Social Security Really Is A Ponzi Scheme

Rick Perry’s book “Fed Up!” says that Social Security is a Ponzi Scheme. Rick Perry reconfirmed his commitment to this belief on the September 7, 2011 debate on MSNBC. His opponents on stage mainly disagreed. Vice President Cheney disagreed. Karl Rove took issue with Rick Perry’s assessment – probably because of political motivations.


What is a Ponzi Scheme?

Wikipedia cites a Ponzi Scheme as:

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. 

It goes on to cite a quote from Michael Tanner:

…the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind youto pay the taxes that will finance your benefits.As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. 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. As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide.
—Michael Tanner

[/caption]There are only a few instances where the funds could never run out and the pyramid collpase on itself:

  1. Taxes increase forever. The only problem is that the government cannot increase taxes beyond 100% of income and 100% of assets.
  2. Populations increase forever. The only problem is that the US have an average birthrate of 2.1 children per couple, which is barely sustainable for more than 2 generations for any culture. No culture has ever economically survived a birthrate of less than 2.1. The current SS tax rate is 15.3% (per SSA website). Assuming Social Security taxation remains  approximately 1/6th of our income…we would need 6 working adults for every 1 retired person on Social Security.
  3. People die younger. The only problem is that people are dying older. The other bigger problem is that 40% of all Americans will be over 65.
  4. If the account actually held investments which yielded a return greater than or equal to its expenses. The only problem is that the account has no cash to invest, just IOUs.

Congressional Budget Office Report: Population Age 65 or Older as a Percentage of the Population Ages 20 to 64

CBO: Life Expectancy of 65-Year-Olds

The pyramid must collapse based on simple economics.



Sources which Wikipedia cites as agreeing that Social Security is indeed a Ponzi Scheme:

  1. Daniel Indiviglio Perry Is Right: Social Security Is a Lot Like a Ponzi Scheme The Atlantic, August 15, 2011
  2. Laursen, E. (March 12, 2010). “Is Social Security Really a Ponzi Scheme”. “The Ponzi epithet for Social Security originated in a 1967 Newsweek column by Paul Samuelson: […] A growing nation is the greatest Ponzi scheme ever contrived. And that is a fact, not a paradox
  3. “Social Security: The Enron That Politicians Have in the Closet”. Capitalism Magazine. 23 March 2002.
  4. “Yes, It Is a Ponzi Scheme”. National Review. 31 August 2011.
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