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Social Security - A Ponzi Scheme


The Lawrence Journal-World recently published an editorial, "National Divide," linked to President Obama's economy speech given at Georgetown University. The forum users at one point began a sidebar discussion of Social Security.

An astute user, Did_I_say_that, made the comparison of Social Security to a Ponzi Scheme. Is there a legitimate comparison of Social Security to a Ponzi scheme? Let's take a look at the Security and Exchange Commission's (SEC) definition and signs of a Ponzi scheme from their Ponzi Scheme - Frequently Asked Questions page.

What is a Ponzi scheme

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

With only minor changes the above description of a Ponzi scheme can be adapted as a description of Social Security.

"Social Security is an investment that involves the payment of returns to existing investors from funds contributed by new investors. The SSA solicits new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. Social Security attracts new money to make promised payments to earlier-stage investors to use for personal expenses."

Why do Ponzi schemes collapse?

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

Although there is a continuous supply of new "investors" into Social Security, the second reason for collapse - "when a large number of investors ask to cash out" - is occurring now. Baby Boomers are now starting to draw Social Security and the raw number threatens to overwhelm an already strained system.

What are some Ponzi scheme “red flags”?

According to the SEC, "Many Ponzi schemes share common characteristics." Here are some of the warning signs:

High investment returns with little or no risk.

Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

Some of the first "investors" in Social Security, those retiring in 1960 and having paid in for nearly 23 years, would have made life time contributions of $17,600 (single male, 2010 dollars). This same group experienced individual lifetime payouts of approximately $125,000. The differential has slowly been shrinking. A person retiring in 2010 may only collect $417,000 for his $345,000 contribution. Additional comparisons of individuals and couples may be found in the Urban Institute report, Social Security and Medicare Taxes and Benefits Over a Lifetime.

Overly consistent returns.

Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

Unlike private retirement programs and investments, Social Security has always provided consistent and typically increased benefits. Prior to 1950 this was accomplished irregularly via legislation. However, in 1950 Social Security recipients were given a 77% increase in benefits and have had a Cost Of Living Allowance (increase) every year since then, with the exception of 2009 and 2010.

Unregistered investments.

Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

Funds collected from employees and employers for Social security are accounted for in the Social Security Trust Fund. Well, kind of, that is. Actually, anything over and above what is actually budgeted to be spent is put in the trust fund. The trust fund, not subject to SEC regulations, loans money to the Federal government at a conservative interest rate.

Unlicensed sellers.

Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

Needless to say (yet, I find the need to say it), the government always exempts itself from its own regulations. There is no license to "sell" Social Security ... unless it is a license to steal.

Secretive and/or complex strategies.

Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.

Here is The Social Security Act of 1935. The list of Social Security Publications could, in and of itself, be considered complex.

Issues with paperwork.

Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.

Issues with paperwork? See above list of Social Security Publications.

Difficulty receiving payments.

Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

Although there are some examples of late payments, and a few times that all payments were delayed, Social Security has been consistent in its payments to recipients. However, as every senior citizen can tell you, Social Security is constantly held hostage by Congress and payments are continuously the subject of threats. Normally, the threat comes as a warning from the minority party, "They want to cut Social Security and starve grandma." Congress, regardless of party, should not have the power to threaten grandma.

Social Security promises a higher dollar payout for deferring (roll over) retirement.

The Last Word

So, is Social Security a Ponzi scheme that is doomed to crumble in upon itself and leave millions of Americans without promised benefits? A Ponzi scheme? The Social Security Administration states that it has "nothing in common with Ponzi schemes." Imagine that! Doomed to crumble in upon itself as it pays out more than it receives? You bet your sweet bippy!

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tange 2 years, 12 months ago

Has this Fonzie scheme found it's way out of the men's room, yet...?


Richard Heckler 2 years, 12 months ago

With Social Security Insurance a person gets a return. How about $850 - $1400 a month as a supplement. Not a bad deal. Who is going to say no? Raise your hands.

Wall Street is not a sure thing no way jose' . Neither was ENRON or Bernie or the many more. Then we have had Reagan/Bush and Bush/Cheney killing economies and putting millions upon millions out of work.

With Car,home and medical insurance you may never see any type of return. Just pay out a bundle year after year after year after year. The icing on the cake is when the industry decides they will not pay for one reason or another in spite of all money paid out over many many years.


Richard Heckler 3 years ago

"Social Security Insurance AT Risk for no reason( This would cost taxpayers $4 trillion, add $700 billion to the debt each of the next 20 years, place taxpayers insurance money at risk and wreck the economy)"

Perhaps it would be wise to keep a close eye on any political party that feels it is necessary to keep reminding voting taxpayers that it is the party of “less big government”. In fact it may be only political rhetoric.

These actions clearly demonstrate my point.

It's YOUR money! 6 cases in point to be considered and read completely:

  1. The Reagan/Bush Savings and Loan Heist(Cost taxpayers $1.4 trillion)

  2. Wall Street Bank Fraud on Consumers

  3. Bush and Henry Paulson blew the $700 billion of bail out money?

  4. Social Security Insurance AT Risk for no reason( This would cost taxpayers $4 trillion, add $700 billion to the debt each of the next 20 years, place taxpayers insurance money at risk and wreck the economy)

  5. Medical Insurance Insurance is COSTING YOU MORE BUT YOU ARE GETTING LESS How much is the sick U.S.A. Medical Insurance industry costing you?

  6. Billions in Over Charges! Why did the medical insurance industry allow their clients to pay what they should have paid?

Perhaps it would be wise to keep a close eye on any political party that feels it is necessary to keep reminding voting taxpayers that it is the party of “less big government”. In fact it may be only political rhetoric.


jayhawklawrence 3 years ago

I think the conclusion is that it is definitely not a Ponzi Scheme.


Flap Doodle 3 years ago

You are obligated to buy auto insurance as a condition of driving legally on public roads. Nobody is being forced own a car or drive on public roads. You may be obligated to buy homeowner's insurance as a condition of getting a mortage. Nobody is being forced to buy a home. merrill's arguments are invalid.


George Lippencott 3 years ago

I might point out that many Americans do not make a lot of money. Living pay check to pay check is all they have. If the government did not take out SS these people would not invest and would end up wards of the state at the end of their days - or dead in the street as in some countries in which I have served. SS mildly redistributes as the benefits formula returns all contributions more quickly to low income Americans than to higher income Americans - providing a slightly higher standard of living than earned at the low end. Note it does not continue that redistributive effect on the wealthy with incomes above $110K. The whole program was and is to prevent us from facing a large number of destitute seniors. It has worked. One way or another we will pay. LO the market is simply not an alternative to low income people.


jayhawklawrence 3 years ago

According to one source, the stock market lost 56 per cent of its value between September 30, 2007 and March 6, 2009, a roughly $13 trillion drop.

The loss greatly reduced or wiped out the retirement savings of millions of Americans. One of the major reasons given for the government bail out of AIG was because it put at risk millions of Americans retirement savings.

If a similar financial crisis wiped out the savings of Americans in a new privatized program, how do you think the American people would react?

I think they would blame corporate America and I think it would weaken our political system in a way that we have not seen before.


Richard Heckler 3 years ago

"merrill, it is not like insurance because you are forced to buy it."

What then do you call auto insurance?

What then do you call homeowners insurance ?


Did the president Bush actually lie to the public about Social Security?

Yes. President Bush has repeatedly said that those who put their money in private accounts are "guaranteed" a better return than they'll receive from the current Social Security system. But every sale of stock on the stock market includes the disclaimer: "the return on this investment is not guaranteed and may be negative"--for good reason.

During the 20th century, there were several periods lasting more than 10 years where the return on stocks was negative. After the Dow Jones stock index went down by over 75% between 1929 and 1933, the Dow did not return to its 1929 level until 1953. In claiming that the rate of return on a stock investment is guaranteed to be greater than the return on any other asset, Bush is lying. If an investment-firm broker made this claim to his clients, he would be arrested and charged with stock fraud.

Michael Milken went to jail for several years for making just this type of promise about financial investments."


jayhawklawrence 3 years ago

I am sure that the people that fought against barbed wire and sheep farmers had similar feelings.

Somewhere in the back of our minds we long for the open range and nobody to take what I get and claim as mine.

But we have to adjust to a changing world and societies that fail to adapt to a changing environment will fail.

Too many Americans are not benefiting from the rules as written by either the very wealthy elite or the folks at the other extreme.

Partisanship gridlock is the anti-thesis of adapting to change.


jayhawklawrence 3 years ago

I completely agree with Merrill regarding Social Security.

However, the argument that American citizens should not be forced to pay for a government program they don't want gets a lot of traction these days.

I think we need to find a compromise for the people who feel this way because there are many. We need to find a way to make social security and health care solvent. Any negotiations regarding social security should also involve health care.

I think some privatization of social security is probably inevitable and I think the security of the funds themselves has to be part of any discussion. It should not be used as a cash reserve for every administration that wants to play games with the budget.

The first two years of the Obama administration were dominated by heated political rhetoric about "Obamacare". Much of the discussion was for political purposes only. It was political theater and it worked for the Republicans in the fact that much of America simply got burned out watching it.

If this is the game plan until the next election it is no wonder the Obama is reluctant to get involved in any meaningful discussion with the Republicans.

I cannot imagine any meaningful discussion that would involve Sarah Palin, Donald Trump or Michelle Bachmann. As long as Republicans take these people seriously, what is the point in starting any discussion.


Flap Doodle 3 years ago

This comment was removed by the site staff for violation of the usage agreement.


Richard Heckler 3 years ago

Social Security can be compared to other types of insurance such as home insurance. You insure your home because if it should burn down, you would not be able to afford to rebuild it with your personal income alone. If your house never burns down, you will pay into the insurance fund and never get a penny back. But fire insurance isn’t a “bad investment” because it isn’t an investment at all. You are purchasing security.

Unlike fire insurance, Social Security inevitably gives most of us our money back. But the fact that we get money back does not change the fact that Social Security is a form of insurance, not an investment. Only the richest of the rich can afford not to have insurance and to rely solely on their own savings and investments to fund their retirement or risk of disability.

Young people must also understand that financial investments are inherently risky. Many investments fail, and when they do, you lose all of the money you invested.

Today’s 25 year olds have only seen the stock market go up, except for one (very large) drop. But you don’t have to go back to the 1930s to see a different picture:

If you put money into the stock market in 1970 and waited until 1980 to take it out, you would have lost money.

There is absolutely no guarantee that stock investors will see the high returns politicians many times imply.

Doug Orr is a professor of economics at Eastern Washington University. He speaks and writes regularly about Social Security


Richard Heckler 3 years ago

Millions of Americans have lost their retirement funds due to: • Unexpected job losses to outsourcing • The savings and loan scandal during the Reagan/Bush years • ENRON • Dot com fraud • Bernie Maddoff • Home loan fraud during the Bush/Cheney admin which put an estimated 11 million out of work

In essence we never know from one day to the next if we will be employed. As we all know Wall Street investing offers no guarantees of safety.

The best way to explain Social Security is to say what it is. It’s an insurance system that protects your income when you retire or face disability, and provides income to your children if you die.

Politicians want you to look at Social Security as an investment--but it is a form of insurance that guarantees a constant stream of income in retirement or in case of disability, adjusted to protect against inflation, for as long as you live.

Separating Fact from Fiction By Doug Or

It has repeatedly been said by politicians that those who put their money in private accounts are “guaranteed” a better return than they’ll receive from the current Social Security system.

But every sale of stock on the stock market includes the disclaimer: “the return on this investment is not guaranteed and may be negative”--for good reason.

During the 20th century, there were several periods lasting more than 10 years where the return on stocks was negative. After the Dow Jones stock index went down by over 75% between 1929 and 1933, the Dow did not return to its 1929 level until 1953(24 years).


thuja 3 years ago

"These discussions and debates are interesting, and worth having, but on a certain level I wonder if they're distractions from more concrete things worth considering."

Don't wonder. Its a distraction. Distracted is what most people are all day, every day.

jafs you're all right.


jhawkinsf 3 years ago

Upon birth, we all enter into a social contract. We live in a free society, by that I mean one in which we may choose to stay in or we are free to leave. If we choose to stay, the government must protect us. They must keep us safe from foreign invaders as an example. Specific to the U.S., they must protect our freedom of speech, religion, press as well as all other freedoms we have come to expect. That includes protecting us from becoming old and worn out from a life of hard work and then becoming too poor to live within a standard we expect. These are all things the government must do, it's in the social contract. In return, we must obey the rules of society. These might be things like obeying the law. Included in this is paying all taxes that we are legally obligated to pay. We must live within the expectations that society has for all of us. We must work, if we can. We must pay into things like Social Security and Medicare, because these will be used by us all. These are the things we must do, it's in the social contract that we all entered into at birth. The only way to opt out, in a free society, is to leave. You are free to do that anytime. Simply accepting the freedoms given (speech, religion, etc.,) obligates you to the contract.


tomatogrower 3 years ago

I have a question for all of the people who want to get rid of Social Security. What would you do with the old people who need it to live? How are we going to take care of the old and infirm? You give us the impression that you would just let them die or starve to death. Some could keep working, but then you and your children will be competing with experience. Do you have another solution? Or are you really willing to have the elderly living in the streets and begging for a living?


Liberty275 3 years ago

Wonderful, the ponzi scheme will implode just after it's supposed to pay off for the money they already took from me. I guess I'll just have to die (as if I wasn't going to anyway).

The worst part about this is that certain members of the left would force us all into medicare from the day we are allowed to be born. Given the co-payments, co-insurance, deductibles, limited coverage, and lack of annual limits on out of pocket expenses, medicare is utter garbage compared to the insurance we pay for.

No thank you, medicare-for-all advocates. On a related note, I prefer not eating out of dumpsters.


jafs 3 years ago

LO, I have some free and unsolicited advice for you.

Please take it in the spirit offered.

These discussions and debates are interesting, and worth having, but on a certain level I wonder if they're distractions from more concrete things worth considering.

For example, the most important concrete issue regarding money (as I understand it) is do I have enough money to pay for my needs and some wants. If the answer is yes, then you're fine. If not, then you need to change something (s).

I doubt you can find another country you'd like to live in without a government, or taxes, so why not do what you can to make yourself happier here?


jayhawklawrence 3 years ago

Of course people have been arguing about the Social Security system since the beginning. If it is a Ponzi scheme than you would have to argue that almost every insurance program and even to some degree 401K plans have at least some of the same characteristics as Ponzi schemes.

What if they just don't have the money to pay your benefits? What if they were just too big to fail but this time the government didn't bail them out? Didn't that just almost happen?

In the movie,"Its a Wonderful Life", George Bailey is in charge of the Bailey Building and Loan Association. When they misplace a large deposit, the company is in danger of collapse and you know the rest of the story.

The point is that the money was not really lost, Potter had it and he wasn't going to tell anyone because he wanted the Building and Loan to collapse so he could take over the town.

The money that was invested in the Social Security system was transferred out of the system.

That is the bottom line. People who are against the system want it to collapse. They prefer to see that money transferred into large corporations, insurance and investment companies. The people behind this are people like the Koch Corporation who are ideologically against social safety nets such as Social Security. At least that is my impression based on the right wing attacks on Social Security and Franklin Delano Roosevelt. It looks like a strategic smear campaign.

If they can convince us that it is an illogical business model such as a Ponzi scheme, they can convince us to privatize the program and eventually end it.

Imagine the huge avalanche of money they could channel into the markets for corporations to spend on whatever they want. Then you run the risk that the money would be invested in the highest growth economies outside the United States.

I would predict that hundreds of millions of people would not have any money left for retirement if there was no safety net.

The promise is that Americans would have a huge retirement nest egg waiting for them if they give their money to corporate America.

That is just not reality.


Crazy_Larry 3 years ago

When the gov't does it it's called a FONZI scheme....ayyyyyyy!


pizzapete 3 years ago

I would have to agree that Social Security is being run like a ponzi scheme. The government probably has another twenty years to continue the fraud before the bubble bursts.


George Lippencott 3 years ago

Well, you are right, as it has evolved. Of course, if the trust fund had not been spent on government largess and unpopular wars it would pay for my social security with money I and my fellow participants paid into it - it did not all go to our predecessors.


allenwsmithphd 3 years ago

There are similarities between Ponzi schemes and the overall Social Security program as enacted in 1935. But radical changes were made to Social Security by the Social Security Amendments of 1983. The 1983 "fix" foresaw the problems that would arise with the retirement of the baby boomers and made changes to offset those problems. A hefty payroll tax hike was enacted that required the baby boomers to prepay the cost of their own benefits in addition to paying for the benefits of the previous generation. That 1983 payroll tax hike has generated $2.6 trillion in surplus Social Security revenue that would be enough money to pay full benefits until 2037, if the money had been saved and invested in marketable Treasury bonds as was the intent of the law. But none of the money was saved or invested in anything. It was all spent by the government as general revenue for such things as wars and other government programs and no provisions were made to repay the money. I have devoted the past ten years of my life to trying to expose, "the great Social Security theft." Every member of Congress knows about the theft and cooperates in the ongoing effort to keep the public from finding out.about it. Republicans and Democrats are equally guility for the looting of Social Security that has taken place under five president for the past 25 years. In effect, the government has stolen the surplus Social Security contributions of the baby boomers and used the money to offset lost revenue that resulted from the Reagan income tax cuts.

Allen W. Smith, Ph.D.


none2 3 years ago

One could also argue that the whole family unit was setup on a Ponzi scheme basis. People used to have large families. Those children were to help out with the family workings as well as take care of the older generation and weaker family members as needed. Now some couples may choose not to have kids, or have small families.

Thus, are we as a society simply going to say that if you are old or weak, if you don't have family to take care of the hordes of money you need to buy the medications and/or the hospital/doctor care you need that you should just lay down and die?


pappyg 3 years ago

There is a way forward, and it isn't entrusting the future to the failed ways of the past. Their plan is to keep us all confused and in the dark:


jhawkinsf 3 years ago

The problem with comparing Social Security with a Ponzi scheme is one of intent. With a Ponzi scheme, the specific intent is to defraud. that is not the case with Social Security. When Social Security was first implemented, there were 13 workers for every person receiving benefits. The ratio is now 3:1 and will soon be 2:1. That is not sustainable. We are all living much longer than the average retiree was a couple of generations ago. There has to be an increase in the age in which a person can start getting benefits or a lowering the level of the benefits themselves.
One other point that should be made, the original beneficiaries of Social Security did not pay into the system. They were carried by the next generation, those 13 workers. Each subsequent generation of workers drew upon the labor of the next generation. With the declining ratio of worker to retiree, that has become unsustainable.


Liberty_One 3 years ago

I wish I could opt out. I know that there won't be anything left for me when I retire, or anything more than a few crumbs. Why can't I just opt out? This is the cruelest thing you liberals do to us.


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