GOP Candidate Rick Perry caused a relative firestorm in recent weeks by referring to Social Security as a Ponzi Scheme.  This has caused a number of rebuttals – one I’m particularly fond of – being a visual person – is this one at MotherJones.  While that graphic makes a number of good points – and it may reasonably demonstrate that Gov. Perry’s statement that “Social Security is a Ponzi Scheme” is false as-stated at face-value – it doesn’t really acknowledge that there are some striking similarities between the two – let’s explore:

SS-Ponzi Venn Diagram

 Of course, we’ll also go one-further to back up our graphic with detail, for the interested:

  1. Money from later participants goes to pay the benefits of earlier participants
    • Even the Social Security Administration acknowledges this one[1] – though it claims that similarity is “superficial” and “where the similarity ends”.  We’ll see.
  2. Destined to become insolvent when income is less than payments
    • While this seems fairly logical, let’s review:  A Ponzi Scheme is “Destined to collapse because the earnings, if any, are less than the payments to investors”[2] – which also seems to apply to Social Security, under current projections by the Social Security Board of Trustees[3], which says, “The combined OASI and DI Trust Funds are projected to increase through 2022, and then to decline and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036.”  Destined for insolvency?  Check.
  3. Promoter tries to minimize fund withdrawal
    • While obviously characteristic of a Ponzi Scheme[2] – have you tried to withdraw your Social Security contributions lately?  ;-)  More seriously, what is one of the ways the Social Security Board of Trustees recommends[3] to help alleviate shortfalls?  Benefit reduction.  Then there’s raising the retirement age, first done in 1983[4].  I’d call those “minimizing fund withdrawal”, yes?
The MotherJones graphic did outline some of the legitimate differences – but for sake of completion, here’s a few more.  For fun, we’ll also try to figure out which value of these differing attributes seems superior.
  1. Option to participate
    • With a Ponzi Scheme, the investor has the option to participate, usually enticed by the possibility of “high returns”.  With pretty rare exception – you don’t have a choice on whether or not to participate in the Social Security Program, irrespective of how enticing (or not) the returns are.
      • Point:  Ponzi Scheme
  2. Investment vehicle
    • Social Security invests any surplus funds (e.g. any funds left from revenues after paying out benefits) in US Treasury Bonds.  Ponzi Schemes might invest in anything – from international reply coupons for postage stamps to hedge funds – or nothing.
      • Point:  Social Security
  3. Issuance of Statements
    • This one’s fun – This was originally a “similarity”, in that Ponzi Schemes might “send statements to investors showing them how much they earned”[2], and the Social Security Administration used to send an annual statement.  ”Used to” – Seems they no longer do that[5], at least “for now” and “as of this writing”.  Hey – at least with a Ponzi Scheme – you can get a statement!  ;-)  Shoot, this one’s so funny, we gotta screen-shot it for posterity:
      ssa.gov/mystatement
      • Point:  Ponzi Scheme
  4. Prevention of collapse
    • For a Ponzi Scheme, “Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.”[2]
    • Per the Social Security Trust Fund, “timely legislative action” will be necessary.[3]
    • Who do you want to bet on to do their job in time – “authorities”, or legislators – a.k.a. Congress?  ;-)
      • Point: Ponzi Scheme

So, “is Social Security a Ponzi Scheme”?  Not under the precise definition of “Ponzi Scheme”.  Are there some significant similarities?  Are there some things about Social Security that are actually worse than a Ponzi Scheme?  You be the judge.  ;-)

Sources:
  1. Research Notes #25: Ponzi Schemes vs. Social Security, //www.ssa.gov/history/ponzi.htm (last visited Oct. 5, 2011)
  2. Ponzi scheme, //en.wikipedia.org/w/index.php?title=Ponzi_scheme&oldid=453165507 (last visited Oct. 5, 2011)
  3. THE 2011 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS (last visited Oct. 5, 2011)
  4. The Full Retirement Age is Increasing, //ssa.gov/pubs/ageincrease.htm (last visited Oct. 5, 2011)
  5. Information Regarding the Social Security Statement, //www.ssa.gov/mystatement/ (last visited Oct. 5, 2011)

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