A Ponzi Scheme? You Bet

Rick Perry has taken a lot of heat for equating Social Security with a Ponzi scheme. Truth is, he’s right. Social Security is a sham and will collapse. The only question is when.

Lest you think this too harsh an appraisal, let me explain how a Ponzi scheme works. It is named after one Charles Ponzi, who in 1916 came up with a clever idea. He talked some investors into giving him money, for which he would provide a good return. However, instead of actually investing the money, he paid early investors back with the money he got from later investors.

Things worked fine until it became impossible to find enough new investors to pay early investors their returns. Ponzi’s ultimate reward was jail time and the privilege of having his name associated with a legendary con game.

When it was created, Social Security seemed like a reasonable way to protect seniors from the ravages of old age and limited income when the ratio of workers was 40-something to 1. It is now 3 to 1 and by 2030 will be 2 to 1. As with all Ponzi schemes, an ever-increasing number of new patsies is needed.

With six original investors, the pyramid collapses on or before Level 13

As the author of the aforementioned article notes, there are some differences between Social Security and Ponzi schemes. One, Ponzi could not force people to participate. The government can. Two, while Ponzi had to pay off early investors to keep the scheme going, government does not. Government can reduce or stop altogether payments it makes to recipients.

This raises a couple of interrelated questions. Is there a point at which people will simply refuse to pay into the scheme? Say, 50% payroll taxes? The 75% level? What will happen when government reduces benefits and people wake up to the fact that they are likely to receive only a pittance, if anything at all, from their participation in the program? Remember, if you look around the table and can’t find the patsy, it’s you.

An often overlooked and equally troubling fact about Ponzi schemes and Social Security is that they both remove productive wealth from the economic system. Money early investors put into either “program” comes back to them not from anything tangible that was created, but from new investors. This money could have been employed in something productive, like building a factory, but was removed from the system.

All of which leaves us in a profoundly uncomfortable situation. The people who have been scammed thus far declare that they must be paid what they were promised. It is hard to argue against that. Problem is, they can’t have it because it will not be there. The rights and wrongs of the situation are irrelevant. Economic reality always wins.

What to do? Social Security must cease to exist. There is enough money in the system now to make the transition at least bearable, but there won’t be for long. We need to put on our big boy/girl pants and dissolve the scheme over a couple of decades. Pain now or devastation later–you make the choice.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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