Social Security is Not a Ponzi Scheme, Mr. Perry


Rachel Maddow and her MSNBC guests are scandalized that Rick Perry stuck to his guns that Social Security is a Ponzi scheme during the presidential debate tonight. "This kind of rhetoric will hurt him in the general elections," they reassured each other. They didn't flat out say that Perry was wrong, but actually he is. Social Security is not a Ponzi scheme. It is much worse.

Here are three reasons why:

One, a Ponzi scheme collects money from new investors and uses it to pay  previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

Two, participation in Ponzi schemes is voluntary. Not so with Social Security. The government automatically withholds payroll taxes and "invests" them for you.

Three: When a Ponzi scheme can't con new investors in sufficient numbers to pay the previous investors, it collapses. But when Social Security runs low on investors—also called poor working stiffs—it raises taxes. Indeed, Cato Institute's Michael Tanner points out,

Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.

And given that the worker-to-retiree ratio is expected to fall from 3-1 today to 2-1 in 2030 (down from 16-1 in 1950) these taxes will only go up unless the government decides to kick retirees in their dentures and slash benefits.

Rick Perry should stop soft-peddling the issue and tell it like it is.

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  1. Rick Perry just started all this “radical right wing” talk in 2009, right?
    It seemed like only yesterday he was raising Texas taxes and writing mandatory prescriptions for Gardasil.

    1. We don’t have a state income tax in Texas. There are other taxes, such as sales and property, much of it locally controlled. Unlike various Fed taxes on phones and such, Texas has not raised our taxes in decades. Locally there have been increases in sales and portions of the property tax makeup.

      1. True, there is no income tax in Texas, but property taxes are very high.

        1. Property tax rates are controlled by county and city governments. Unfortuantely, local government receives the least scrutinity, even though it has significant impact on our daily lives.

        2. Our property taxes aren’t as high as CA, NJ, NY and there’s no income tax. How much do they pay in state income tax?

          1. Sean, you are wrong. TX has the highest property taxes in the nation. Data here:

      2. Bill, you are incorrect.

        The state of Texas prefers to raise revenue through fees. Have you checked the cost of registering your car lately? Compare that to 10 or even 5 years ago. Ditto for tobacco and alcohol excise taxes. The state is taking more and more of your money whether they call it a “tax” or not.

    2. NYT’s Tom Friedman calls Rick Santelli an idiot for asking whether Social Security is a Ponzi scheme.…..n-he-idiot


      1. Tom Friedman wouldn’t recognize a Ponzi scheme if Bernie Madoff’s photo was on the prospectus.

    3. I like what Friedman says: It’s not about electing the right people, it’s about making it politically profitable for the wrong people to do the right thing.

      1. Politically profitable – like avoiding the tar and feathers!

    4. @siv, it’s about Social Security. Screw Rick Perry. He is just the whipping boy/messenger here. Look at the argument; it IS a ponzi scheme and we need to wake up and change it, i’m 51 and remember people saying it would go broke in “2030-ish” when i was 14 in “74. Guess what… IT IS GOING BROKE—-Don’t get sidetracked by WHO said it..IT’S TRUE (ps you’re 100% on the Gardasil, that’s why he is not my guy)

  2. When I saw the headline, I thought it was saying that Mr. Perry had said SS wasn’t a ponzi scheme.

    At least he admits it’s a big problem and doesn’t claim a bit of tweaking will fix it.

    1. I have been waiting 40 years for someone to have the guts to be honest. He has my 100% support along with my entire family of seven, inlaws, outlaws and simblings not included.

      Come on young people, this is your time to take back what is rightfully yours. People complain about gas being high, what about the 560% increase in the payroll tax, the more than 3300% increase in the base. Just think how this is compounded?

      1. It’s going to take more than a well-timed attack on SS to win me over.

  3. Some good linkbait there.

    Not to state the obvious, but …

    #1 if I lose money in a Ponzi scheme, who really cares if it’s the first people in or some other group. Someone has my money.

    #2 My wife was a teacher for LAUSD. She did not pay into SS. And no one forces you to work (something the Democrats are grateful for)

    #3 There aren’t enough taxes to pay for my generation’s SS benefits under the current law, just like there aren’t enough new investors in a typical Ponzi scheme.

    1. Technically, if you check the exact definitions, Social Security is not a Ponzi scheme at all, but what’s commonly called a pyramid scheme.

      Ponzi and pyramid schemes are similar in their result; i.e. when the music stops, the last set of investors takes it in the shorts. However, Ponzi schemes always center around one guy who claims to have some esoteric profit source from which to pay his investors (such as the post office coupons to which the original Ponzi attributed his unlikely profits). In pyramid schemes, the profit source is openly stated to be new money from new investors. Also, while it can be administrated by some central person or group, a pyramid scheme doesn’t have to be; the origins of “airplane” games in California are somewhat obscure because the people who started them could always take their money and run once they got their payout, and some of them did.

      What makes Social Security the worst kind of pyramid scheme, as noted, is that the government coerces people into “investing” in it, and also that it was set up with the expectation that the majority of the “investors” wouldn’t live long enough to collect any payout. This has, until recently, allowed it to continue bilking people out of their money for decades on end. Worst of all, the people responsible for starting this scam are all long gone now that the bill is finally coming due.

      1. I believe if the definitions of Ponzi and pyramid schemes are studied the Social Security scheme seems to be a hybrid of the two. Basic differences here is that the pyramid requires money from new members not more money from old members. The Ponzi requires more money from new members and/or more investment optionally from old members. Participating in either is strictly voluntary. Social Security, however is mandatory in almost all situations, plus it gets its money without question or permission from both new and old members.

        1. Ponzi scheme??!! Aw you guys. Your money is in a lockbox right here in Washington. Not to worry!

        2. Participating in a Ponzi scheme is not voluntary if the participants don’t know they are participating, ie they are being defrauded.

          So to contradict the main article:


  4. “Social Security is not a Ponzi scheme. It is much worse.”

    Madoff would have *loved* an arrangement where ‘investors’ were required at the point of a gun to ‘invest’. And where the numbers were beyond his wildest imagination. Hell, he might have kept it going for, what, 70 years or so!
    How long did the USSR last?

    1. If Rachel Maddow is of Polish ancestry, her name was probably once pronounced “Madoff.” Which would explain why she loves SS so much.

  5. It is much worse.

    Nobody’s stupid enough to argue that they’re going to ‘save’ a Ponzi scheme.

      1. Winner!

  6. Maddow is like Eva Braun. Hanging around lowlifes and pretending everything’s alright. Who cares what that useful idiot thinks? Facts don’t penetrate her brain much like something else that doesn’t penetrate…

    1. A progressive friend posted on FB: “Rick Perry: worse than Bush and Reagan.”

      Really, liberals like him and Maddow pretend to evaluate each Republican as they come along, or, long for the good ole days of past tolerable Republicans (who they hated at the time).

      There’s not to like about every Republican, but people like Maddow have nothing interesting or not entirely predictable to say about any of them.

  7. It’s surprising the Cato institute fell for the you-pay-half/employer-pays-half nonsense. The employer only writes the check for their half, drawn from the employee’s salary. The employee pays 100 percent, not 50.

    1. Or…. The employer pays 100 percent of it.

      1. No. Wrong.

        It is definitely the employee who pays all of it. Think about how it works for at least 5 minutes.

        1. No, both ways of looking at it are correct in a way.

    2. The employer only writes the check for their half, drawn from the employee’s salary.

      This is not correct. The employer contribution cannot come from the employee’s salary.

      One could argue that the employee salary would be higher if the employer didn’t have to pay the tax, but one must argue that.

      1. One doesn’t need to “argue” that. It is self evident. Employers calculate the cost of an employee. They do not, for example, calculate how much money the employee will take home.

        The entire cost of the FICA tax is borne by the employee..

        1. True, that is how the employers look at it (every employee is viewed as a fully-burdened cost, which includes health and life insurance, PTO, salary, FICA, an office/desk/cubicle/chair/floor space, a phone, computer, software, pens, post-its, paper clips, etc.), but hey, they are just big bad corporations, some of which actually try to impose a system of accountability on a few of their employees. No wonder they are so mercenary. Better to be a kindly modern government employer who is happy to pay a fully-burdened cost just so someone has a job and a place to go each day. The money required, after all, does not depend on sales or pleasing of customers or voluntary transactions or any such crass things, but rather grows on millionaires. Hence, more funding can always be procured at the point of a gun.

          1. Except in this particular case of the OASDI it’s only 10.4% (4.2% employee + 6.2% employer if not self-employed) of THE FIRST $106,800 of WAGES. That brings two points: (1) If you make $106,800 in wages or $1,000,000 in wages you pay THE SAME AMOUNT in OASDI taxes. (2) The EFFECTIVE tax rate for ‘millionaires’ is FAR lower than the marginal max of 35% since typical ‘millionaires’ don’t make their millions in WAGES but rather make most of their millions (TOTAL COMPENSATION PACKAGE) via components not subject to PAYROLL or other INCOME taxes. This is why those with money keep bitching about CAPITAL GAINS. The capital gains tax also has little effect on profit reinvestment for expansion of a corporation as it’s the MARKET that drives growth and not a tax on PROFITS which have not been invested.

            Oh, and yes, your TOTAL COMPENSATION PACKAGE is your paycheck + benefits and this is what an employer looks at when determining the cost of an employee. So it looks like we all agree on that. But, it’s also a joke on the employee when the employer says, ‘aw, snap: your health insurance cost went up — sorry’ and pulls that additional amount from your check. You just got a paycut when they do that. An honest discussion would be, ‘insurance costs went up… so, do you want a 6% pay raise (while the executives got a 28% raise) and pay the increase yourself, or pull the increase from your raise and put the rest in your check?’

        2. Nope. It’s not at all obvious that the entire amount of the employer contribution would be paid to the employee in the absence of the tax. The tax’s absence would possibly alter the labor market in other ways.

        3. One doesn’t need to “argue” that. It is self evident.

          It is not, however, self-evident that if the employer didn’t have to pay the tax, he would pay the employee all of the money that he would otherwise pay as the employer’s share of SS tax.

      2. An extra note: Contractors are often paid more (like software contractors in the Bay Area) because they must pay the employee portion of social security, have a little bit extra for their own unemployment insurance, and their own medical insurance.

        1. Good point. And even more transparently, anyone who is self-employed has to pay both halves of the payroll tax. Nothing left to be argued there, both halves are a direct tax on you.

          Unemployment is a state thing by the way. If you are self-employed and “lose your job”, you don’t get unemployment benefits generally, so I’m not sure you have to pay that one.

      3. It is 100% correct. This is EXACTLY how it works for the self-employed.

    3. Extending this line of thought leads to the dangerous conclusion that only individuals can bear the burden of taxation, not businesses or corporations.

  8. While, technically, SS does not adhere to the letter of Ponzi law… it does adhere to its spirit.

  9. Very recently, I had this same discussion with a family member who insisted that it wasn’t a Ponzi because a Ponzi required deceit. Of course, SS was sold to the public as a trust, not a tax, then argued to the courts as a tax. Also, the impression that employers “match” contributions, when in fact, those funds would have simply gone to the employee. If Madoff could force everyone to invenst and print his own money, he too would be an ongoing venture. Of course, the investors would at least had the illusion of equity. Not so with S.S.

    1. That’s not deceit, that’s just a disingenuous sales pitch. Anyone who cares enough to do a bit of research can find out where SS payments come from. Not so with a Ponzi scheme.

      1. Might wanna check your dictionary there. A disingenuous salesman is being deceitful.

        And you could fill volumes with examples of how the govt has deceived people about SS. They only ever refer to it as a welfare system on the rare occasions when it’s to their benefit.
        They fucking call them “contributions” instead of taxes. When Perot or Republicans try to do means testing, the democrats insist on giving benefits to the same top brackets they want to rape with income taxes. Look at the “trust fund” that they won’t shut up about even though it would only cover a fraction of the promised benefits anyway.

        It is a massive lie from top to bottom.

        1. …and if it were a Ponzi scheme, you wouldn’t know about any of this.

          Like I said below, a minimal amount of research is necessary to find out where SS payments come from and what the nature of the SSTF is.

          1. Tulpa is right it’s not a Ponzi scheme because there aren’t even any assets in play.

            1. It may not be a Ponzi scheme, but it is a dirty Sanchez.

            2. Sure there are assets. Pretty pieces of paper marked IOU are assets, right?

          2. …and if it were a Ponzi scheme, you wouldn’t know about any of this.

            In fairness to brave pioneers who first swindled idiots out of their money (and their descendants in the MLM schemes) discretion was a necessity after the Ponzi Law. None of the trustees of the SSA are in danger of going to prison, hence the lack of discretion.

    2. They identified the problem back in 1943 and did nothing about it. When it was going broke in the late 40’s, they added more of less desirable workers (low wage earners) who were left out of the original covered workers because they would be a drag on the program (pay less in than their benefits cost). This created a second ponzi scheme to support the first.

      Is this not deceit?

      A. J. Altmeyer, Chairman
      Social Security Board Before the House Ways and Means Committee November 27, 1944

      “There is no question that the benefits promised under the present Federal old-age and survivors insurance system will cost far more than the 2 percent of payrolls now being collected. As I pointed out in my testimony of last year, none of the actuarial estimates which have been made on the basis of present economic conditions and other factors now clearly discernible result in a level annual cost of this insurance system of less than 4 percent of payroll.”

      “Indeed, under certain assumptions the level annual cost has been estimated to be as much as 7 percent of payrolls. On the basis of a 4-percent-level annual cost it may be said that the reserve fund of this system already has a deficit of $6,600 million. On the basis of 7-percent-level annual cost it may be said that the reserve fund already has a deficit of about $16,500 million.”

      Robert Ball
      Commissioner of Social Security
      1962 and 1973,Wrote June 2005

      “When Social Security began, benefits for those nearing retirement age were much higher than could have been paid for by the contributions of those workers and their employers. This was done so that the program could begin paying meaningful benefits even though workers nearing retirement would have only a short time to contribute.”

      “Instead, the impression is left that the program was sound only when 16 paid in for every one taking out. Thus, of course, when the ratio changed to 3.3 to 1, the program became “unsustainable.”

      “They ignore the fact that in 1950 only about 15 percent of the elderly were eligible for benefits and that it was expected by all who were acquainted with the program that the ratio would, of course, change dramatically as a greater proportion of the elderly became beneficiaries.”

      “What in fact happened is that when just about all the elderly first became eligible for Social Security benefits, about 1975, the ratio was 3.3 contributors to each beneficiary and the ratio has stayed that way for the past 30 years. As the baby boom reaches retirement age, as the administration says, the ratio is expected to drop for the long run to 2.0 or 1.9 workers to each retiree. But that is the size of the problem – a drop from 3.3 to 2 workers per retiree.”…..llplan.pdf

      1. This would be deceit if it were a plan carried out with the intent to deceive. But that it not what happened. Different legislatures did different things to try to fix it (or pander to constituents or whatever). There was no deliberate bait and switch.
        I think a lot of people make the mistake of thinking that government has its shit together a lot more than it actually does.

    3. Deceit.

      I still have my original SS card from 1965, when I graduated high school. It still says “NOT FOR IDENTIFICATION.”

  10. Please explain how you (Richard and newsbot) know that the employer’s contribution would automatically wind up in the employee’s paycheck if they were relieved of the SS burden. It seems to me that the employer could use the money however he wants. Higher wages, R&D, advertising, CEO pay, hookers and blow…

    1. You are right there is no way to no for sure that the employer contribution would go into your pocket but either way it would definitely go to something more productive than SS.

    2. I think the idea is that if I’m paying $100 to employ someone, including $10 in payroll taxes, then if the payroll tax is taken away, other employers are going to try to use that extra $10 to lure my employee away. So I’ll have to offer at least some of the freed-up money to the employee.

      I doubt wages would go up by the entire amount taxes were cut, but it’s likely they would go up by a certain percentage.

      1. I don’t diagree with that statement at all. I believe the pagal was attempting to undermine the entire notion that employers would use the extra money for employee wages. That is why I replied with the statement it would be better off going any where else

        1. uh, I was replying to pagal, I wasn’t objecting to your statement.

          1. Threaded comments strike again.

    3. I agree with both of the comments above.

      1. Ugh, I’m a noob at threaded comments. I’m demoting myself back to lurker.

        1. Funny. I am not a fan of them either.

          1. Yeah, noobs and lurkers suck.

    4. I can’t answer a hypothetical, but it’s simply one cost of having an employee.

      1. Sure, and having an employee is one cost of running a business. Look, I’m on board with all of the criticisms of the SS system. I just think we should stick to the facts, and I get twitchy every time I see that assertion.

        1. Try googling for Milton Friedman’s argument on the subject. Its more than just some religious assertion.

          As Tulpa says, it’s simply based on supply and demand in the labor market. When there is competition for workers, pay ultimately ends up tracking productivity. If a firm is paying less than the employee is making for them, they are earning higher margins and another firm could come along, pay a bit more, earn slightly lower margins but still make profit. This continues till an equilibrium is reached. If the govt tosses in a specific tax that applies when you have an employee, it pushes that equilibrium down by the corresponding amount. In a real world situation, salaries won’t be exactly at this point but that’s where market forces are driving it.

        2. Fair enough.

    5. The cost of doing business includes the FICA tax. There is no doubt that as FICA taxes went up, the US Savings rate has declined. In fact, during the 60’s and early 70’s the CBO combined FICA taxes with the Savings rate to publish overall savings. They viewed the FICA tax as saving for the future. When Social Security began to run negative cash flows (1955 to 1965 and 1971 to 1983) this line of reasoning vanished.

      As for the company, where would the money go if there were no Social Security?
      1. The employee would get 6.4% off the bat. US Savings rate would increase; ability to participate in the American Dream would be restored; and the true size of the general budget deficit would be known.

      2. The employer would no longer be paying 6.4%. They could keep the entire amount and add to profits. This would mean share holders would benefit in higher stock price and possible dividends.

      3. The company could lower its price because the competition lowered their price and so the consumer would save by not paying so much for goods and services. This means the employee would benefit.

      4. The government would no longer be sending out statement saying they can pay just 76% of promised benefits under current law.

      Oh, under current law, COLA is eliminated when the Trust fund falls below 20% of any given years expenses.

      Social Security by law cannot borrow money. It has statutory authority to spend only those funds received from the dedicated social security tax on wages, tax on benefits and funds in the trust fund. Federal Law prohibits transferring general revenues to any trust fund. [4] United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a),

      By law the trust fund cannot be drawn down to zero. The trustees must submit a report promptly to congress detailing benefit cuts or tax increases when in any given year the trust fund is projected to fall below 20% of that given years expenses. Social Security’s ability to pay future promised benefits is dependent solely on the ability to raise social security taxes. United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a),

    6. It’s obvious if you change from a salaried worker to a contract worker. You negotiate a price that takes into account the fact that you’ll be paying all your own FICA. Or at least, if you don’t require your employer to take that into account, you don’t know how to negotiate.

      1. You should also take into account that the employer is no longer paying unemployment tax so you should negotiate for half of that savings.

  11. And Social Security had to raise their payroll tax from 2% to 12% in an era when the base of the pyramid was flush with baby boomers.

    Fun fact: The first social security receiptant paid in $10 and got out about $10,000.

  12. Technically speaking it’s not a Ponzi scheme, because it doesn’t promise a profit on the money paid in, and because the funding mechanism is publicly known. In a Ponzi scheme the investors are kept in the dark about where the money’s coming from. SS is more a case of robbing Peter to pay Paul.

    1. Which is why she said it is much worse than a Ponzi scheme.

      1. It’s not worse than a Ponzi scheme except possibly due to the fact that it’s coerced. But of course it’s possible to imagine a coercive Ponzi scheme too.

        Of course standard terminology in the libertarian world treats fraud as coercion, which is kind of strange terminology, and which would seem to indicate all Ponzi schemes are coercive.

        but I’m talking about violent or threatening coercion.

        1. I would disagree if you look at the whole picture of SS.

          It was presented as a personal trust fund/retirement for the contributor when Congress debated it. Of course there was never any intention of it being such and now today everyone knows the true nature of the scam. Add in the fact of automatic withholdings from your paycheck it is forced coercion.

          I believe the premise that fraud is coercion but there are obviosuly different levels of coercion. No one who got caught up in the Madoff scheme was forced to contribute nor was it withheld from their check. Thus I believe her conclusion is correct that it is much worse.

          1. Not everyone understands the nature of the scam. I still hear from lots of people who claim that Social Security is only in trouble because the Republicans under President Johnson stole the money to fight Viet Nam.

            Hell, they don’t even know which President Johnson was a Republican.

    2. “the funding mechanism is publicly known” to be bullshit. When Democrats claim SS is a great system and doesn’t need reform, they are keeping their constituents in the dark.

      1. Ignorance of the law is no excuse…

        1. and we’re not talking about something obscure buried deep in the US Code. Hundreds of position papers have been written on this topic. Anyone ignorant of it is willfully so.

          1. Oh wow position papers you say? And how many of those you figure the average person has read?

    3. “Social Security was never meant to be the only source of income for people when they retire. Social Security replaces about 40 percent of an average wage earner’s income after retiring, and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably. To have a comfortable retirement, Americans need much more than just Social Security. They also need private pensions, savings and investments.

      The money you pay in taxes is not held in a personal account for you to use when you get benefits. Your taxes are being used right now to pay people who now are getting benefits. Any unused money goes to the Social Security trust funds, not a personal account with your name on it.”

      Social Security: a simple concept,

      “There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled “RESERVATION OF POWER,” specifically said: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.”

      Social Security Administration’s Web Site,

      “Workers and beneficiaries have no legal ownership over their Social Security benefits. Instead, what they have is a political promise that can be changed at any time, by any amount, for any reason. In any retirement system a lack of legal ownership is a source of insecurity. In one that is under-financed in the long run by 25 percent, it is a serious problem.”

      President’s Commission to Strengthen Social Security, Interim Report August,
      2001, Page 3

  13. What is the definition of a ponzi scheme?…..ition.html

    Finally a candidate who knows the difference between right and wrong. At age 55 I and all my children will vote for him. Keep in mind that there are 118 million potential voters under age 46. there are just 42 million seniors and less than 58 boomers which I and my siblings belong and we all view Social Security as a con.

    Too many people think they have earned their SS-OASI benefit. My reply is this;

    When a person says “We Earned it!” what exactly do they mean?

    To me, this phrase is a righteous euphemism for making the more truthful statement: “We were snookered by this Social Security Ponzi scheme, and now we are going to snooker the next generation!”

    If Social Security benefits have been “earned” who is obligated to pay benefits to those who “earned” them? Workers? On a regressive tax basis? Why? Why perpetuate a fraud upon the innocent? Who is responsible for bearing the burden of a fraud? The person defrauded? Or an innocent or unborn child?

    The definition I have heard and use goes something like this:

    A person, whom I will call the seller, asks another person, whom I call the investor, to invest in a scheme. The seller of the scheme asks for a lump sum or a periodic payment into an investment proposal from the investor. In return the seller promises a return to the investor. Normally the return is far greater than can be obtained by the seller. It is not based on any actuarial basis and the risks have not been fully disclosed nor identified.

    The seller normally provides a statement showing how well the fund is doing. This statement shows the buyers investment is paying off as stated. This can be in dark contrast to a reality. The seller will show new prospective investors the statement as proof the investment is sound.

    What normally happens is the first investors are being paid their promised returns from two sources. One source is real returns and the other is from the contributions of later investors. The seller was unable to earn the stated return on the original investors money. The seller is forced to use some of the money received, for investment, from new investors, and show it as a return on the original investors money. It is a game of moving money around to show investors good returns, keep them happy and unaware there is a problem.

    When the seller can no longer enroll new investors, they have a problem. They can not indefinitely continue to pay unreasonable returns. Without new investors, the sellers cash flow is insufficient to pay promised returns to all the investors. When this happens, the investors tend to become angry with the seller. Those who were the last ones enrolled normally loose the most.

    Old Age Survivors Insurance began with a low tax rate of 2% and promised to pay a return in the form of a benefit equal to 42% of ones average wage. Was this sound? Based on the investment vehicle (US Treasury notes), United States Wage Growth and Inflation at the time, the tax rate was over five times too low. It should have been 11.83% and this does not count the original unfunded liability based on some paying only a few years before benefits were paid.

    Just as a pyramid scheme requires ever more participants to keep its current participants happy, Social Security ran into the same problem in the early 1950’s. OASI ran into difficulty when the benefit expense began to grow faster than revenues. The US Treasuries were being redeemed thirty years before they should have been. This Trust fund should not have been tapped until well after all the original participants had retired. To keep the system afloat, they redeemed the treasuries masking the real problem. But some smart people finally realized the trust fund would be exhausted in a few years and the game would be up.

    To keep the original participants happy (continue the payments of benefits) and make it appear Social Security was a great idea, they increased the OASI tax by 50% to 3% and then increased the Base by 50%. At the same time they enrolled more non covered workers into Social Security. This is exactly what a pyramid scheme needs to do in order to continue to survive. It needs new investors. The new participants contributed revenue but by and large would not retire for decades.

    In the 1960’s the problem became acute when once again Social Security began to run deficits and the trust fund was being redeemed much earlier than it should have. They then increased taxes, the base and enrolled all those workers who were not covered by Social Security. Again social security increased its revenues to pay current participants and keep them happy (buy votes and PR) while also increasing the tax and base.

    By the 1970’s the problem was really becoming acute. Almost every worker was covered. There were no more non-covered participants (suckers). The seller could not admit benefits would have to be cut to continue Social Security. The seller would loose the senior vote for sure. The only thing left to do was raise the tax and base even more. But even raising the tax and base proved insufficient and now the seller had to raise the retirement age.

    Social Security is the “standard” for what a pyramid scheme is. I do not think there is any other pyramid scheme which has existed as long as Social Security, which has suckered as many people and which will destitute more families in the history of the world.

    You can define pyramid scheme in two words “Social Security.”

    1. Before you vote for Perry you should keep in mind that he doesn’t believe any of the things he said. He’s just stealing Paul’s position. There’s nothing in his record to suggest he would live up to it.

    2. Simple transfer from one generation to the next for the purpose of keeping old people out of poverty.

      Do you have a better way to do that, or do you not care if there are lots of old people in poverty?

      1. Do you have a better way to do that, or do you not care if there are lots of old people in poverty?

        Yes, I have a better way to do it. You can read my detailed plan at;…..n_plan.pdf (copy link to address bar)

        The median income of a senior according to the IRS is over %$75K a year. Subtracting out SS and Pensions, the Median Income of a Senior is just over $45K

        The question is due we pay those who have enough assets promised SS-OASI benefits while demanding 10.6% from minimum wage workers who have a much lower standard of living?

        The truth is that half of all SS-OASI benefits go to 1/3 of seniors. One out of five seniors have a million dollars or more!

        If we want to help those in poverty, should it only be those who are working, or should it be the nation as a whole?

        Repeal the Social Security Act, allow the worker to keep their 5.3% SS-OASI tax in their pay checks (they could add it a 401K, IRA, Roth, pay down a mortgage, save for college, buy health coverage). The employer’s portion is directly deposited into a individual retirement account that is controlled and owned by the employee.

        The SS-OASI trust fund pays a means tested benefit that is higher than the current average SS-OASI benefit to those found in need based on assets and ability to support themselves.

        In simple terms if the person can walk one mile before having to be carried, why should I carry the person the first mile and every mile thereafter. Every person should be required to provide for themselves as much as possible before becoming a burden on someone else.

        The SS-OASI trust fund ($2.6 Trillion) will last just under 9 years paying a means tested benefit. At the end of nine years we have the firs group of beneficiaries who have been allowed to save a total of 10.6% of wages for ten years. This should allow this group to have enough to provide the first 3-5 years.

        We use general revenues to pay the means tested benefit. This means all Americans, not just workers provide for those who fall on rough times. By year 40 we have the first cohorts retiring who were allowed to save 10.6% of wages. I project that less than 9% of those over age 67 will need assistance.

        What is the result? Instead of costing 10.6% of wages, it costs 1%. My children and yours will have enough assets to provide 90% or more of life time indexed wages adjusted by inflation at age 67. Compare this to SS-OASI that targets 41% of life time indexed wages and has publicly stated can pay 76% starting in 2036 and decreases to 68% by 2070.

        Social Security is a ponzi scheme. It was started with good intentions, but politicians are not very well schooled in simple math. At the same time voters have become ever more dependent on government. It is time we kick the addiction; JUST SAY NO TO SOCIAL SECURITY!

    3. Not to be picky but why is it that obviously intelligent adults in comment sections cannot spell lose? and instead use “loose” Not just here, but almost everywhere I look,maybe spell check is a curse

  14. Social Security is not technically a Ponzi scheme, for a number of reasons. But it is CERTAINLY the biggest financial scam in the history of man.

  15. I’m 19 and I think it’s a scam since what are the odds of me having access to the money I’m putting in today 50 years from now?

    So semantics aside, it’s a pretty big case of fraud that I have no choice but to contribute to.

    1. what if you have a genetic disease that means you will probably die before 40. Can you get a Social Security exemption?

      1. How about if I don’t have any diseases but I smoke and ride a motorcycle? I’m also willing to take up hanggliding.

  16. “That made for a [SS adoption] maximum tax of $60.” and “…[current] maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.”

    Alternate inflation calculation: $60 at the time was 3 oz. of gold (i.e. three US $20 gold double eagle coins, then just barely still in circulation). Gold at today’s close was $1,845.80/oz, so at melt value those three coins would today be worth $5,537.40. The result is that the maximum tax today is a 230% increase in real value.

  17. Excellent points on matters of law- none of us have legal claim to benefits iif congress changes the law.

    And also matters of fact- the entitlement mindset developed, over time, because people paid into the “system” and therefore believe they have earned a benefit.

    Payroll taxes were first collected in 1937. The first reported Social Security deduction was paid by Ernest Ackerman, who retired only one day after Social Security began. Five cents were withheld from his pay during that period, and he received a lump-sum payout of seventeen cents from Social Security.

    The first monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92

    It must’ve some heady days indeed for the people who retired on into the 1960s…

    The most egregious fraud is that Social Security participation/non participation was and is completely voluntary, otherwise, it would be unconstitutional. Think about it, not everyone yet is required to participate and the law must be applied uniformly.

    If you want to participate, just fill out a W4 and you become an “employee” and receive “credits” in return for the employment taxes of title 26 USC subtitle C that you have subjected yourself to.

    Enjoy that retirement,
    American Taxpayer Schmuck

  18. come on guys. Most ponzi schemes have to pay out their investors. Social security, well you could solve the problem by instituting a demographic shift.

    1. No. Ponzi schemes pay a small return to their investors to keep everybody happy and quiet while the “base” is expanded as rapidly as possible. As soon as the rate of growth of the base (relative to the size of the pool of investors) slows to a point where it cannot sustain the payments, the scheme folds up and the scammers (and the money) “disappear”.

    2. I am shocked! shocked, I tell you!

      Are you suggesting that elderly people might be about to suffer a string of “accidents”?

  19. It’s not a Ponzi scheme. It’s an annuity that insures you against outliving your income.

    The average person can’t save enough for the longest possible retirement, but can save enough for an average retirement.

    Solution: the ones who die early pay the ones who die late, and nobody runs out of money.

    Where SS fails is that its retirement age is out of balance. It needs enough non-retired workers to be willing to support the retired people.

    People are living a lot longer than the plan envisioned long ago.

    So just raise the retirement age for full benefits until it balances, and there’s no problem.

    You get the insurance you pay for; at the moment though you’re paying too little. Have more children if you want that to change.

    You can always retire sooner than the full benefit age, but bridge the gap on your own dime.

    1. So just raise the retirement age for full benefits until it balances, and there’s no problem.

      Wrong solution. Just kill all old people. The SWAT teams will need a make-work program after Balko puts them out of the drugs business.

      1. Sandman!

        More seriously, rhhardin’s approach is probably easier to implement. It doesn’t even seem that bad when compared to some of the alternatives.

    2. So just raise the retirement age for full benefits until it balances, and there’s no problem.

      Except that you’re changing the terms of the system. Sure it isn’t a contract per se, but the basic thought is “I fucked up, so it comes out of YOUR end.” Fraud by any other name…

      You also have to ask WHY people are living longer. Let’s first eliminate all the freedom-ending things we’ve enacted like the EPA and the anti-smoking and anti-drinking crusades and then we can reevaluate the finances of the SS system.

    3. “People are living a lot longer than the plan envisioned long ago.”

      Define a lot longer? Do you really believe this? The Social Security Administration has Period Life Tables by cohort. You should take a look.

      The problem with how media and politicians use life expectancy is without reference to age. Life expectancy is measured at each age, 0 to well over 100. For example a baby born in 1900, at age 0 had a life expectancy of 54.90 years. But at age 1 this same baby now had a life expectancy of and additional 62.26 years. At age 18 this baby had a life expectancy of another 51.68 years.

      So referencing when life expectancy is important. Also keep in mind that life expectancy for those born in 2000 at age 0 is 82.15 years. Sounds like an impressive increase right? The reason for this is that infant mortality dropped from over 18% to less than 0.3%.

      A baby born in 2011 when at age 67 can expect to live 18 days longer than a baby born in 2010 at age 67.

      In simple terms, this 18 day increase per cohort at age 67 is just barely over a half month. In terms of percent increase we are looking at less then 0.25% increase in retirement. With inflation at 2% a year, inflation has 8 times the impact as increased life expectancy in JUST ONE YEAR!

      Politicians love to talk about increased life expectancy, but the truth is the rate of change in increased life expectancy has been slowing steadily for decades.

      Keep in mind that increasing the retirement age by one year,means the worker delays retirement by one year, pays one more year’s in taxes and draws one less year in benefits. The actuarial cost to the worker is 2.5 years. In other words, to raise the retirement age by one year, the person needs collect 2.5 years more in benefits to recoup the cost of this delay.

      I suggest this link to information solely devoted to SS-OASI.

      Educate yourself and you can make informed decisions.

  20. Deciding whether SS is a Ponzi scheme on a technical basis kinda misses the forest for the trees.

    It’s plainly unsustainable, the existence of a trust fund is an egregious falsehood, and it hugely fucks over some (unwilling) participants at the expense of others. If it’s not a Ponzi, it’s a clearly nefarious investment scheme in spirit.

  21. Please don’t sully Mr. Ponzi’s name by calling Social Security a Ponzi scheme.

  22. social security is a classic math problem…

    water entering a bucket, water leaving a bucket.

    unfortunately, the field of math required to examine it as such falls under differential equations.

    still, even to a math novice, the concept of a bucket filling slower than it is draining, leading to the empty bucket, becomes obvious.

    in the grand scheme…
    msnbc is a force for good. the relationship between my precious metals appreciating and their calls for printing more money has been fantastic.

    if we ever get to act two, where we go to staunch inflation with a massive interest rate hike, i can cash out of metals and draw 8-10% interest for several years.

    thank you msnbc. seriously. thank you.

    1. “still, even to a math novice, the concept of a bucket filling slower than it is draining, leading to the empty bucket, becomes obvious.”

      Simple. Raise taxes to 900% (or the equivalent of using three firehoses to fill the bucket). The people will love that!

  23. Did Maddow, et al, mention that the Chilean model offered by Cain was set up by Pinochet?

    Oh noez.

  24. A real ponzi scheme is where you take money from, say, 100 investors. You use that money to pay off, say, 10 of them. You use the stories of those 10 people to fuel investments from 1000 more people.
    So, as with Bernie Madoff (classic Ponzi) you have a 5-10% of people that profited greatly and 90% of people that lost their money.

    With Social Security (depending on your age and income) you get back what you put into it. It may not be efficient and you probably would have gotten more if you’d invested on your own…nonetheless it’s not a Ponzi scheme. Assuming that you don’t die when you’re young (which is not really different than paying into an IRA or 401K or other investments and then dying young) you’ll get your money back.* If you live to be 100, you’ll get WAY more back than you put in.

    So it’s more like an “insurance scheme” than a ponzi scheme. It’s a scheme, for sure. It’s a scam, by some definitions. It’s just not a Ponzi scheme.

    * If you’re under 45, disregard.

    Btw, I don’t believe in really any taxation or form of government, so it’s all bullshit. I’m just saying let’s not muddy terms just to try to make a point.

    1. Oh, as to #1 (in the article), that’s just not true.

      SS money goes directly into SS treasuries. There are essentially no exceptions to that rule. SS is not diverted to other purposes.

      However… the government may borrow against those SS treasuries they are holding. So in a sense, that’s sort of like “spending SS” but not really. If you’re in the SS system, your SS investment is still sitting there.
      (Again, if you’re under 45, you’re only going to get maybe 70% of current benefits, so the leaking bucket analogy applies, but no water is being “stolen” from the bucket.)

      Again, it’s not accurate or factually true. I don’t like confusing things with misleading rhetoric just to make a point. If you’re right (and the author is right in principle) you shouldn’t need to mislead/obfuscate to make your point. SS is a broken system, that’s not hard to see.

      And, either way (successful or not) it’s still tax/theft through state force.

      1. Oh, bullshit. Every bit of money ever coerced from people for SS has been spent, much of it for unrelated purposes.

        You seem to not understand the shell game by which these supposed “savings” get funneled into the general fund. If I give you a piece of paper in exchange for your money (at gunpoint) and call the piece of paper a “SS Treasury”, and then go spend that money, the piece of paper is not a fucking asset. It is an IOU, and a worthless one at that as regards SS.

        1. Actually the SS-OASI tax is paid to the IRS which directs it to the Federal Bank where it keeps track of the deposits and with drawls/checks.

          Like a bank, the money you deposit are made available to other entities. You have little say as to whom the bank loans money, except you have the option of closing your account at the bank and taking the money else where.

          The SS-OASI has spent nearly 95% of every penny including interest on the payment of benefits. Not one penny has been spent on any non social security expenditure. The US Treasury has credited Social Security’s Account over $2.6 Trillion in Special US Treasury Notes, payable on demand.

          If you think these notes are worthless, than the national debt is $2.6 Trillion less than the $14.6 Trillion reported.



      2. If you count the missing SS trust fund money as debt our debt is 100% of gdp. Which seems to be the cutoff point for debt crises. As everyone has taken to doing lately, if you ignore the self-iou’s in the trust fund and elsewhere, we have more like 60% debt to gdp.

        So pick how you prefer to describe the fucked-upedness of our govt’s finances. Unfunded entitlements or unmanageable debt level. The result is the same. But don’t go along with their bullshit of trying to have it both ways: claiming both the smaller debt level, and that the intragovt debt is guaranteed.

      3. I have a business partner who has been doing this. He is about to see his world explode in his face as soon as I and the other partners get our act completely together. It won’t be pretty for him or the government.

      4. SS money goes directly into SS treasuries. There are essentially no exceptions to that rule. SS is not diverted to other purposes.

        However… the government may borrow against those SS treasuries they are holding. So in a sense, that’s sort of like “spending SS” but not really. If you’re in the SS system, your SS investment is still sitting there.

        If you lend me money and I turn around and spend it on building a factory, sure. The cash has left my hands but I’ve received something valuable for it whose proceeds I will use to repay you. If I spend it on hookers and blow, not so much.

        To the extent that government has spent it on productive capacity, yes, your money is still there. But they tend to spend it on inefficient bureaucracies, handouts to others and bombs for them Ay-rabs.

    2. “(which is not really different than paying into an IRA or 401K or other investments and then dying young)”

      But if I contribute to a 401(k) or IRA, won’t my beneficiaries be able to recover my contributions plus any earnings? Not so with Social Security.

  25. Obviously, point #3 in the article shows why SS is not a Ponzi scheme. Increasing the taxes as SS’s expenses have risen is actually an attempt to fund the plan. A Ponzi scheme would never do that. It would do the opposite. It would advertise something like: “Our cost of becoming an investor is low and will never go up.” It would then use that promise as a marketing tool to lure maximum investors before shutting down and stealing their money.

    SS is best described as a really shitty retirement plan. Shittily designed and more shittily executed.

    1. This is generally right, except it’s not really a retirement plan. It’s only sold to the public that way to disguise that it’s a tax that redistributes wealth to create a social safety net.

      I’m not sure that I agree that the design and/or execution is particularly “shitty.”

      1. You begin to collect SS pension when you reach a certain age, not when you reach a certain “need”. It is a retirement plan. The amount you receive as a pension payment is related to the amount you contributed, not related to the amount you “need”. It is a retirement plan. If it weren’t designed or executed shittily, would we be having this conversation?

    2. Social Security may have a very difficult time raising taxes this time.

      Think about it for a few minutes. Ever see the movie ants who bowed down before the grass hoppers in fear? The ants outnumbered the grasshoppers, but the ants never stood up to the grasshoppers until the “straw finally broke the camels back.”

      In one corner the “Ants” are 118 million potential voters under age 46. When I ran on repealing the social security Act from 2002 to 2006 my support grew from 2%, 21% to 33% mostly from those who were young. However, more than 25% of seniors also supported me. In the “grasshopper” corner we have 42 million seniors and 58 million boomers.

      I will side with my children.

      The SS-OASI benefit has no correlation to the taxes paid.

      There is no shared risk as with Social Security. The premium in this case the tax, has not relationship to the loss, which in this case you live long enough to collect. The word insurance was added to the Social Security Act in order to get around the program being unconstitutional.

  26. Perry’s ridiculous. If SS is like a Ponzi Scheme, then paying taxes for services you don’t want is like extortion.

    Oh, wait, that’s true.

  27. Social Security is like a milk cow with 310 million tits!

  28. “Rachel Maddow and her MSNBC guests are scandalized…”

    When aren’t they?

  29. All this wrangling over terminology, utility, etc is interesting and somewhat helpful, but not fundamental.

    Fundamentally, Social Security is immoral and not just because it is coercive (though that is one major reason). SS supports those who didn’t create enough assets for retirement through a collectivist Federal program based on Comtean altruism.

    The view that being poor is some automatic marker of virtue is a highly destructive idea.

    Apart from that, a not so minor consideration is that SS is – on its face – unconstitutional and no amount of dodges and spin by FDR and his progeny can get around that.

  30. A good way to tell if it is a Ponzi scheme is to ask for your money back without interest – just principal.

    Here is my offer to the government – give me back 50% of what you have taken and I’ll call it even – I’ll pay for my expenses and you leave me alone.

    The government can’t take up this generous offer that any real investment program would leap at. Why? Because it IS a Ponzi scheme complete with faked, Madoff-ype statements that are sent out purporting to tell you what is in “an account.”

  31. Rick Perry should stop soft-peddling the issue and tell it like it is.

    The expression is soft-pedal, like the one on a piano.

  32. Hey, Rush Limbaugh just read this entire piece on his show, giving it high praise.

  33. It’s “Soft *pedal* ” like the soft pedal on a piano. Not “Soft peddle” — even though that may make some sense. The correct term is “Soft pedal”.

  34. Look, the long and short of a retirement plan is the miracle of compounding interest over the years. Ignoring the fact that ALL the money we paid in has been used to pay beneficiaries, and the balance borrowed and replaced by “notes”; no one enrolled in SS has an interest bearing account. This is the reality we are facing.

    Of course the SS system can not be viewed in a vacuum, our federal/national government is AFU from stem to stern- our monetary policies and lack thereof, we are so boned…lulz

  35. You don’t know what the hell you’re talking about. Get a job.

  36. Actually Social Security is worse than a Ponzi scheme, in that it is pyramidal in counting on a population growth base to fund the retiring higher echelons, but when the population/contributors wane, then it becomes unsustainable, and what makes it even worse is that those at the bottom of the pyramid will not only be forced to pay even more for those at the top, but they will also not see any return, except in the negative. Why do you think our political class chose to opt out on this whole scheme?

  37. it is a Ponzi scheme by definition. A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. Social securtity has never made a profit. It pays out from other peoples money only. and it is going broke.

  38. “The ‘Perfect’ Federal Ponzi Operation”

    Social Security was enacted into law in 1935; thus creating the perfect and completely legal Ponzi operation.

    American citizens, who are coerced as federal government conscripts, must gamble in these fraudulent operations or face incarceration in federal prison.

    Moreover and ironically, conscripted ‘investors’ have no legal rights to exit from Social Security and demand a Ponzi operation refund; even if all other financial markets are in total collapse and chaos.

    Congress has ingratiated citizens with Ponzi gifts of monthly Social Security checks and Medicare health insurance. Consequently, many secure SSucker votes are guaranteed for national political parties.

    To run the federal Ponzi operations, Uncle Sam takes money from certain groups of citizens and then awards ‘their’ money to other groups. Moreover, the youngest group who was born after about 1965 shall be defrauded, when the schemes go bust.

    The SS Trust Fund has been secured by worthless federal bonds, while being squandered on congressional pork projects. However, many Americans would instead call such actions a breach of fiduciary trust and outright misuse of the People’s money.

    Any other American citizens would expeditiously be sent to federal prison, along with Bernie Madoff, for behaving exactly as elected federal officials routinely do; while ignoring the American Constitution with intent, impunity and immunity from prosecution.

    Please accept my apologies, but no fresh application of pastel paints could possibly make this grievous situation look any prettier. Does the most brilliant criminal fraud, which has ever been devised, work any slicker than Uncle Sam’s grand Ponzi pension scam?

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