Politics of the week

Is Social Security a Ponzi Scheme??

Much debate has been going around about Social Security being a Ponzi Scheme, so I decided to delve into this topic a little deeper and form an opinion for myself.  Lets start with the basic definition of a Ponzi Scheme:

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. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

Ok, lets take out the "fraudulent" part for a sec and see if Social Security meets the technical requirements of a Ponzi Scheme:   

Indeed it does, but it is a lot more complicated then what you may think which is why I will link to a few articles to help support this opinion.

First article:  http://www.chron.com/opinion/outlook/article/Krauthammer-Social-Security-lockbox-is-full-of-1690376.php

This article outlines what happens with the money you pay into Social Security while you are working.  You basically get an IOU in the form of a treasury bond from the government, but they spend those dollars today to pay retirees who are receiving Social Security now, so in effect, there is NO MONEY in there for you.  This is screaming Ponzi Scheme, but it actually gets worse...

Second article: http://www.cato.org/pub_display.php?pub_id=13625

This article lays out the numbers game that is being played out with Social Security right now.  In a nutshell the number of working citizens paying for retirees is headed towards an unsustainable equation.  Here is a key quote from the link above:   "In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two." 

So how does Social Security keep on going when it is clearly based on the Ponzi Scheme?

Good question and here is the reason Social Security is not a Ponzi Scheme.

1).  In a real Ponzi Scheme the investors are voluntary:  Social Security is mandatory so you can't "opt out".  This protects Social Security from falling apart like Bernie Madoff's Ponzi Scheme.

2).  In a real Ponzi Scheme, investors can take their money out whenever they want:  Social Security has an age eligibility requirement that must be met which protects it from falling apart like Bernie Madoff's Ponzi Scheme.

3).  In a real Ponzi Scheme, you can't change the rules or the contribution amount:  With Social Security the government can always change contribution amounts and age requirements to keep the program solvent.  Say the numbers look really really bad for the baby boomer generation, they just keep moving up the age requirements to 69, 70, 72, 75 etc...  Eventrually the number of eligible retiree's will match up favorably to what is being taken into the treasury.

4).  In a real Ponzi Scheme you can't print your own money:  Unlike any other investment, the US government can decide to just print more money when it runs out of tax payer funded money.


I'm sure there are more reasons that I am leaving out, but the overall point is Social Security is not a real Ponzi Scheme, it is just based off the Ponze Scheme and made worse by the mandates that the government can control. 

I'm looking forward to hear feedback on this and hear what others have to say about Social Security.  Needless to say I'm 36 and don't think I'll see a penny of my Social Security, but who knows.