Is Social Security a Ponzi Scheme?

A lot of people I know think so. From what I understand the government has borrowed money from social security, and if that is true, it pisses me off. That money should only be used for paying social security benefits, not stolen to pay for other programs. But back to Ponzi, for sure SS is dependent somewhat on the next generation paying in to help support the people who are retiring now. But, really it is more like a savings, or insurance program, because you have to pay in to get the benefit.

When social security runs out, the point will be moot.

It works as long as there is as much money coming in as going out. Where the problem arises is when there are more and more older people drawing benefits and fewer young working people to pay in. It isn’t a deliberate scam, per se, but it is running out. If they raise the maximum amount of annual income that can be taxed (right now you stop paying SS tax at around $90,000 per year), the fund will be solvent for at least another while.

I meant to say that I think Social Security is brilliant, and I hope we never walk away from it. I agree with @janbb they should raise the maximum.

@JLeslie Good save, CIA is everywhere.

@chyna LOL. I’m serious. GA. Most Americans are idiots when it comes to saving, if the big bad government isn’t forcing them too, many will wind up with a tin cup out on the street in their 80’s.

What means Ponzi, please??

@Adagio Here you go.

More answers here.

Social Security is run exactly like Bernard Madoff ran his Ponzi scheme. Although we don’t call it a Ponzi scheme because it is a government program, and, as we all know the “contributions” are “voluntary”.

SS benefits that are paid out this month are funded by the “voluntary contributions” that you and I paid in last month. There is no SS fund. It is nothing at all like a pension plan where money is actually put aside in a fund that is funded according to sound actuarial principles. SS payments are totally dependent on the govt’s ability to tax those with earned income.

SS came into being in 1935 and may have been sound at the time. But over the years it has become a political football and Congress has done whatever they wanted to do with it. The SS system that we have now bears little resemblance to the original SS system.

@janbb is correct, Social Security needs a small correction to extend its viability.

With no adjustment, the program can pay its way until 2049.

Taxing income over $106,800 will extend that. Currently a person who earns $106,800 pays the same Social Security tax as a person making $1,000,000 or $10,000,000.

@jaytkay Although I am in favor of raising the maximum, I would not say every penny of income should be taxed with no limit for social security, because you get what you give. The person who makes $106,800 and the person who makes $500,000 will ge the same social security check when they are 70 years old assuming all other things are equal (like when they were born etc.).

It’s a total fraud. There is no “Social Security Trust Fund” ... what a joke. The “Trust Fund” is filled with IOUs from the General Fund. FICA “contributions” from workers and employers this month are paid out in benefits next month to current beneficiaries, with the surplus drained off… and replaced by another IOU… this from the government with the largest deficits in the history of the world.

“Small correction” my ass. This program defines “broke”.

A Ponzi scheme, by design and intent, promises to payout more money than it actually takes in, instead rerouting the money to a few people the top of the pyramid.
Social security, by design and intent, merely rerouts the money taken in to those eligible in equal parts. So no, it is not a ponzi scheme.

Not at all. In fact the system would be in good shape if the federal government had been allowing the excess contributions to fund reserves, the earnings from which would probably ride the system through any bubble caused by the impending Baby Boomer retirements. It is only the irresponsible action of the federal government that has put the system at risk and even that can be fixed if the administration and the US Congress will timely address the problem.

No social security isn’t at all a Ponzi Scheme. Most Ponzi Schemes collapse with a year or two, with alsmost all investors losing everything. Bernie Madoff holds the world’s record for biggest and longest running Ponzi Scheme, and his scheme only paid out to a small number of people and ran for less than 20 years. Madoff wasn’t even born when the original Social Security Act was passed.

Social Security has some structural problems looming in the future because the actuarial tables used in its design are out of tune with today’s America. Medical advances have made it possible to live much longer than was anticipated in 1935 when the original act was passed. Also, birth control and changes in attitudes have reduced the birth rate. So we have an aging population drawing more than was expected plus a drop in new workers coming in to the workforce to support the system. These problems can easily be resolved, but only by increasing revenues or reducing payouts, and neither approach is politically popular.

@ETpro “These problems can easily be resolved, but only by increasing revenues or reducing payouts”.....exactly the solution for maintaining a Ponzi scheme. Increase revenues and reduce payouts. You’re right about Ponzi schemes having a limited life, UNLESS a govt, which has the power to increase revenues and reduce payouts is running it. That’s why SS has lasted so long and probably will into the future.

As opposed to a true pension system which accumulates and invests a corpus of investable assets, the earnings on which detemine the benefits to be paid.

@plethora Ponzi Schemes are intended not to pay out much of anything. They are intended to allow skimming off the top by the person or persons who set them up. If social security had followed the Republican dream of investing in Wall Street, all its current recipients would have just seen their payments cut in half.

When I say increase revenues, it will not take much of an increase to set the system back in working shape. All they need to do is raise the withholding cap a bit. I’d favor that to cutting the payout as it’s small enough right now that you can’t live all that well on it.

@ETpro Ponzi schemes MUST payout substantial sums on a continuing basis in order to continue to exist. That’s why they MUST keep getting new dollars in. Yes, huge amounts are used by the schemers, but that only continues if new contribuitons are continually increased and steady payments keep going out the door. Bernie Madoff consistently paid 10–12% per year. In fact, many people (his competitors, but not the SEC, although they were repeatedly alerted) knew he had to be running one because his payouts were so high and so consistent.

As for Wall Street, you will find liberal Democrats at the helm of most of the big firms. Timothy Geithner was Governor of the NY Federal Reserve Board prior to his current job, and you can bet he will be welcomed on Wall Street when he leaves this administration.

@plethora I will grant you that Madoff is the exception that proves the rule. He ran an exceptionally long-term Ponzi by paying out to investors who cashed out early in order to entice new investors in with his grand returns. But he did not come anywhere close to paying out all that came in. Many of his early investors heard what great returns he was generating and decided to leave their money right where it was. As evidence, the court appointed trustee in the case estimates losses at $18 billion. Madoff made off with a VERY large amount of money and had he been paying all investors, he could not have come close to that amount.

Most Ponzi schemes collapse within a year, and involve far lower losses. Often the scam artist intends to simply abscond with the money before paying anyone.

The fundamental difference between a Ponzi scheme and Social Security is intent. Social Security was established on firm actuarial tables (for 1935) and was definitely not a scheme to make a few people fabulously rich by stealing most of the money taxpayers put in in SSI withholding. Ponzi schemes are deliberate rip-ffs. There is NO intent to make them last forever, as it is not possible to do so and also make the organizer fabulously rich. They cannot grow forever and would, at some point, not be able to pay out the huge returns they promise in order to grow rapidly.

Your point about the partisan makeup of Wall Street is both false (most of Wall Street contributes to both parties but more to Republicans) and irrelevant to our discussion. I was not talking about who Wall Street brokers vote for or what party they belong to. I said that Republicans want to privatize Social Security. They fought tooth and nail to stop it from being set up back in 1935, and they have been against it ever since. Privatization of Social Security was a major objective of the Bush Administration. Fortunately, it was one blunder Bush wasn’t allowed to make.

Social security in every country in the world works as a Ponzi scheme.
Ponzi copied the framework, not the contrary.

@qashqai No, it absolutely does not. Ponzi copied the idea but corrupted it for personal profit. When corrupted that way, the set of members must grow exponentially forever in order to support payouts. No sicual security system in any developed country is structured in that way. All can run forever so long as the intake over a lifetime of work matches the payout upon retirement.

@ETpro My part of this conversation is over. I’ve spent 30 years in the financial business. I know exactly how Ponzi schemes operate and you clearly do not. @gashgal is exactly right re SS….in every country.

Bon Jour

@plethora I agree to disagree.

One of the worst features of Social Security is the fact that no one can “opt out” (up until a few years ago I would have gladly sacrificed everything in my “account”—what a hollow joke that is) for the opportunity to withdraw… and make no more “contributions”.

That, and the fact that the same government that runs this massive fraud also debases the currency in the meantime, so that yes, absolutely Social Security does pay out “nothing from something”.

@CyanoticWasp My question to you is are you saving enough money for when you retire to opt out?

That’s pretty difficult to do with 15% of my earnings being hijacked by the government for the entirety of my working career—40 years so far.

@CyanoticWasp I understand your point, but you are the very type of person who will need social security. It sounds to me like you want that money partly to spend. Even if you save $500K for your retirement, which might seem like a lot to you, you don’t know how long you will live after retiring. Social security is for the rest of your life after retirement age, your savings might not have lasted you the rest of your life, and then at age 80 you run out of money? Doesn’t sound good to me. Are you self employed? Is that why it is 15% for you? Or, do you count what your employer pays in?

Of course it is. And, like all other ponzis it will implode.

@JLeslie based on your previous responses in this thread, you flat don’t have the chops to preach to me about financial security or anything to do with economics. Please don’t embarrass yourself further in this regard.

Yes, of course I count the employer match to my “contributions”. Anyone who doesn’t is hiding his head in the sand about the actual costs of this program. The employer match is based on my service to the company, so it is “my” wages, withheld before I get a chance to invest it. Those who think they “only” contribute around 7.5% of their salary and get “so much” in return are fools—just the way their government likes them to be.

Furthermore, I very much resent your assumption that I am “the very type who will need” a paternalistic government to look after me in my dotage. Utter nonsense. However, I find myself being forced into that position.

Since IRAs first came on the scene, I’ve had one (several, in fact). I’ve had 401(k) plans with every employer who offered them, and contributed the max to obtain the best company match to those, too. Every time I’ve left an employer I’ve rolled the 401(k) into a new IRA. Now I’m at an age where I can make “catch up” contributions—to my own accounts (thank you so much, Big Brother). I understand and accept—and have lived with—“market risk”. I know very well that a half-million-dollar retirement account is insufficient to retire on. I used to joke that I could afford to retire three years before I die. Now the joke is that I can’t retire until three years after.

I didn’t say “I haven’t planned”, what I said was that it is “pretty difficult”. And it’s made that way deliberately, I know. Our government most assuredly does not want “free and independent” citizens; it wants subjects it can control from cradle to grave, which is why I resent it so much.

Don’t preach to me about this stuff.

do you really believe the employer would give the 7.5% to you when he could bolster his profits with it instead?

Is human love a Ponzi Scheme?

@CyanoticWasp I did not mean to put you on the defense, or to imply that you can’t save for yourself, I apologize. I made a poor assumptions, of course I have no idea of your total financial situation, I was just going by your answers. But, there are a bunch of Americans out there who don’t save or think about retirement, and probably need the paternalistic government. Look at how many people got themselves into mortgages they cannot afford (I am not talking about people who have lost their jobs, that is another issue altogether) or who are in credit card debt up to their elbows. Our government does not want citizens who are destitute in their old age, or at least I will say I don’t want that. Think about it like this, many of us pay for home insurance and car insurance, and might never need to use it, at least with social security, most likely you will get some of it back, unless God forbid someone dies very young. If it is true that the government takes from the SS fund to pay other government expenditures, that is what really needs to change in my opinion, not getting rid of SS.

I agree with @ragingloli I doubt if tomorrow the gov’t said _employers no longer have to contribute 7.5%, we are cutting social security in half for everyone, that the employer would give you the money in your paycheck. I think most employers would see it as a tax break for the employer. Maybe I am wrong.

you say thank you so much Big Brother, about the catch up contributions, but because we have IRA’s the earnings on that money is protected from taxes until you start withdrawing the money, so that helps you. The thing that upsets me about the tax laws regarding IRA’s is if you make too much you can’t protect that money from being taxed in the current year, AND, the worst to me is, if you own your own business you have a lot more options for contributing to 401 type funds from what I understand (although I am no expert) I think the average working guy gets screwed a little, or actually I think the business owner makes out like a bandit, especially above a certain income (but again I am no expert).

@JLeslie
Not just that. I think that even if social security was abolished altogether the employer would keep the entire 15%, because from the point of view of the employer, it is his money. He already pays 7.5% directly and only puts the other 7.5% on your salary so you can pay it. You are just a conduit to him. He knows that you do not have this 7.5% which means he knows you don’t need it and that gives him reason enough to deduct it from your salary and keep it for himself and his profits.
In short, if SS was abolished, your salary would not go up 7.5%, it would go down 7.5% and your employer’s profits would go up by 15% of your salary.

@ragingloli according to your logic we’re all stupid slaves anyway. Perhaps we’d be better off—using your logic—if we gave all control of our lives and salaries to government.

You surely do not have to be reminded that every right you have as an employee was given to people from top down, via governments (which, in democratic societies, are a tool of the people, created by the people and for the people, not an imposed ruler you have no influence on) and not from the businesses. They would have preferred to continue paying you as-low-as-possible wages that force you to send your 10 year old kids to the coal mine to earn enough for your family to survive.

@ragingloli I would not go that far. Salary is dictated by market forces for the most part, and so I don’t think a company would reduce the salary 7.5%, at least not immediately. I just asked my husband who is a VP of Compensations and Benefits what he thought if a company was told it no longer had to pay the 7.5%, if they would pass that back to the employee, and he replied a flat no. It’s like health care. I want the company to give me the money they allot for my medical insurance, and let me shop for my own insurance. Very few companies do that. That would be more like real competition in the health care insurance business, instead of sweetheart deals among corporate businessmen.

Yes it is.