollar that you and I put in today, or the 25 or 30 year old, is not going to be --

DOOCY: Sure.

JOHNSON: -- the same dollar that hopefully we get back at the time we're due those, those moneys. So for both of them, firm, decisive statements. They stuck to their positions, and I think it was refreshing for a lot of Americans in a lot of ways in spite of the cultural anthropology and sociology questions that the NBC folks and Politico decided to come up with. They were kind of strangers in a strange land.

DOOCY: Well it was nice to finally hear Rick Perry at a debate. Let's see if he changes -- if the poll positions change, we'll be --

JOHNSON: Debates are good. [Fox News, Fox & Friends, 9/8/11, via Media Matters]

Bolling: "You Can't Disagree" That Social Security "Is A Ponzi Scheme." From the September 8 edition of Fox News' Fox & Friends:

DOOCY: One of the things Mr. Perry was talking about was that Social Security is a Ponzi scheme, he didn't back down, he said this last night:

PERRY [video clip]: 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 gonna 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.

DOOCY: Mitt Romney disagreed, what do you think?

ERIC BOLLING (Fox Business host): Well you can't disagree that it is a Ponzi -- it is a Ponzi scheme. What they've done is they've taxed people now, they're gonna pay people down the road. The problem is they've run out of money. They've also raided the trust fund. There's supposed to be 2.3 trillion dollars in the fund. What are in there are a bunch of treasury notes. They say we're gonna just use this money right now, we'll pay you back. That part's not really a Ponzi scheme -- if that were a Ponzi scheme, all of government is a Ponzi scheme, but, this is easily fixable. I mean, easily fixable.

BRIAN KILMEADE (co-host): That's what everyone says, out of all the entitlements, this is the easiest.

BOLLING: And it's the most solvent, it's the one that makes the most sense. All you have to do is raise the retirement age. [Fox News, Fox & Friends, 9/8/11, via Media Matters]

Limbaugh: "I Want To Applaud" Perry's Claim That Social Security Is A "Ponzi Scheme." From the September 8 edition of Premiere Radio Networks' The Rush Limbaugh Show:

LIMBAUGH: You know, George W. Bush tried Social Security reform and used the word privatize. And, of course, the important word in Social Security is security. And it was demagogued and all this. But we're at a point here where we've got real problems. Our country cannot handle four more years. Our country as we know it can't survive four more years of this regime and these kinds of policies.

I want to applaud Perry for hanging in and sticking with it. He wrote the book Fed Up, and he's got the description in the book of Social Security as a Ponzi scheme. How can it not be a Ponzi scheme? If we can take a payroll tax holiday from paying into it whenever we feel like it -- I mean, you realize a payroll tax holiday is exactly that? They give us a year off from paying into the Ponzi scheme. [Premiere Radio Networks, The Rush Limbaugh Show, 9/8/11, via Media Matters]

For other examples of conservatives pushing the falsehood that Social Security is a Ponzi scheme, click here.

Experts: People Who Call Social Security A Ponzi Scheme "Are Very Wrong"

Social Security Administration 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 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]

Expert On Ponzi Schemes: "Social Security A Ponzi Scheme? No Way." From a CNNMoney piece headlined "Social Security a Ponzi Scheme? No way" by Boston University professor Mitchell Zuckoff, who wrote a book titled Ponzi's Scheme: The True Story of a Financial Legend:

It's hard to knock down such a persistent and seemingly elegant analogy. But since it creates a false impression of Social Security, and since I for one consider real Ponzi schemes too important and interesting to obfuscate, it's worth rebutting this myth.

First, in the case of Social Security, no one is being misled. Madoff allegedly falsely claimed to have discovered a "black box" method of earning impressive results, and by doing so enticed individuals and organizations to invest with him. 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.) [CNN.com, 1/7/09]

Economists Baker And Weisbrot: Contrary To The Claim That Social Security Is A Ponzi Scheme, "There Is Nothing Particularly Sinister About" Social Security's Accounting. From a book titled Social Security: The Phony Crisis by economists Dean Baker and Mark Weisbrot:

Some of the program's most vocal critics have therefore attacked Social Security as a "Ponzi scheme," that is, a pyramid scheme in which the first participants benefit at the expense of those who join in after them, with the whole structure collapsing underneath the hapless Generation X or perhaps their progeny. Exhibit A in this argument is the declining rate of return on Social Security contributions. For example, an average-income, single, male employee born in 1920 would have received an expected real return of 2.73 percent on his contributions, as opposed to 1.37 percent for someone born in 1943.

It is indeed true that in a pay-as-you-go system the rate of return will decline from the time the system is initiated until it reaches maturity. The program was signed into law in August 1935, and the first beneficiaries, who began to receive benefits in 1945, had paid into the system for only a short time. It was not until the late 1970s that the first cohort of workers who had paid into the system for their whole working lives began to retire; in the meantime, the total number of retirement beneficiaries drawing benefits has grown from 1.3 million in 1945 to 37.9 million in 1998 (SSA 1999, table II.H2). As a result of these dynamics, the payroll tax has been steadily increased: from 1.0 percent in 1936 to 6.2 percent on both the employee and the employer today. In 1983 benefits were also cut significantly by raising the retirement age to 67 (phased in for retirees beginning in the year 2000).

There is nothing particularly sinister about the declining rate of return generated by the arithmetic of a pay-as-you-go system. The alternative in 1935 would have been to postpone the initiation of Social Security for a few generations until a collective pension fund could have been built up, with payments based on the returns generated from these assets. This was not an attractive option in the middle of the Great Depression, when so many senior citizens, as well as their families, were impoverished. The nation opted instead for a pact between generations, and this accord has been maintained. Is it unfair that earlier recipients received a higher return for their contributions? Perhaps some will see it that way, but how many Generation X-ers would trade their grandparents' return on Social Security taxes and also their lifetime income for their own? [Dean Baker and Mark Weisbrot, Social Security: The Phony Crisis, University of Chicago Press, 2001, via Google Books]

Marketplace Economics Correspondent Chris Farrell: Social Security "Is Not A Ponzi Scheme, And There's A Lot Of Money That's Been Set Aside" To Pay Benefits "Down The Road." From the September 8 edition of American Public Media's Marketplace Morning Report:

JEREMY HOBSON (host): A monstrous lie, a Ponzi scheme -- Chris, when I hear Ponzi scheme, I think Bernie Madoff. Is Social Security a Ponzi scheme?

CHRIS FARRELL (Marketplace economics correspondent): No. There are real workers, there's real wealth, that are backing backing Social Security. So no, it is not a Ponzi scheme, and there's a lot of money that's been set aside to help pay as you go down the road. However, Social Security over time does need some changes. Not a Ponzi scheme, but the status quo can't stay the same either.

HOBSON: Marketplace economics correspondent Chris Farrell, thanks so much. [American Public Media, Marketplace Morning Report, 9/8/11]

CBS MoneyWatch.com Piece: "Social Security Simply Doesn't Fit [The] Definition" Of A Ponzi Scheme. From a CBS MoneyWatch.com piece by Steve Vernon, a fellow of the Society of Actuaries:

A Ponzi scheme is a purposeful investment swindle in which early investors are paid off with money put up by later investors in order to encourage more investors. Along the way, the perpetrators pocket a lot of the investors' money -- remember Bernie Madoff? Social Security simply doesn't fit this definition. While the first Social Security beneficiaries did receive more in benefits than the amounts they paid in FICA taxes, Social Security lacks the fraudulent, profit-making intent to fit the definition of a Ponzi scheme. Social Security is simply one generation helping another. [CBS MoneyWatch.com, 12/8/10]

Poverty & Public Policy Journal Editor-In-Chief: Social Security "Bears No Resemblance To" A Ponzi Scheme. From a 2010 article by University of Missouri-Kansas City professor and editor-in-chief of Poverty & Public Policy Max Skidmore titled "The U.S. System of Social Security: Emphatically Not a Ponzi Scheme":

As I make clear in Securing America's Future, "Social Security is not a Ponzi, or pyramid, scheme; it bears no resemblance to one." Social Security does not promise great riches, and in fact is not an investment scheme at all. All participants benefit. Even the unusual person with no dependents who dies before retirement without ever having become disabled has received a measure of protection from disability insurance. This person may also have benefited indirectly by not having to support elderly relatives who are independent because of Social Security. The situation of such a person is similar to that of the homeowner who has fire insurance but never has a house fire; that homeowner has benefited from the insurance coverage, and is hardly likely to consider it unfortunate that his house didn't burn. Social Security does not encourage risk, and certainly does not benefit a manipulator. In fact, it "turns the notion of a Ponzi scheme upside down; instead of impoverishing all but a few, for nearly three-quarters of a century it has provided extensive benefits to virtually the entire population." No Ponzi scheme can survive for an extended period, and none can pay benefits to all who participate -- or even to more than a very few of them. All participants in a Ponzi scheme lose their investments, except for the initial handful of investors (and, of course, the promoter). [Poverty & Public Policy, 2010, available via Policy Studies Commons]

PolitiFact Gave A "False" Rating To The Claim That Social Security Is A Ponzi Scheme. From a November 14, 2010, PolitiFact post:

In September, PolitiFact Wisconsin rated Barely True GOP U.S. Senate candidate Ron Johnson's statement that Washington politicians "run Social Security like a Ponzi scheme." Despite a superficial similarity, Social Security is obligated to pay benefits, a commitment the shysters who run Ponzi schemes do not share. What's more, participants are aware of how the system is operating. It's all public. In a Ponzi, investors have no clue where their money is going and are told lies by the promoters.

PolitiFact Rhode Island later rated False Republican U.S. House candidate John Loughlin's statement that "Social Security is a Ponzi scheme." Their analysis zeroed in on the lack of an element of deceit to how the 75-year-old Social Security program takes in money and pays it out. We'd add that Social Security is accountable to Congress and the American people while a Ponzi scheme is a crime.

We rate Perry's statement False. [PolitiFact, 11/14/10]

Even Financial Blogger Who Believes Social Security Is Not Working Well Acknowledges That "Social Security Is Not A Ponzi Scheme." In a post claiming that, without reform, Social Security "is likely to be a huge disappointment to millions of working Americans," MarketWatch blogger Kurt Brouwer wrote:

Social Security is not a Ponzi Scheme, but that should be small comfort to those who are counting on it. Unfortunately, Social Security is on the road to insolvency and this sad situation is unlikely to get better with time. By way of background, a Ponzi Scheme is a private investment scam that makes phony claims about high investment returns to draw in a steady supply of suckers. Eventually, the supply of suckers runs out and the scheme collapses.

Social Security is a government program designed to ameliorate old age poverty for working Americans. Social Security was created in the 1930s to help working Americans survive in retirement. In that regard, it has worked well. Unfortunately, from a financial perspective, the program is now on the road to insolvency, according to the Social Security Administration's own annual report. [MarketWatch, 9/6/11]

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, retrieved 9/8/11]

But Social Security's Finances Are Fully Disclosed To People Paying Into The System. The Social Security Administration 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 Social Security Administration 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]

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 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, retrieved 9/8/11]

But The Government Can Continue To Collect Taxes To Pay For Social Security Indefinitely. From the 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 the article by Social Security Administration 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]

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