Good Question: Is Social Security A Ponzi Scheme?

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.

More from Jason DeRusha
  • Redneck Purist

    Gee let me think. You give some huckster money on the promise that later he’ll give you way more than you put in. If it’s not, then there’s no such thing you moron. Anyone below the age of about 55 who thinks they’re going see even a fraction of their dough is a fool.

    • Mike

      Your right, but on one condition; if Republicans have their way, which is to destroy it.
      If Democrats gain control, they will fix it by raising the bar on contributions by raising the $109K limit. If that were to happen, it would be forever solvent.

      • me

        Hey Mike, you forget that it was the Democrats that first took the money from SS and used it to pay forBig Govnerment plans. Nice try though.

    • Once again

      Social Security isn’t like a 401(k) or a pension. It’s insurance. As in you pay premiums and if you come to have an eligible claim, you collect.

      Like auto or health insurance. If you don’t have an accident or don’t get sick, you don’t get anything.

      Simply put: if you pay into SS, and die before you retire, no benefits are paid.

      You understand that, right? The idea of insurance?

      • Jake

        Sure, except it’s like an insurance policy where you get a new neighbor who never paid into the insurance pool and that neighbor starts drawing benefits if they meet certain criteria unrelated to you. Also, with insurance, you get to decide whether and from whom to buy the insurance.

        • Nope

          Not true. It’s just like insurance. If you don’t pay premiums, you aren’t insured. Maybe try reading up on what it is before you say much more:

          Also, no one gets a decision as to auto insurance. You drive, you have to buy insurance. Unless you want to go to jail.

          • No need for SS

            Every year I get a SS report stating how much I will get in benefits from the monies I paid in as a H.S and college student. I’m self employed and haven’t paid in for 15 years. Not because I don’t want to–just the way it is. I’m never going to rely on it so I don’t care. Peolple in their 30’s don’t count on it (or shouldn’t) and we don’t care if it continues to exist as it exists now, so they can wrap it up with the boomers and revamp into another gov’t assisstance program for all I care. My parents don’t use theirs either and they have been retired for going on 10 now.

            • Well if that's true

              and you’ve been self-employed for the past 15 years and haven’t been paying your self-employment tax, you’d better hope the iRS doesn’t find out:


              • No need for SS

                I have a reliable and wonderful CPA who explained the choices to me. I’m very legal, thank you very much. I pay in many other ways—such as DONATING heavily, with my 6000 total in property taxes, to schools etc. I don’t have kids so I “donate” that portion. I take care of myself through saving and various insurances. I like to think of myself as self-sufficient. Which appears to be a crime in today’s world. I don’t have debt, of any kind, either–makes me a criminal. My husband and I live off his income, save mine. Horrible, horrible American’s, we are!

                • Good for you!!

                  Keep it up!!

                  Though you really don’t have to be so defensive about it!!

  • Redneck Purist

    Oh yeah, there is one difference. I hate the just reminded me…. Participation in a ponzi scheme is voluntary.

  • Christian Wait

    The money that was to be kept in a “lockbox” to pay for future benefits has already been reallocated to other projects, and IOUs were put in its place.

    But they promise to pay those benefits by reallocating future taxation that was to go into the lockbox to pay for the future generation’s benefits.

    Now, replace “lockbox” with “pension fund”, and “taxation” with “contributions”. Any private company that did that would see a lot of executives in jail.

    If the government was held to the same standards it holds the private sector, every single politician would be in jail.

  • Rebbecca

    If S.S. were run correctly it would be sustainable.

    • Jake

      Sure, and if the Timberwolves were run properly, they’d be NBA champions. The challenge is in how to run it properly.

      • Jim

        It’s simple. Don’t pay out more than you take in. We just need to get our politicians to stick with it instead of borrowing against it to pay for bombs and food stamps.

  • Jason Scott

    social security is easy to fix and they know how to do it, they just will not do it because it affects them.we only pay social security on the first like $120,000 earned a yer per person.if the amount was raised to every dollar earned then the money collected in 1 month would completely remove any chance of collapse for the next 30 years. imagine if they just raised the max amount to say the first 300,000 earned in a year there would be no problem or chance of collapse at all.but it would affect the upper class so that’s a no no

    • Jake

      But then it’s not really a plan for people to draw benefits based on their contributions, is it? That would be wealth redistribution, which Social Security is not supposed to be, if you believe that.

  • Bill

    Just give me back the money I already paid into It and we’ll call it even!

    • Mike

      Why don’t you pay me back the money you owe me first for educating your children in public schools and paying for your doctors visits through your socialized insurance plan that you get at work?

      • Me

        Socialized insurance plan you get at work? The employer, probably a private business, pays the majority of the premiums for its’ employees.

        • Matt

          I agree with Mike. People don’t complain when they are the ones receiving the money of others (e.i. public school system). For some reason when people receive money they feel they ‘deserve’ the money but if they have to pay money they consider it ‘unfair’.

          Everyone should pay for their own. Parents should have to pay for their kids education, people should have to pay for their own health insurance, people should have to save for their own retirement, etc. It’s not that hard to understand.

          @Me – yes, employer covered insuranace plans are socialized insurance plans. People with families (versus single people) often receive about $600 more in benefits EVERY month from their employers when they use the family health plan. That’s over $200,000 in a life. We all have to pay into the system but the benefits received don’t reflect how much a person pays in. It is very unfair.

    • GH

      I’ll even tell them to keep what I’ve paid in exchange for never having to pay it again. People my age (30’s) will never see a dime. It’s a joke!

  • John L

    mmm. we are force to pay into this entity, but all knows we aint getting any of it back when we retire, or we will get limited amount back. nooo, its not a ponzi scheme. its gov’t extortion at its worst. if i had a choice. u know freedom, i rather keep it to myself

    • It's otherwise known as


      You pay premiums. You collect benefits.

      It’s like auto or health insurance. If you don’t have an accident or don’t get sick, no benefits are paid.

      You understand that, right?

      • Redneck Purist

        No, it’s not anything like insurance. First of all it’s not voluntary, like insurance. Second, it is supposed to be a guaranteed benefit like a retirement account. Whether you’re sick or well or whatever financial or physical condition you find yourself in at age sixty-five. If you’re a multi millionaire or flat broke, you get the check.

        And also, unlike insurance, the account out of which these funds are to be paid has no money left in it. If it were a retirement fund (which is what it is – a govt, retirement fund) the people running it would now be in prison for collecting funds with a promise of a much larger future payout, when the account is empty. You know – like Bernie Madoff did.

        Rick Perry is 100% correct. The worst part about it is that it’s a crime being perpetrated on its victims by our own government while the victims watch, some of them (like you) apparently approving

        • Nope

          It’s insurance, pure, plain and simple.

          Insurance isn’t always voluntary. If you want to drive a car in this state, you have to have insurance.

          It’s insurance because if you have a valid claim, you get the payment. Just like a health insurance. If you go to the doctor, and have a valid claim, the policy pays.

          As to funds, the thing is fully funded for the next 25 years. If nothing is done, it will be able to still pay 77% of benefits.

          Try reading the Trustee’s report. You might learn something.

          Then again…………………………

  • Ted

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

    I think Mr. Kehoe doesn’t get out of the ivy halls often enough and interact in the real world.

    If my conversations with people are any indication, most people do NOT know how SS works. From what I hear, most people think SS is like a government run retirement savings account they’re putting money into to draw out later. That’s why you hear people say “I paid in all these years”. They think they have this money sitting there with their name on it, but they don’t. When I point out the fact the first recipients never paid in and nowhere on a SS statement does it saying anything about an account balance people get weird.

    The original intent was probably for it to be like an insurance policy: a large pool of premium payers against a much smaller risk pool that would draw from it. Of course, it has now ended up more like a pyramid with a rapidly shrinking base.

  • Jake

    Dear Mr. DeRusha,

    If you are going to open THIS can of worms, then you had better be a whole lot more comprehensive about it, and not look so partisan. First of all, those who started collecting SS bennies back in the 50s, 60s, and 70s, are getting MANY times more money than those who are just starting to collect NOW, and those who won’t collect for another 10-15 years will be lucky to collect just what they and their employers put in. Then you have all of those frauds who are now collecting SS “disability”, thanks to idiots like wellstone and ramstead, who said that winos and methheads and crackheads could collect. Now, you have those who are in their 50s, who are unemployed, who say that they can’t find a job because they are too old, and that qualifies as a “disability”, so they QUALIFY, and can start collecting SS benefits before the age of 62. Lawyers run ads all day long on local TV peddling their services claiming that they can help you get SS bennies before you reach retirement age. And don’t even get me started on the ILLEGAL ALIENS.
    IF there wasn’t so much FRAUD, and IF they raised the income caps, and IF congress wasn’t stealing so much of the SS funds currently in the system, it WOULD be OK for a LONG TIME. Somebody should be in jail for allowing the system to be robbed so easily.

    • KR


  • G Dog

    This from the governor of the state that gave us Enron.

    • John Frykman

      He wasn’t its governor then! What an idiotic red herring!

  • Willow

    This is an answer that is biased towards the Democratic side. Social Security *is* a Ponzi Scheme. I’m 36, and I have no illusions that I’m going to get any of it. We should be responsible for saving up for our retirement. The government should not be giving people retirement money. A huge reason why we, as a country, are in the fiscal mess we’re in is because the government is still in the business of giving people retirement money. We the people can no longer afford it.

    • Citizen

      @Willow. Social Security is one leg of a three-legged stool to provide retirement for people. The other two legs are personal savings and investments. Social Security is meant to provide a fraction of what people need to retire. You must be very young and not remember what it was like for people who were starving during the Great Depression when there was no social security income. A lot of people didn’t have the other two legs of that three-legged stool, either. At least now there is a miniscule baseline income so people won’t starve to death because that happened in the past. Is that what you want to happen again, Willow? A giant leap into the past with people roaming the highways like Okies did in the 1930’s? Or people robbing to get food? Or begging for handouts to survive? The reason our country is in such a fiscal mess is the result of 40 years of mostly GOP administrations giving tax breaks to the wealthy and corporations, and, yes, the middle class as well, while wages stagnated and jobs transferred overseas. No substitute for a healthy, broad-based tax system to pay the bills.

  • Jeff Gunn

    It’s NOT a Ponzi scheme people. Social Security is a government-run insurance program that provides the typical retiree with single-digit returns on contributions deducted from their paychecks over the course of their working lives. Why aren’t republicans up in arm about the for-profit, Ponzi Insurance companies. Democrats need to call out this big lie when republicans bring it up.

    • dan

      The simple definition of a Ponzi scheme is that it is not sustainable. With the Babyboomers coming into retirement age the ratio of workers to retirees has decreased significantly over the years and the current SS program is not sustainable : Ponzi Scheme.
      In response to your for-profit insurance companies, these are private companies that are in the business to make money and are required to keep certain reserves to guarantee solvency. The current SS program only has the American workers as a reserve. That’s the difference.

      • Citizen

        Wrong, dan. A Ponzi scheme is sustainable as long as the money keeps flowing and you don’t get caught. What really caused Bernie Madoff’s downfall was the recession–he couldn’t keep the money coming in any more. Without the recession, old Bernie might have kept going for another 20 years. Let me see, investing my money in a private company (such as found on Wall Street, and the banksters who used derivatives to bring down the housing market) or give a small portion of my income to Uncle Sam to hold for my retirement. No contest, the government wins on this one. No average working man can afford to take the risks of 401k/b accounts or the stock market for his retirement. Those are really options for the effete and elite. The current social security monies have U.S. Treasury bonds are security backed by the full faith and credit of the United States of America. Excuse me, but I believe in my country, but I don’t believe the GOP and CONservatives do. I think they are out to ruin the United States at any and all costs and undo 80 years of programs initiated by FDR to help American workers. And you are helping them.

        • dan

          Citizen, I see you didnt bother reading the article. If you read paragraph 9 is states the authors definition of a ponzi scheme. So, I would say you are wrong today.
          Govt wins in a no contest? Please please please compare any 10 year timeframe of the stock market vs the Govt plan and tell me where your money is better invested. Stock market, hands down, no contest.
          That being said the stock market isnt for everyone. You need to work thru a risk profile to determine your level of risk. In your case it would be minimal and SS or govt bonds would probably suit you the best for your comfort level. Others risk profile is much different and should not be judged by you as “no average man can take risk….”
          You are in the minority with your investment risk profile, so please dont judge others

        • DUMBcocratic vote doesn't support SS either

          “…2010 Congress installed a 2 percentage-point reduction on the social security payroll tax from the old 6.2% rate to 4.2% for one year. President Obama wants to add to that by cutting the overall rate in half. So much for the sanctity of the Social Security Trust Fund. It must be noted this is not a huge new cut but an enlargement of the existing cut. Net paychecks will not dramatically increase, but for budget purposes, the cost is around $175 billion. This is not great tax policy and raises the issues again about the funding, integrity and support of Social Security.”

  • Bill Clinton

    Social Security is a pyramid scheme. Once Again, you like to call it “insurance”, it is not. SS depends on ever increasing numbers of participants to pay the beneficiaries at the top of the pyramid. Insurance is voluntary. SS is not. Insurance policies use the proceeds of the premiums to invest in assets to offset the future liabilities. SS “contributions” are used to pay current beneficiaries, the remaining monies are spent on non-SS expenses. I can setup an annuity and get a much better payback than I ever will out of SS. The other positive aspect of opting out of SS is I mey estate gets to direct what is mine, the “premiums” I pay in to the system, rather than having them confiscated by the government upon my “transition”.

    • Mark

      Except it does not rely on an ever increasing amount or participants. It relies on the body of people paying to compensate those collecting. If the number of collectors goes up, the amount per payer goes up. Just like if say an insurance company has to payout for a major national disaster, they might have to raise your rates, even if you never filed a claim.

  • Billy "tough as nails"

    I was involved in a real Ponzi scheme called class action lawsuit against Franklin Insurance, saying SS is such shows your lack of knowledge.

    I feel the reason why you would agree with Perry’s Ponzi “lie” is because you want him as President. It’s your red meat and his attempt to appeal to young voters.

    Yes, I did get my money back thanks to the hard work of the lawyers. I strongly recommend a Roth IRA to supplement SS. There’s no guarantee that the Roth will be available when I retire as well because the funds are in the stock market but I’m pre-paying the taxes when I can (now).

  • Doug T

    I just love it when liberals try and defend the indefensible…..

    SS like Medicare and Medicaid are broken. They are bankrupt. When others suggest ways to fix the problem they are called names and suggestion are made that they are evil….Oh to live in an adult world.

    But for the liberals its all they got and logic and reason have nothing to do with it – Its ALL emotional….


  • factdealer

    The people that sit on here and say SS will not be there when i retire please tell me the date that SS expires, because people have been saying this for a decade, SS is another government run program that they will borrow money against until the U.S. is a 3rd world country, which it is doing everything it can to get there. The point is they pay people 2 years of unemployment now because they are afraid of too many people not spending money, yet you people think they will tell millions and millions of people you are old know you can’t work and you get 0cents, wake up certain government programs whether there a money maker or loser don’t go away.

  • kr

    In some respects it’s worse than a Ponzi scheme because we’re forced to pay in to it.

    If I get back what I paid in, I won’t have any gripes. If not… can I sue the government to get my money back?

  • Citizen

    The baby boomers should be really incensed about Perry’s remarks about social security. The boomers are the generation that has paid into social security the longest and most deserve the benefits. Yet, here the boomers are again getting blamed for paying into social security for over 65 years and having the gall to expect a retirement check! My children have already paid into social security for 20 years and there should be money for them, also. Social security is solvent and will remain so if Americans stand behind it and support it. What Americans need to do is NOT support the GOP plan to undo 80 years of FDR’s programs to help the working people of America. This is ultimately the GOP plan, to undo all the social safety nets put in place during the Great Depression and make America just like countries like Somalia where citizens starve and beg the Western nations for food. Is that what we want to the USA to be? Third-world nation status? At the end of the day you can’t EAT money.

    • No need for SS

      Well, keep it. We will support it for the boomers, but alot of us don’t rely on it, don’t believe in it. Don’t want it. Alot of us support the GOP for the good and betterment of this courntry. Alot of us believe we are better than Somalia.

      • Mark

        Believe away. What precisely do you believe makes us better? I always thought is was things like social security that showed that American’s value the well-being of their fellow citizens. What good and betterment do you hope the GOP to bring you? Low taxes for the rich and minimum wages for the rest at no benefit jobs with long hours?

        • No need for SS

          It appears to me Mark, that the only choice we have this time around is a Republican. I listened intently to Obama speak—sounded like any other Republican. In fact, republicans don’t even like the ideas—since they know that the ideas have already failed. Politicians are politicians. If you heard differently, hit play and watch again. At the very least, Obama is purple.

  • mfenimore

    Social Security is never going to go bankrupt. First off, our government is NOT taking the money and putting it into a Social Security account. It doesn’t exist. When we here people say SS is giving out more money than it is taking in simply means that it will start going against our national dept when it starts paying more than it takes in.

    As we all seem to know, the government just takes this money and spends it however they want! For them, at this time, it is a profit maker. Soon it will start costing the government to give us our checks. That’s it. It will just go against the rest of the 14-Trillion dollar deficit that already exists. This is why there is nothing to really “fix”. Social Security is just rolled into “income & expenses” for the government and just like all of our other budget issues . . . it will soon become an expense.

  • SoonItWill

    It is not different than other ponzie schemes. And no more sustainable that other ponzie schemes…except that the government doesn’t allow private ponzie schemes so they shut them down…they don’t want any competition.

  • Hopingforbalancedcoverage

    Social Security is Not a Ponzi Scheme, Mr. Perry
    Shikha Dalmia | September 7, 2011

    Rachel Maddow and her MSNBC guests are scandalized that Rick Perry stuck to his guns that Social Security is a Ponzi scheme during the presidential debate tonight. “This kind of rhetoric will hurt him in the general elections,” they reassured each other. They didn’t flat out say that Perry was wrong, but actually he is. Social Security is not a Ponzi scheme. It is much worse.

    Here are three reasons why:

    One, a Ponzi scheme collects money from new investors and uses it to pay previous investors—minus a fee. But Social Security collects money from new investors, uses some of it to pay previous investors, and spends the surplus on programs for politically favored groups—minus the cost of supporting a massive bureaucracy. Over the years, trillions of dollars have been spent on these groups and bureaucrats.

    Two, participation in Ponzi schemes is voluntary. Not so with Social Security. The government automatically withholds payroll taxes and “invests” them for you.

    Three: When a Ponzi scheme can’t con new investors in sufficient numbers to pay the previous investors, it collapses. But when Social Security runs low on investors—also called poor working stiffs—it raises taxes. Indeed, Cato Institute’s Michael Tanner points out,

    Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.

    And given that the worker-to-retiree ratio is expected to fall from 3-1 today to 2-1 in 2030 (down from 16-1 in 1950) these taxes will only go up unless the government decides to kick retirees in their dentures and slash benefits.

    Rick Perry should stop soft-peddling the issue and tell it like it is.

  • "ponzi scheme"

    “ponzi scheme” is a perfect name for it…… it just alot larger! Its “government” level!!

  • "ponzi scheme"

    this country is sitting on a three-legged stool. An that 3rd legs about about to bust!!! the US cant even pay for eveything the way it is. why u think they raise retirement age. Cause they spending SS in so many other ways, that it was never meant for…. “ponzi scheme” RIGHT!

  • Tom Phillips

    Here’s agood article making a good case that Social Security IS a Ponzi scheme:!_ponzi!_ponzi!

    It’s intene is not to defraud, however is mandatory that EVERYONE contribute (cannot opt out) and the money is mis-used by Congress to cover their spending.


    What Governor Perry said was truth and thank God someone had the courage to say it! Our Social Security System as-is now, is a Ponzi scheme! Imagine…a politician who finally tells us the truth! We, the People, need to be informed!

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