Social Security

Is Social Security a Ponzi Scheme?

Republican presidential contenders scare seniors with some simple truths.

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At the Republican presidential debate in Tampa on September 12, Mitt Romney said Rick Perry had needlessly "scared seniors" by calling Social Security "a Ponzi scheme." Romney, more sensitive to the anxieties of retirees, prefers to say "the American people have been effectively defrauded out of their Social Security" (as he puts it in his 2010 book No Apology) because Congress has spent the program's surplus revenue instead of saving it to pay for future benefits—the sort of crime for which bankers "would go to jail."

See the difference? Neither do I. Both the former Massachusetts governor and the current Texas governor understand that Social Security is a transfer program disguised as a retirement plan and that its frequently mentioned "trust fund" does not actually exist. Their spat over how exactly to characterize that situation is illuminating not because it reveals substantive differences between them but because it shows how often these simple truths are overlooked.

The day of the debate, for instance, USA Today opined that "Social Security is most certainly not a Ponzi scheme," because Ponzi schemes "are criminal enterprises, which Social Security is not." Fact-checking Perry after the debate, CNN declared that "Social Security is not a fraudulent criminal enterprise" but "a legitimate government program." When the government does it, that means it's not illegal.

Digging deeper, Reason Foundation Senior Policy Analyst Shikha Dalmia noted that Social Security is in some respects worse than a Ponzi scheme, since participation is mandatory, money is diverted not only to earlier investors and the fund manager but also to various government programs, and the con goes on and on, even after it is revealed. I might add that Ponzi schemes offer much better returns (initially).

At the Tampa debate, Perry pointed out that Social Security "has been called a Ponzi scheme by many people long before me." It's true! And what did they mean by that?

As CNN helpfully noted, "the Securities and Exchange Commission defines such a scheme as 'an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.'" Social Security benefits likewise are funded not by returns on money that current retirees "paid into the system" but by payroll taxes collected from current workers. Yet the government misleadingly portrays Social Security as a pension program, periodically informing us about the retirement benefits we've "earned," as if our money is being saved and invested for us.

Don't be embarrassed if you've fallen for this scam. So has The New York Times. It tried to set Perry straight by reporting that "economists of all stripes agree" Social Security won't "exhaust the money in the trust fund" until 2037.

But as the Times itself conceded last year, this trust fund is no more than "an accounting device" that represents how much the government owes itself—or, in other words, how much must be extracted from taxpayers to cover all the surplus Social Security money Congress has squandered over the years. The surpluses themselves are long gone, replaced by Treasury bonds that can be redeemed only through higher taxes or further borrowing (which eventually translates into higher taxes).

"This trust fund is an elaborate illusion cooked up by government magicians," Perry observes in his 2010 book Fed Up! In No Apology, Romney agrees, calling the trust fund a "fiction that's often used to obscure the extent of the crisis."

Social Security's benefits already have begun to exceed its annual revenue, meaning the program is contributing to the deficit instead of making it seem smaller. By the 2040s payroll tax revenue is expected to cover only three-quarters of promised benefits.

All of the possible solutions ultimately involve raising taxes or cutting benefits. But in settling on a particular fix, it is helpful to understand the true nature of the system we are reforming.

Senior Editor Jacob Sullum is a nationally syndicated columnist.

© Copyright 2011 by Creators Syndicate Inc.

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  1. Ponzi…yada yada…Boomers…yada yada…class warfare.

  2. Sort of like shouting “Fire” in a burning building tends to scare the tenannts. Better to whisper “There may be a problem with rapid oxidation of the building materials which could lead to structural integrity degradation.” No need to scare folks. Why, that might lead them to do something rash, like leave the building or giving the arsonist a beat down.

    1. AAAGGHH!! “or give…” – where’s my damned Diet Pepsi Max?

      1. Between your fiber supplements and Social Security check?

  3. Sounds like the guy is making a LOT of sense to me. It really is a scam.

    http://www.totally-anon.us.tc

  4. when Bernie Madoff did it, it was called a crime. When govt does it, it’s called SS. Look at how both Madoff’s scheme and SS function; explain what the difference is.

    1. Ponzi schemes rely on voluntary investments. They haven’t the monopoly on force that the federal government enjoys. In SS, there is no choice.

      Ponzi bilks suckers, some of whom, by definition, will never be paid. SS bilks taxpayers, all of whom have been paid, so far.

      1. Even under Madoff’s scheme there was a point at which you could say the same thing.

      2. “SS bilks taxpayers, all of whom have been paid, so far.”

        Yes, it’s the “so far” part that is the problem. That’s how Ponzi schemes work (voluntary or not is immaterial).

        The early investors (retirees) collect. Those who come later are just out of luck. Their money has gone to pay the early investors.

      3. Social bilks suckers. The taxpayers are suckers for allowing the scam to continue.

  5. I am outraged when I hear people say, “That’s my money…I paid into it for 50 years…”

    When you point out to them, they will receive grossly more in benefits that they ever payed in….crickets…nope…don’t want to hear it.

    Math is a bitch!

    1. That’s my money…I paid into it

      They didn’t (by law, at the risk of fine and/or imprisonment) pay into it?

      Tell me, what would be a fair return for this forced investment, in your opinion?

      a) 10%
      b) 5%
      c) 2%
      d) Nothing. Fuck ’em!

      1. A fair return is not something they can actually receive since anything they will get will be stolen from another generation. The only way out is to let them be screwed and hopefully their kids can tighten their belts and see them to the grave with full stomachs and a roof over their heads. Then again, if a lot of the government’s ill-gotten assets could be liquidated, maybe the transition does not have to be as drastic.

        1. “WTS Department of Energy, pst with offers.”

        2. Then again, if a lot of the government’s ill-gotten assets could be liquidated, maybe the transition does not have to be as drastic.

          ^THIS^

          The government has land, buildings, planes, ships, vehicles and more. Offer a share of something that can be used or monetized and a lot of us will call it even.

          Money was taken at gunpoint, the perpetrator has assets, liquidate them.

      2. Tell me, what would be a fair return for this forced investment, in your opinion?

        a) Steal 10% from the next generation
        b) Steal 5% from the next generation
        c) Steal 2% from the next generation
        d) Steal Nothing from the next generation. Fuck ’em!

        Fixed and D. Fuck off thief.

        Stealing from others who did not steal from you is not a moral answer to having money stolen.

        1. Gotcha. Your solution is to compound a crime (involuntary “contributions” stolen from workers at the point of a gun) with a greater crime (telling those whose money was stolen from them that they can’t have it back). Nice!

          Tell me, thief: would you be content to relinquish all your future tax refunds? Since the country is broke, aren’t you “stealing” from future generations by cashing your refund check?

          1. Not if I contend (as I would) that the taxes imparted on me were illegitimate to being with.

            1. Nice! You have a “right” to your refund of stolen wages, but retirees don’t have a right to theirs!

              Nothing exposes libertarianism’s weak ethical flank like the problem of Social Security.

              1. That’s not what I’m claiming at all. I’m not asking for a refund of my stolen wages, just that they stop being stolen from this point on.

                Really? Weak ethical flank? My contention that the outright theft needs to stop is an ethical failure? That speaks volumes about your worldview. Fuck off.

              2. Social Security wouldn’t be a problem if the participation was voluntary. In fact, I’d wager the whole program would die out pretty quickly–look at all these left-wing millionaires begging the government to tax them more, yet maintain an army of accountants to get them as many tax breaks as possible.

          2. If if was stolen, how is it a greater crime for a 3rd party not to pay back the person stolen from?

            Maybe it was a good idea at the time. But in a million ways the house wins and it’s a disaster with no signs of life.

            Do what you want.

            1. If if was stolen, how is it a greater crime for a 3rd party not to pay back the person stolen from?

              Why should a third party be responsible for the payment?

          3. Tell me, thief: would you be content to relinquish all your future tax refunds? Since the country is broke, aren’t you “stealing” from future generations by cashing your refund check?

            HAHAHAHAHAHA!

            I don’t get refund checks, moron, I PAY taxes.

            Two years ago, my wife and I were both out of work. We did not take a penny of “unemployment insurance” even though one of us could have collected, for 99 weeks apparently.

            When my son was born there were complications and he spent several days in NICU. The bill was for about a years salary. When I told my wife that we could not accept welfare, she cried. It was one of the most proud moments of my entire life. Even though it seemed like a bill we could never pay, we did the right thing.

            I will never take a penny of SS. If I can not support myself I will put a bullet in my head.

            I would rather die than become what you are.

            1. If I can not support myself I will put a bullet in my head.

              Promise?

              1. Only if you dunk yourself in sulfuric acid first.

                1. That comment was for OK the Phaggot Striver Poor.

          4. While I am not in favor of option D, I do think it is the most fair. The people who voted for politicians that were going to create and perpetuate social security did so knowing that future generations could elect politicians who would end it. They should have taken that into account before they decided to steal money from their neighbors to give to their parents.

            1. Greg, Greg, Greg. You’re assuming that society values personal responsibility. It doesn’t. We have a system which will act to bail out the irresponsible. When it all comes crashing down, I’ll be the one in the back laughing.

      3. How would that money make interest? It’s gone…not invested. You going to pay the “interest” by increasing the tax?

        I’d accept a market based system, where you actually get what you’ve earned. As it is, it relies on ever increasing population growth. Which obviously unsustainable.

      4. Tell me, what would be a fair return for this forced investment, in your opinion?

        a) 10%
        b) 5%
        c) 2%
        d) Nothing. Fuck ’em!

        It wasn’t an “investment”. The government stole money from us. Saying you want them to continue stealing money from younger people so you can get back some of what was stolen is you advocating stealing.

        So, my answer is “e) make social security voluntary. if you opt out, you give up the “right” to receive any payments whatsoever. if you stay in, and you aren’t a recipient yet, your payments will be much higher, since it won’t be financed by theft any more but all the current beneficiaries will want to keep getting checks.”

      5. They didn’t (by law, at the risk of fine and/or imprisonment) pay into it?

        Fair ain’t got nothing to do with it–Fleming vs Nestor says that we aren’t entitled to a damn cent of what we paid in.

        SS is a transfer payment–a tax–and nothing more.

    2. True,some folks get everything and more, but others do not.
      I’ve run my own numbers and my SS payments are far less than what I’d generate – in an account I could actually leave to my heirs – if the same money I’ve (and my employer) paid in had gone into an S&P 500 fund since the 1960s. Seeing as how most people are math challenged, I can see how most folks think their SS payment is what they earned for having deductions made for 35-45 years.

    3. Well, yes and no. The entire “receive grossly more in benefits that they ever payed in” theme assumes a 0% interest rate. At relatively modest rates of real return (2-3%), you wind up taking a net loss. If math is a bitch, so is finance.

      1. If math is a bitch, finance is her pimp.

      2. Where exactly is said “interest” coming from? Is the “lock box” money sitting there accruing it? Is it invested somewhere creating wealth?

        Yep…finance…

      3. What the fuck are you. talking about, the claim was they’re receiving more than they paid in, which is a fixed number, which has fuckall to do with any interest rate.

        Your point has nothing to do with the initial claim.

      4. What the fuck are you. talking about, the claim was they’re receiving more than they paid in, which is a fixed number, which has fuckall to do with any interest rate.

        Your point has nothing to do with the initial claim.

    4. The amount they receive will depend in very large measure on how long they live. If they live long enough, then yes, they will receive more than they paid in. On the other hand, if they die months after retiring, all of their money is simply gone. Those social security contributions are not a part of the deceased estate — as any investment fund would have been.

  6. All I know is that I’m paying additional taxes on the lie that I’m going to be getting money back. Since I have no choice in the matter, I can’t choose to use that money in a real retirement plan. It’s worse than a ponzi scheme. That is voluntary. This is theft.

  7. SS may not have operated as a Ponzi scheme was it was first devised (despite the conceptual similarity), but the original demographic assumptions underlying it are long gone.

    Not to mention the continual expansion of benefits and addition of disability benefits since World War II.

    To make it work like the original program, we would have to cut back the level of benefits by probably half, ditch the disability component, and raise the mininum age of eligibility to at least 75, if not 80. If we did that, the program would undoubtedly be in the black, even with all the boomers starting to retire. Funny, I don’t see anybody proposing that, however.

    1. Nobody(with any real power) is proposing that because 55+ year old people would riot in the streets demanding the blood of the blasphemers. People have been entitled for so long, have adjusted their lives accordingly, think the idea of retirement is a god-given right and not the luxury it still is.

      1. I don’t know if I would riot, but I am pissed off at all the morons for all the years thinking that SS was actually a good program and that they were putting their money away for retirement…and that was 40 years ago when a was a kid.

        1. …I am pissed off at all the morons for all the years thinking that SS was actually a good program and that they were putting their money away for retirement…

          That’s the problem George. Most of these people didn’t think at all. They just wished and hoped that they could retire at 50 like in the people’s paradise of Greece. It’s more realistic and prudent to expect retirement these days, but then again, it would be more feasible for everyone if we weren’t robbed to pay for this New Deal Zombie Dinosaur in perpetuity.

      2. Our great-grandparents (even our grandparents, for some of us oldsters here) would have laughed at the notion of an average person spending one-fourth to one-third of their life as a retiree.

        There’s nothing magical about reaching 65. It’s just that in 1930, a person was pretty much used up by then, especially in a working world dominated by hard physical labor. Today, the average person in their 70s is in much better health, physically and mentally, and still capable of working, albeit with physical limitations. Why should that person be entitled to live off taxpayers, just because they reached an arbitrary age?

        Who doesn’t want to be retired? Hell, if I suddenly acquired wealth, I’d be retired tomorrow in my 40s. It’s the *expectation* of spending the last 30 years of your life not working, regardless of your financial position, that is the problem.

  8. I happen to agree with Mr. Sullum. But both Factcheck.org and Politifact claim that Social Security is NOT a Ponzi scheme:
    http://www.factcheck.org/2011/…..sept-6-12/

    http://www.politifact.com/trut…..zi-scheme/

    It’s a reminder that even independent fact-checkers are not infallible. Like USA Today mentioned above, they base their opinion on the fact that SS is not a criminal enterprise, and it doesn’t rely on deception. But these are distinctions without a difference. I suppose they would be forced to agree that at the very least, SS is an open and legal version of a Ponzi scheme…

    1. good points
      http://money.usnews.com/money/…..retirement

      The fact remains that SS was premised on an ever expanding population (growth). The very earliest beneficiaries got a windfall. A lot of the middle break even. Young people will get screwed.

    2. Social Security gives Ponzi schemes a bad name.
      “doesn’t rely on deception”? BULL SHIT!
      What’s “criminal” is the way my ass hurts.

    3. The lack of deception is completely cancelled out by the forced participation.

  9. Of course, nobody warns that the Pentagon will run out of money. The political system makes sure that the military stays fully funded, something which it could just as easily do for Social Security by making a few changes and paying the benefits out of general tax revenues.

    1. Maybe they should:

      The Congress shall have the power… To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years…

    2. They DO pay benefits out of general tax revenues. The general fund. All taxes go into the general fund, including payroll taxes.

  10. This article seems vaguely familiar…

    All of the possible solutions ultimately involve raising taxes or cutting benefits. But in settling on a particular fix, it is helpful to understand the true nature of the system we are reforming.

    Since it’s a Ponzi scheme, treat it like one: shut it down today, prosecute the people who started it, and distribute any remaining assets to the victims. Unfortunately there are no remaining assets, except maybe the buildings and computers and such.

  11. The definition of Gross Domestic Product: GDP = Federal Spending + Private Investment + Private Consumption + Net exports

    So, here is a simple question you should be able to answer: Specifically, how do federal tax increases and/or spending cuts (aka debt reduction) reduce unemployment or grow the economy?

    If you can’t answer, then there clearly is something wrong with the whole super committee concept.

    Those who do not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) do not understand economics.

    1. Unfortunately, you seem to believe that government (economic) numbers equate to reality.
      http://www.economist.com/node/…..ortstomars

      1. I love this overly simplistic view of the math. GDP = G+I+C+E. So you conclude that if G decreases, GDP decreases. But the others, particularly I and C, are dependent on G. So it’s more like GDP = G+I(G)+C(G)+E. What matters is how I and C are affected by G (it is most often strongly negatively). So increasing G does not mean that GDP increases. Conversely, decreasing G does not mean that GDP decreases. Most evidence suggests that the correlation between I and C is so strongly negative that decreasing G (to a certain point) increases GDP.

    2. Old Rancid Bean, we’ve seen you Modern Monetary Theory types here before. MMT is utter shit.

      http://tinyurl.com/8y53bfl

  12. Anyone else sick of the PC Democrats feigning outrage when somebody says that the emperor has no clothes?

    It is a Ponzi scheme by any objective standard. It is unconstitutional by any simple reading the of the text and also unworkable and immoral.

  13. It’s Social Security *Insurance*. When did politicians start characterizing this as a retirement plan (probably from the start)? However, if it was merely insurance, there would be no payments from it unless you actually needed it.

    1. It was somewhat closer to the insurance model at first, from an actuarial standpoint. A substantial portion of the population didn’t live long enough to receive benefits, and the amount of benefits was low by current standards. Moreover, even those who lived beyond retirement age generally didn’t linger with serious illnesses or live to the point where they would require assisted living or 24-hour nursing care.

      In the ’30s, we also still had a high percentage of multi-generational households, and even in a more “atomic” household it was more likely that elderly parents would move in with their adult children.

  14. Is there any part of the fucking status quo that Mitt Romney is not 100% ok with? Jesus Christ, he is a disgusting fucking stereotype.

    1. He’s not OK with that part of the status quo that involves him not being president.

  15. Is there any part of the fucking status quo that Mitt Romney is not 100% ok with? Jesus Christ, he is a disgusting fucking stereotype.

  16. 1. Doesn’t a Ponzi Scheme, by definition, involve defrauding the “investors”?

    2. If the government continues to pay the promised social security benefits, there’s no “defrauding” of anyone.

    3. The article states that Congress has “squandered” the “Trust Fund” money. What does Mr. Sullum propose should have been done with that surplus that was collected for the past 25 years, other than what, in fact, was done?

    1. 1) Yes, with the caveat that “investment” was voluntary. Social Security depends on robbing the victims, even the ones who know it’s theft and unsustainable.

      2) This isn’t going to happen. The benefits promised can’t be paid over the long term, no matter what tax rate is imposed.

      3) The surplus should have been returned to the people it was stolen from. All the other money stolen should also have been returned, and the program dismantled.

    2. 3. there was NEVER a “surplus”. Payroll tax is just a tax. It all goes into the general fund. Then congress creates the fiction that there is a relationship between payroll tax and SS (there is not) by arbitrarily setting the SS budget higher than it needs to be, setting it equal to the payroll tax revenues. Then they call it a payroll tax “surplus” and pretend that money is protected somehow by “borrowing” from it against future GENERAL FUND monies.

      There is no “surplus”, there never was a “surplus”, it’s all a big scam on the working class.

      1. Also note: benefits calculations have no relationship to the payroll taxes you have paid. Most people don’t realize this, even SS critics.

        1. Uh…say what? Your contributions are determined by your income, your benefits are based on your income. How is that disconnected?

          1. Earned income is not payroll taxes.

    3. Oh, I don’t know….maybe they should have bought special issue treasury bonds that were collateralized by CASH like every other bond issuer is required to. It’s called the “Interest and Sinking Fund.” It’s purpose is to make sure that the CASH will be there to pay the bondholders when the bonds become due. Try issuing bonds in the non-governmental sector without one and see what happens to your ass. (Hint: It gets corn-holed if you bend over in the shower)

    4. 3. The article states that Congress has “squandered” the “Trust Fund” money. What does Mr. Sullum propose should have been done with that surplus that was collected for the past 25 years, other than what, in fact, was done?

      Well, those who were taxed would have either had to pay more taxes, or they would have had to spend less money. The money “paid in” to Social Security was spent instantly, on the people who paid in were taxed.

      Social Security amounts to a tax where the government spent the money right then and also promised a return, with interest.

  17. Is Social Security a Ponzi Scheme?

    Nah. Social Security is a welfare program that was disguised as a Ponzi scheme to make it palatable to the American voter.

  18. It will likely be by short changing the cost of living adjustment in SS payments + removing benefits from some people. But one way or another the value will fall to a near starvation level if that is ones only income. It will still be there but not worth much.

  19. So, what’s new already? My mother (then aged 19) told my grandfather that it sounded like a Ponzi to her in 1937 or 1938.

  20. The American population is going to get older on average. Nothing you can do about it. Its not possible to regain the youthful population ratio America enjoyed in earlier decades by growing the population, either through birth or immigration – in the long run it doesn’t work. So what are you going to do? Ultimately medical care is going to have to be rationed somehow, triage style. And people encouraged to work longer. Neither are palatable, but they are perhaps unavoidable.

  21. Farting in a jar is defintely not a Ponzi scheme. You get what you give – assuming the lids on the number 2 jars are tight fitting and you store the jars in a dark, cool place. Think of the possibilities!

  22. Whether or not Social Security is a “Ponzi scheme” doesn’t change the fact that the program is projected to go bankrupt in 2036. The way in which the program functions now is simply unsustainable. Currently Social Security and Medicare use 8.5% of nonentitlement revenuees (federal revenues dedicated to all other programs besides the two). By 2020, the deficits will grow to almost 25%. This means that within 9 years, in order to pay projected benefits to retirees and the disabled, the federal government will have to stop doing about one out of every five things it does today (http://eng.am/poetWU).

    All of the following solutions will substantially eliminate these problems: Reducing benefit payments by 5% AND increase the retirement age to 70 over time; increasing both the employee and employer contribution immediately by 1.1% for income up to $106,800 (its current limit); reducing benefit payments by 5% AND increase both the employee and employer contribution immediately by 0.05% each year for the next 20 years for income up to $106,800 (its current limit); removing the $106,800 limit and count all income towards the SS tax; decreasing the cost of living adjustment by 1% per year AND raise the retirement age to 67; or taxing income over $106,800 at 3%, index the retirement age to longevity AND decrease cost of living adjustment by 0.5% (http://eng.am/oTlck2).

    1. “… the federal government will have to stop doing about one out of every five things it does today.”

      I’m ok with this part, but could we just pretend we diverted the rest of the money to SSI and, you know, get a pizza or something?

  23. The question may be, Do you want a purple party hack, or a guy who has done far more good than bad over the course of his career?morninmojo.wordpress.com

  24. I can’t understand why Reason is so ignorant of the actual science, of the problems with the IPCC, and of the level of corruption in the climate field.

  25. A ponzi scheme? Holy christ you right wing radicals are morons. Just keep telling yourself that kook Ron Paul can save the country..get rid of SS, the fda, dep. of education and all will be well. The first step is admitting you’re all racists and that you don’t want your tax dollars supporting minorities. A shame you subhuman scum think that way. That’s self-education for you. You’re racist janitors who think they own the building.

  26. Ponzi scheme.” Romney, more sensitive to the anxieties of retirees, prefers to say

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