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Good Question: Is Social Security A Ponzi Scheme?

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MINNEAPOLIS (WCCO) — When you hear “Ponzi scheme,” you think Bernie Madoff, Tom Petters, but perhaps not Social Security.

“It is a monstrous lie. It is a Ponzi scheme,” said Texas Gov. Rick Perry, a Republican candidate for President during a debate on Wednesday night.

Social security has problems, but is it a Ponzi scheme?

“It’s a cute sound bite, to say it’s a Ponzi scheme,” said Peter Koller, an attorney with Moss & Barnett in Minneapolis.

Although he acknowledges, “it has certain elements that resemble a Ponzi scheme.”

The scheme has a real namesake: Charles Ponzi was an Italian immigrant who claimed he was selling postal coupons to investors, promising a 100 percent return within 90 days. The interest rate was 360 percent. However, he wasn’t selling anything, nor was he investing anything. He paid early investors with the money put in by later investors.

“Not the original Ponzi scheme, it’s the most famous one,” said Koller.

The scheme eventually collapsed because Ponzi couldn’t recruit enough new participants to pay off the existing ones. He was arrested and sent back to Italy.

“A Ponzi scheme, by definition, is not sustainable,” said Tim Kehoe, a professor of economics with the University of Minnesota.

So, does social security fit the description of a Ponzi scheme?

“I think Social Security is sustainable,” said Kehoe.

Social Security used to take in more money in payroll taxes than it paid out. That surplus, however, has been borrowed by the federal government to pay for other things, and it’s also being depleted because of changing demographics: people are living longer, so benefits are being paid out longer.

By 2036, if unchanged, Social Security will only be able to pay out 77 percent of its promised benefits. So, if we’re paying into Social Security today in order to pay retirees today, isn’t that the same as a Ponzi scheme?

“It’s missing the big element, that’s the fraud. It’s not phony,” said Koller.

Everyone knows how the system works and that the money is going to pay benefits — not to buy some phony postal coupon.

Also, a Ponzi scheme runs out of people.

In a Ponzi scheme, if six people are recruited, who each recruit six friends, and on and on, after 11 levels of recruiting new people, it would need more people than the entire population of the United States.

Social security is different.

“The new people entering the scheme are new generations, so that doesn’t run out,” said Kehoe.

A Ponzi scheme offers incredible, spectacular rates of return.

“I’m not sure that we are,” with Social Security, said Kehoe.

Also, in a Ponzi scheme, the fraudster can’t really tweak the benefits formula, generally, the entire scam just collapses.

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