Is Social Security Just A Grand Ponzi Scheme?

By Xin Lu on 13 May 2008 55 comments

I received my Social Security statement this week and it was a useless piece of paper to me since I do not qualify for retirement benefits yet. I always hear critics of Social Security say that it is a government sanctioned Ponzi scheme, and today I did a little research into why this comparison is often made.

Ponzi scheme is named after Charles Ponzi, an Italian immigrant who promised investors 50% returns in 45 days on an investment of postal coupons. He raked in millions of dollars in investments in less than a year in 1920. In actuality he was paying the earlier investors with money he collected from later investors and did not invest the money at all. Eventually the scheme collapsed because Ponzi just could not find enough new suckers to pay for the ealier investors who wanted to cash out. Ponzi went to prison and after he was released he returned to Italy and became a top financial advisor to Mussolini.

The Social Security program does have a few similarities to a Ponzi scheme. The main point is that it is a system where the later contributors pay for the returns of earlier contributors and if the number of later contributors dwindle to a point where they cannot support the existing promised benefits then the system would collapse. Second, the money collected is not invested to produce more money so the system pretty much depends on new taxpayers. Finally, the earlier participants of Social Security do get a bigger return on their money. For example, the first Social Security beneficiary who received monthly checks was Ida May Fuller. She collected a total of $22,888.92 from the program and contributed only $24.75 from her paychecks. Of course, she was extremely lucky to live to 100, and her Social Security earnings amounted to an annualized return of 22% on her contributions over 36 years of retirement. I am sure when I get my checks I will not have such great returns.

So why is Social Security not a Ponzi scheme? Well, first of all it does not make wild claims about making money fast. It also does not claim to be investing your money so it is not actually fraudulent. It is also based on taxes so it is not a voluntary scheme like the original. Finally, when a person dies then the payout stops under Social Security so it is possible that some people who contribute never see a single penny returned. The Social Security Administration actually calls the program a "pay-as-you-go insurance system" and claims that it is sustainable as long as the population demographics of retirees and working people stay stable.

Regardless of the semantics, in the near future there will be many more retirees than working folks so the demographics shift will make Social Security pay out more than it takes in. According to the 2008 Social Security Administration report the program could cover 75 percent of scheduled benefits until 2082 after the current surplus exhausts in 2041. This means that young people like me probably cannot count on solely Social Security for our retirement. Just in case Social Security collapses, I think everyone should be putting at least the amount paid in Social Security taxes in an IRA or mutual fund for the sake of a better financed retirement.

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Guest's picture


More accurately, it's a "pay-or-go-to-jail insurance system".

Guest's picture

This is probably nothing new, but here I go anyways...the worse quirk about the whole system is that the Social Security Trust Fund is held in Treasury Bonds.

This means that whatever money that goes into the Trust Fund (amounts above the current payout) is nothing more that a big fat I.O.U. from Congress. The money doesn't sit there waiting, it gets spent in the current budget.

Once the out-go exceeds the funds going in, Congress will have to start paying benefits out of the Trust Fund, ie. paying back on those Tresaury Bonds, which comes out of currently collected taxes.

The only way that can happen is by either cutting back in other spending (which we know isn't going to happen) or raising tax revenues.

That is the moment that I'm scared of. I know Social Security won't be there for me, and I seriously doubt it will be there for my parents (with its current design).

Guest's picture

Why do you think they fought Bush so hard over the Private Accounts you could put part of your Social Security in???

My parents both died just before they were able to collect the first dime and made enough that they paid the Maximum into the system all their lives.

I figured out that if even Bushes 2% had been put into a Private account over their lives and into a stock market mutual fund the account would have had over $250,000 in it.

But if you can actually look at an account with your name on it and see it grow over time it suddenly is "Yours" and the government can't allow that...especially because you want to leave it to your heirs..or god forbid the heirs see how much they Would Have gotten.

Every dime my parents paid in was lost even to them because they died before retirement age and the government keeps all the money.

And just the insolvency deepens they will look to tax any source of revenue they can....and where will the money be then...Why in ROTH IRA's!!!!

Don't ever believe that they will always remain Tax Free!!!!!

Xin Lu's picture
Xin Lu

Yeah, I personally think private accounts are a good idea because it is like a government mandated savings plan and you have your name on it. Right now I feel like I'm paying for random people who could be irresponsible with money for all I know. The worst part is as commenter #1 says, if I don't pay I could land in jail.

Guest's picture

In the post she said "This means that young people like me probably cannot count on solely Social Security for our retirement."

Social Security was always meant to be an addition to personal retirement savings or pensions. So many people have come to believe that SS will be there to meet all their needs in retirement, when it just wont cover everything.

So, now with most employers no longer offering pensions, it is vital that we are all investing for our futures in Roth's or traditional accounts.

Another thing to consider with SS is the vast numbers of people needed to keep paying into the system to keep benefits at current levels. When the baby boomers start retiring en masse in the next 7-10 years, there will be a big drain on the entire system. Take away the 48+ million future contributors to SS that have been aborted the last 30 or so years, and you can see one of the factors eroding the entire SS system.

Guest's picture

As pointed out in this article, the number of people collecting Social Security is rising. These people vote, and this is an important issue to them. It is an important issue to me too, and I'm only 45.

The real problem with funding Social Security isn't the I.O.U's that have replaced the actual funds, or the date that outgoing funds exceeds incoming funds. The problem is with the Social Security cap.

I have paid into Social Security my entire 20+ year working life, and I'll be damned if I let some deficit spending warmonger steal the money I have put into it.

Pay attention to the issues, and vote accordingly. It really does make a difference.

Guest's picture

There is a big misconception about Social Security. It is supposed to be a social safety net, not your personal retirement program.

Most developed countries have some form of social safety net to keep people from living in the streets eating cat food in large numbers. There are also more components to Social Security than just retirement. There is social security disability and SSI payments. The disability is there for people that exhaust all of their other benefits if they become unable to work. SSI works as a supplemental income source for people who qualify for SSD.

People should have something more than social security for retirement.

Guest's picture
Bill Woessner


Why is it that I pay more for the "safety net" than I do for my personal retirement program? I put 10% of my income in my 401k, which will ensure a VERY comfortable retirement. I pay 12.4% of my income to Social Security, which MAY ensure I'm not eating cat food when I'm 62.

Furthermore, if Social Security is a safety net, why is Warren Buffett collecting from it? Surely the richest man in the world doesn't need to be collecting money from a "social safety net".

Also, why do I have to pay for my "safety net"? If I can afford to pay for it (and, as I pointed out above, pay dearly for it), chances are I don't need it. What about the people who CAN'T afford to pay for it? Why don't we focus our energies on those people?

The answer to all these questions is obvious. Social Security is NOT a safety net. It's a variable annuity with an extraordinarily crappy rate of return. It's just an investment; an investment with lots of rules, but an investment, just the same.

Guest's picture

Lucille, you were the only one to bring up SSI and SSD. Very good, as you struck the Main Vein of the MotherLoad of all draining Entitlements.
In my area, Shasta County, the amount of SSI beneficiaries is Ssssttttaaaaggggeeeerrrriiiinnnngggg...
I would say, 80% of the residents of this County.
Look on the 1st of the Month. Do you see around you a mega-tude of people with Handicap plates and placard hangers? Most likely they are SSI.
SSI in California now pays $888 an individual. That hardly happens, as every person within the household of an SSI is paid SSI.
Say Dad qualifies for SSI at 22 years old. He's worked 6 months out of his life, maybe never worked at all.
He goes to the Social Security Administration Office and files a claim for Disability.
Social Security determines that Dad has NEVER worked a single day in his life, but that he has enough Medical paperwork that says 'He's Depressed'. Ok, so Social Security has Dad talk on the phone to a physician that asks questions for a little while as part of the form that is filled out, and Dad is Depressed to the Social Security physician. The physician get's a percentage of money to have done the Social Security screening and goes off happy with money and Dad is qualified for SSI because he never worked before a day in his life.
So Dad, and his wife who also never worked before and is 20 years old, both get a check. Combined in California they get $956 a month or real close to that.
Dad and spouse have 2 kids already, so they each get a check each month.
Over time the kids reach 18 and before they turn 18 they are determined to have ADHD by MediCal physicians and school personnel that gets extra money for qualifying them for 'Special Ed' IEP.
So as the kids turn 18 they get a check for $888 for the rest of their entire lives.
Do you see what's going on? And this is something EVERYONE is missing.
The illegals will become legalized, I have no doubt of that. As of today Feinstein has an AG extra attached to the Military Funding Bill. She wants more new Mexicans to be shipped into the US to pick lettuce.
That's because as soon as they get here on an AG Visa they run AWOL into cities and towns. The women go onto welfare CalWorks and EBT, low-income rental assistance, Section 8 Vouchers and HUD housing, and the men work Construction under the table.
That's why we need more Ag workers and will again next year if Feinsetin get's her way shipping more AG workers in this year to pick.
As soon as the Comprehensive Immigration Reform is passed in early 09' or soon after especially if we have a Liberal Democrat in the Presidency, that makes the newly legalized citizens or semi-citizens or whatever they will be called, Entitled to SSI!
That also means their elderly parents can be brought in from Mexico of El Salvador or wherever down there, and are Entitled to SSI also.
Their cousins, aunts and uncles that also live with them and their entire generational family will all be Entitled to SSI, because of one man, head of household.
That's alot of checks-in-the-box. Add it up.
And there's a rule in SSI. The recipient can OWN ONE HOME FREE AND CLEAR OF ANY VALUE.
That means that if Man, head of household own's a $500,000 home with 10 acres, he can collect, SSI.
I know a person exactly like that. You wondering how they could afford a $500,000 home? Inheritance.
Yes, an SSI can inherit real property, paid for, free and clear and keep it.
They will also qualify for low-income homeowners Property Tax Assistance. At the end of the year, after they have paid their property tax's. They will get back 95% of those property taxes.
Now, here is the Root of the whole problem with SSI.
Social Security Retirement beneficiaries pay taxes out of their checks.
SSI pays not a single penny of taxes. It is completely tax free. No tax at all.
This system, SSI is a complete DRAIN on the taxpayer and collected tax dollars that makes Social Security run.
Draining more and more each year. Each year the statistics show that more and more and more SSI's are applying and getting SSI.
More and More for 'MENTAL OTHER'. Like ADHD, Depression, Bi-Polar, Meth Addiction.
Oh the Social Security Administration says right on their site. They do not pay people to be cronically DRUNK. No, but if you are an ADDICT to Alcohol or Meth, and you cannot kick the habit. Or, you are loosing your teeth from the ravages of Meth, or your skin it turning yellow from Alcohol you can collect SSI.
I know tons of people in my tiny town in the mountains and ALL are on SSI.
All live month to month on SSI ONLY. They ALL inherited their property and live hand to mouth on SSI.
They are all a lazy pitiful bunch of completely worthless people.
Some are kids under 18. Some are in their 20's and were on SSI under 18, and continued into the rest of their lives on SSI. Some have been on SSI since 1974.
It's a TAX FREE GRAVY TRAIN, and in the Bum World they have PhD's for 'Swindling and Milking the System'.
I have absolute faith, and no doubt at all, that SSI will cause Social Security Retirement to go flat broke by 2012, after the Amnesty or whatever they are calling it today.
Better do like me, plan to live in a Cobb House on a little plot of land, growing your own food and living very low, as the SSI's are going to have drained the life out of Social Security at the pace they are now.

Guest's picture

I think you're being overly alarmist. The projections you cite are, by design, pessimistic and in fact the SSA's "intermediate case" has for the last decade been unduly pessimistic. Moreover, many of the demographic fears (e.g. life expectancy of the boomer generation) that have been used to justify the political hysteria about Social Security have turned out to be significantly overstated (good NYT article here). Moreover, even if this year's "intermediate projection" turns out to be accurate, the changes we would need to make to move 75% to 100% are not particularly burdensome.

Social Security is and has been one of the most successful government programs in the history of this country. It's continued success will be achieved by the political will of members of each generation to ensure that their parents have a shot at a decent retirement. Every generation, therefore, the American commitment to SS will be tested by those who ideologically oppose "government" programs or economically desire the assets we have amassed for and the income we devote to Social Security.

As I watch the Wall Street banks go belly up and Congress offer plans that bail out banks but not homeowners, I for one am glad Wall Street didn't get its mitts on my retirement insurance during the last 8 years. As I look at the volatality of the stock market in the last couple of years, I for one am delighted that my retirement insurance is, by design, conservatively invested.

The truly frightening problem with face is Medicare, not Social Security. But reform of Medicare will require a transformation of our entire health care and health insurance system. Part of the reason the talking heads make so much fuss about the Social Security numbers is to distract us from the real crisis - no doubt because the only practical solutions to this crisis will occur at the expense of deeply vested parties.

Guest's picture

I keep hearing far-lefties (I'm a registered Democrat myself) say that the system is not bankrupt...but they never explain why or how the system will remain in tact without raising taxes or cutting benefits, or even that it will remain in tact. let's pretend the system is a see-saw. on one side, you have 6 people paying into a system, and one person collecting, which you had during the baby boom. NOW, eventually, you will have 1 person paying into the system and 6 people collecting. theoretically, it is not sustainable. there is evidence that Bush lied, but not enough to convince me that the system is sound.

Guest's picture

As an X-er, I see that Social Security will absolutely NOT be there for me.

Those in the Boomer bracket voted to get the system to "work" for them when they carried the controlling numbers of voters.

When I near the appropriate age, if the system hasn't already gone bankrupt, you can bank that those younger than me- with the higher number of potential voters per the US census dept- will be voting to turn it around in their favor.

I don't want to sound like "woe is me"- I am such a victim-- because knowing this, I can plan accordingly and not be a victim.

Linsey Knerl's picture

I totally agree that there is an issue to remedy, and many people assume that the consequences of not doing anything will only be felt in their retirement years.  But what about the other aspects of social security benefits  (disability, death benefits, etc.)  Many of us could be eligible for these payments way before the retirement age.

You can't assume that you will have time to adequately save for retirement.  If you were to become disabled or a survivor of a benefit-eligible death payment, you would want what you're entitled to.  But it may not be there. 

Guest's picture

For all those who think warnings about Social Security are overblown, please read up a little. No less than GAO Comptroller General David Walker, recently retired, has been warning of an impending disaster for years. Of course, our elected officials in Washington are deaf to logic.

Social Security is a crock of you-know-what. Those who entrust the government to take care of you in your old age will be disappointed. The same people who rail about government incompetence when it came to Katrina, somehow turnaround and believe and trust the same government when it comes to handling what's supposed to be their own money. Amazing, really.

A big liberal government program gone awry, and fast going broke. Like they all do. Look at the ethanol program - (or if you're liberal, don't look too close).

Here's what will happen: Social Security and Medicare will finally go broke (less coming in than going out). They will become 'means tested'. What that means is those who had the foresight, the discipline, the intelligence (can we say that), to provide for themselves and save for their retirements, will be cut out of Social Security. Those too lazy, too incompetent, too stupid to care for themselves, will of course be taken care of.

Isn't this how it always works?

I'm 54 and doubt I will be getting much from Social Security when I retire. I'm not counting on it. In any event, any money I do receive will be so eroded by inflation (under reported by government naturally) that I might have just enough to buy a six pack and revel in my prognostications coming true.

Guest's picture
Johnny boy

Agree 110%, you have it nailed! Gubment will deal with this by (1) means testing (2) inflation and...let's not forget...(3) increased taxes!

Guest's picture

yes, it is. they take it out of our paychecks but it won't be there when we retire. my statement says on the bottom that when I retire, as the assend of the boomers, I will supposedly get 70% what i put in. that's why we have to save and invest all we can, along all categories (see )
If we take care of ourselves...well, don't count on the govt.

Xin Lu's picture
Xin Lu

Yes I have read that Medicare is in even more trouble than Social Security and could use up its surplus by 2017 or 2019. The exact dates are in the same report by the SSA. I don't think I was being too alarmist, I just pointed out the fact that America is becoming an older society as a whole and as some commenters pointed out people are having less children by choice so there will be less people funding the system. I do think the 12.4% deduction is pretty egregious even though half of it comes from the employer. The way the system is set up, it seems that that tax percentage will go up, and not down.

 Another thing is that I think the age cap for full retirement benefits is a bit too high right now.  It is 67 years old and the average person lives to 77 to 80.  So basically a person could be potentially paying into Social Security for 45 years  and enjoy it for 10 years.  I'm not sure the math works out very well there, either.  

Guest's picture

Social Security isn't about you putting money aside for your retirement. It's for everyone to put money aside for *everyone's* retirment. Because, guess what, not everyone can afford to put money aside for retirement. Think about the guy who worked as a janitor for his whole life. Making minimum wage or a bit more. Raising a couple of kids. He barely keeps a roof over his family's head. Where does he get money to invest in retirement? Once upon a time, he worked for the same company for 40 years and at least had a pension. Any more, he doesn't have security is it for him and his wife.

Boohooo,'re not going to get everything you put into Social Security back out again. But someone who really needs it will.

Now I agree that the rich have no business drawing social security. I think it should have an income level tied to it. I also don't think there should be a cap on how much you pay into the system. But then, I'm just a secretary, and I'll never approach the cap, anyway.

But I do think there should be some protection out there for the people who spend their lives doing the dirty grunt work that none of us wants to do.

And, unless you're self-employed, you don't pay 12%, you pay 6%. Your employer pays the other 6%.

If we were to privatize social security, what happens when the stock market tanks? Do we tell the poor elderly, sorry, you can't eat this month? Pay your rent? Buy your meds? Again, social security isn't about one person funding their own retirment. It's about all of us working together to take care of everyone else.

Guest's picture
6079 Smith W

Your post presupposes that any person, no matter how poor, lazy, ill-starred, mediocre, incompetent, or just old is entitled to any portion of the money earned by those who actually work and produce... a claim on their working Time, Skills and LIFE.

NOTHING can ever justify such a claim on another persons LIFE.

Such a belief is tantamount to endorsing slavery... if you, by force of law, force the productive workers to support the poor, old, lazy, ill-starred, mediocre, and incompetent, as you do with welfare and Social (In)Security, you literally are enslaving the productive to the unproductive. Taxing/enslaving productivity only decreases productivity. That results in lower living standards for all.

> unless you're self-employed,
> you don't pay 12%, you pay 6%.
> Your employer pays the other 6%.
OK, Who just got elected President in your universe - Ronald Reagan? The Social (In)Security tax rate is 7.65% (15.3% self employed) on my planet. And the half the employer pays? Gee - that could be paid to ME so I could SAVE it if it wasn't for the f&@#ing taxes! Or maybe my employer could lower his prices so you didn't pay so much for his products!

> If we were to privatize social security,
> what happens when the stock market tanks?
Gee, I think that if we privatized Social (In)Security that it would give the economy and securities markets a helluva boost - consumer goods being bought by the fools & investments being bought by the wise.
Please check Aesop's "The Ant and the Grasshopper".

And - God forbid - people could actually learn something about economics & the markets - and stick their money in CDs if they want safety. No stock market risk (Fed-induced inflation on the other hand...).

> Do we tell the poor elderly, sorry,
> you can't eat this month?
I am not advocating the immediate cutoff of Social (In)Security... it would need to be phased out. People paying lower taxes could then take their own earned money and save it for retirement so they wouldn't need government handouts - again - education away from the 'Government Provides' model is needed (Government only provides by stealing).

Please note, that I am not advocating abandoning the truly poor or disabled - but aid to them should be VOLUNTARY. For a very long time they got along with the charity dispensed by churches, Granges, & the Community Chest - LOCALLY administered by people who knew who they were helping, so they were helping the deserving poor... not the leeching couch potatoes whose sole purpose in life is to produce another generation of leeching couch potatoes. And the working poor were at least working... and didn't pay Social (In)Security taxes, so they were automatically better off than the working poor of present day.

Again... nothing entitles anyone to even ONE SECONDS WORTH of another person's LIFE.

To quote John Galt in Ayn Rand's "Atlas Shrugged": "I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine."

Guest's picture

You don't pay 12+% of your income into social security. Read your pay-stub carefully. Half of that 12+% comes from you; the other half from your employer. In fact, you pay less for social security of your total income than for your personal retirement account. The disparity increases if you, as an individual, earn more than approximately $95/k per year because then the cap kicks in.

Xin Lu's picture
Xin Lu

NVS, I assume you are replying to a previous commenter Bill. It is possible that he pays 12.4% for Social Security if he were self employed. In fact, even if you have a regular job and you have a side business you pay 12.4% on the side business income. Half of it can be reported as an expense/deduction on the 1040 form.  Also, the income cap  for paying Social Security for 2008 is $102000

Xin Lu's picture
Xin Lu

Jodith, I find it interesting that you say rich people shouldn't draw from Social Security but there should be no cap on contributions. So this means that they should just pay for the rest of the people who may not have had money to contribute and never get a penny back? Also, the definition of "rich" is really debatable around the country. What is rich to you? Someone making 100k a year? 200k a year? Here in the Bay Area a family making 100k a year can't even afford a crappy little house, but in another part of the country where the cost of the living is lower they can be considered rich. If there is a blanket statement that says everyone has to pay for Social Security but people over a certain income can't collect any money then I think there would be more dissent.

As a footnote, I find it a bit condescending that you use a janitor as an example of a poor person who can't save for retirement. I have known janitors who had their own companies and did well, and here is a story of a janitor who left 2.3 million dollars to the school he worked for through wise saving and investment:

Would you say that he is a rich person that doesn't deserve to draw from Social Security even though he never made that much in wages?  Anyway, my point is that anyone can save for retirement.

Guest's picture

Janitors who own their own companies aren't janitors. They are business owners.

I grew up when there was a war on poverty. You grew up during the war on the poor. A lot of Americans are poor. I've been poor. There is no "extra" money to invest (and you can bet my employer wouldn't be giving me that extra 6% if it didn't have to pay it to the government - what baloney that is).

Where did my Social Security money go? I understand U.S. history and economic policy so I know that it went to pay for my grandmother - who was a single parent of two children after her husband died in WWII. And my other grandmother - and my parents. I'm thrilled it was there.

SS is a successful program - It virtually eliminated dire poverty among the elderly. It is also a stable program that will require minor tweaking in 35 years - and more tweaking in 75 years.

It will be there for me, unless my children and people of that generation fail to understand history and economic policy, and equally important, lack the will and compassion to protect me and my generation in our old age. Fear mongering spreads disinformation and diminishes community goodwill - the very goodwill so many of us need to depend upon.

We were there for our grandparents and parents - will our children not be there for us?

Guest's picture

The late, great Molly Ivens suggested that folks' SS checks be printed in red once they had exceeded the amount they had contributed so they could understand that they are, in fact, receiving welfare.

One thing that hasn't been mentioned that will mitigate (to some degree) the boomer drain on SS is that many, many boomers will be working (and contributing to SS) beyond their retirement age, due to inclination or low savings.

I hope not to need to depend heavily on SS, but I am glad it is there for my parents. And to those who feel exploited by those boomers taking all the benefits, wouldn't you prefer that they get SS instead of moving in with their children/grandchildren? (Or have you moved out of their house yet?)

Guest's picture
Bill Woessner


I do think about him. He'd be SO much better off if the government didn't confiscate 12% of his compensation "for his own good". If we could invest that money, himself, he'd actually be able to afford a comfortable retirement. Instead, he'll subsist on whatever pathetic existence Social Security affords him.


Actually, that's not true. For anyone who started working after 1990, the probability that they'll get back more than they paid in is exactly 0. This may also be true for people who started working earlier. I haven't run the computation for tax rates prior to 1990.


That's utter nonsense. The employer portion of FICA is part of your compensation, just like your other benefits. The employer pays it because you work. Just because it doesn't cross over your palm before the government snatches it doesn't mean it's not part of your compensation. As a hiring manager, I deal with this issue all the time.


Like when? When in the past 100 years has the stock market "tanked"? You mean, for example, the dot com bubble? Well let's put some real numbers to it. If you retired at the VERY BOTTOM of the dot com bubble, you STILL would have enjoyed a 4.66% real return (above and beyond inflation) over your working career. Compare that to Social Security's GUARANTEED negative real return. I don't know about you but, given the choice, I know which one I'd pick.

Guest's picture

I love the comparisons you made between SS and a Ponzi scheme. People talk about these factors as if they redeem the program from being an actual Ponzi scheme, but in fact, they show that SS in in every way worse than a Ponzi scheme.


-SS makes no claims about making money fast. Of course, they don't have to. Since you're forced to put your money into SS, there's no need to advertise anything.

-SS makes no claims about investing your money, so it's not actually fraudulent. See comments on previous point.

-SS is not a voluntary scheme. A Ponzi scheme is. I don't see how this makes SS better. The one plus about a Ponzi scheme is that you could choose not to go along with this form of robbery.

-People who die before they collect their full SS benefits don't receive their remaining benefits. This might help prolong the scheme for a little longer but it sucks for those who have paid into the thing for their entire lives to gain nothing to leave their survivors for it.

I read somewhere along this thread that SS is not a retirement plan, but a safety net. Nobody is expecting SS to be a government-funded retirement program, but it's not a very effective safety net either. I am 30 and by the time I retire, by SS benefits will be zip. I would have had a better 'safety net' by putting that money in an IRA or a trust fund or even the latest Ponzi scheme.

Xin Lu's picture
Xin Lu

Warren, I'm only 24 so I think I would get an even worse deal than you in all of this.  You are right about the "differences" making Social Security sound even worse, though.  I wasn't trying to argue that it's better and as I was writing it I actually thought to myself that Social Security actually is worse than a Ponzi scheme for most people. 

Guest's picture

Yeah, like the janitor, who might even have two jobs, is going to spend time reading a stack of prospectuses for his retirement investments. The examples presented are just exceptions that prove the rule -- most people aren't good at investing.

Frankly, I would like it if I could get that legendary CalPERS pension. I hate researching for my retirement.

I like that Social Security exists, and is basically a welfare program, because it is a very necessary one. Life before Social Security and Medicare was a lot worse. Old folks not only lived in poverty, some committed suicide.

As for SS running out of money - it will be adjusted for. I understand that's already happening. The SS system is fundamentally a way for the young and able-bodied to pay for the needs of seniors. There are aspects of it that are like a savings plan, but, that seems to be more of a score-keeping system to establish the amount of your entitlement more than anything else. The core of the program is to mitigate the problem of widespread poverty among people who cannot work in the marketplace due to age or disability.

What is wrong with that? It seems like a very civilized, humane task: one that government is supposed to perform.

Guest's picture
Bill Woessner


He doesn't have to. All he needs is a broad base index fund. An S&P 500 index fund or a total stock market index fund. Or he could use a target retirement fund. Investing for retirement doesn't have to be complicated. In fact, it shouldn't be. there's a ton of research that shows that active trading is extremely detrimental to one's portfolio.


Please explain which of Warren Buffett's needs are addressed by Social Security.


So what you're saying is that your "need" is based on how much you made over the course of your lifetime. Oh yeah, that makes perfect sense.


No, the core of the program is transfer wealth from those under 65 to those over 65 in a wholesale fashion. That's not alleviating poverty, that's purchasing the senior vote. Great politics; lousy economics.

Xin Lu's picture
Xin Lu

In response to:


Umm.. it's your retirement so shouldn't you take some responsibility in managing it? Not researching your retirement options is just plain lazy and fairly irresponsible. My mom is going to get the CalPERS pension in 5 years, but she still saved a considerable amount in her own IRAs and 401ks.  The CalPERS pension isn't as much as you think.

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If this would have happened to me I would think that I was the victim of Identify theft, either way how are you going to prove you are you, and that you did not know someone else drew your Social Security account long before you decided to??
Best wake up and smell the coffee!!

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Sure it's a Ponzi scheme, when you realize that it relies purely on demographics and there aren't enough legal working suckers to pay in right now. There is no "insurance" component as the funds are not invested, unless you call the US government T-bond IOU's an investment. It's also designed as yet another welfare program so that poorer taxpayers get more than they put in, compared to the rest of us.

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SS is a communistic method of wealth re-distribution. Of course, many in this country prefer the government to make their life decisions for them. Much like it was in the old Soviet Empire.

What people forget that before SS, old people retired and lived with their kids. The concept of family then was much stronger and people took care of the elders. An unintended consequence of SS was the weakening of the family.

Good topic and one that certainly generates a lot of emotion. It comes down to how one views the all-knowing, all-powerful government. Some view it as an intrusion. Others as a intelligent, benevolent force.

You know where I stand.

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@xin lu, so you're saying that the millions of people who are paid little money, or lack the acumen, experience, or family knowledge to plan their own retirement are "lazy and irresponsible"? Perhaps they are, but, I think they should be cut some slack. Having a $10 an hour (or less) job is bad enough, and if they have kids, they may have to work two jobs and don't have time to deal with a wide range of investment choices.

The CalPERS pension performs well and is steady. It's a good balance to riskier IRAs and 401Ks, does better than other stable investments, and is probably doing better than index funds these days.

I'm lazy about investing and like a set-and-forget style. All this choice we have - it annoys me more than anything. So, yes, I like the government taking care of things for me. I like them to take care of the sewage system, the forests, roads, libraries, indigent people, and numerous other things. I also like them to take care of old folks, and wish they would do more about homelessness.

@bill: As for Warren Buffet getting SS - fine with me. That was the deal offered - everyone pays in, everyone gets something out. Some people get back less than they paid in, others get more. Buffet's just one extremely wealthy guy, but the millions of others receiving SS are not wealthy, and many are low-income. Having a single system that's not means-tested helps create a sense of unity and mutuality.

If you really do want to do more means testing, why don't we introduce toll gates everywhere, libraries for the poor along with pay libraries, and means tested public school too?

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Maybe if you are only making $10.00 an hour, low to no benefits etc YOU SHOULDN'T BE MAKING BABIES YOU CAN'T AFFORD!

Give me a break, it is Econ 101 for God's sake.

Social Security is just Socialism with lipstick, take from one demographic and give to another and there are many in this SCHEME.

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Bill Woessner


So even though we could do more with less in terms of alleviating poverty, you're saying that it's better to do less with more, because it "helps create a sense of unity and mutuality". Is that it? I'm pretty sure that's what they thought back in Soviet Russia, too.

You've really hit the nail on the head. Social Security isn't about helping the poor. If it were, there would be no talk about "means testing" because it would be OBVIOUS that the wealthy wouldn't receive it. Social Security is about purchasing the senior vote via wealth redistribution. Plain and simple.

Xin Lu's picture
Xin Lu

@wildgift No, I'm not saying that millions of people are irresponsible.  I also don't like to underestimate people to say that they lack the acumen to plan their own retirements.  I just thought your attitude towards retirement seems lazy and irresponsible in that you don't want to deal with it. You can have a portfolio that you don't have to manage that much if you just researched it and set it up to begin with.   I think no matter how little money people make they can think about their futures and do some planning on their own.  That is all. 

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there's an interesting post at angry bear today analyzing the history of the projections by the Trustees and concluding that a) we're all going to get our dough; and b)we'll all make out better financially over the long term by being skeptical about any "reform" of social security; because in any year where the "payroll gap" is less than 2.23% of 1997 numbers, doing nothing saves you dough in the long run. The great "underfunding" problem is more one of political discourse than one than one you'll see in your check when you retire.

I'm surprised at the degree of hostility to the program expressed here and I wonder how much of it is generational. If your parents had seen quondam bankers selling apples downtown and grannies in breadlines and had prayed their dads would keep the job that was paid in script, because at least you could buy food, and had daily observed the remorseless cruelty that age and poverty contrived for men who earned wages but not enough to create capital, and you had been raised on those stories, you might be more reluctant to dismantle a program that has worked well and efficiently for more than 70 years. Perhaps if your parents were too young or too rich for the horrors of the depression you lack access to the social memory of the social problem that social security solved.

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Bill Woessner

What problem has Social Security solved? Despite ENORMOUS social spending ($1.5T; $660B on Social Security alone), there are still 30 million Americans living in poverty. That's nearly 10% of the population. The situation is somewhat better among seniors, but not a whole lot. So again I ask, what problem has Social Security solved?

I have no problem with helping the poor. In fact, that's PRECISELY what I want. What I don't want is the wholesale transfer of wealth from one generation to another. That's so imprecise as to be laughable. Social Security does not target poverty. It targets seniors, who vote en masse. No wonder it's so popular.

It boils down to this. For less than we spend on Social Security (let alone the rest of our failed social programs, we could completely eliminate poverty in the United States. Not just alleviate it, not just help out those over 65; completely eliminate it. If you want to help the poor, help the poor. But please don't pretend that this coarse wealth redistribution scheme does anything of the sort. It's a vote purchasing program, plain and simple.

Xin Lu's picture
Xin Lu

@Pudentilla I wouldn't go as far to say that it has worked well and efficiently for over 70 years. It has subsisted over 70 years and as I pointed out in my article the earlier recipients got an awesome deal. However, it really doesn't give very good returns on the money current young workers are putting in. So yes, maybe the hostility is generational, but I think it is understandable given the situation.



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The problem that it's avoided is 10% of Americans living on the streets and 15% on top of that  living in poverty.

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@Bill. The sense of unity is partly for "patriotic" reasons, but also to build political support for the program. Once you introduce means testing, you set up the political situation for opposition to the program from people who aren't included in it -- meaning the workers and investors with the most money. The people who benefit most from SS, who are the poor, mentally disabled, and people working in low-skill jobs, are less likely to vote, and do not contribute to political campaigns. Over time, SS would become an underfunded welfare program resented by the middle class.

As for eliminating poverty - frankly, your argument is hollow. You can't be Milton Friedman, Ron Paul, LBJ, and FDR at the same time.

Then again, if I read between your lines correctly, you don't want to eliminate poverty. (You say if "we" want to eliminate poverty.) You just want an argument against Social Security.

Because, frankly, a good way to eliminate poverty would be to expand Social Security, and also create some quasi-mandatory savings plans along the lines of FSAs or education IRAs. Explanation below.

@xin lu. My mom was basically a poor person who saved money. She did it when the market for financial instruments was more regulated than it is today, and she did manage to save money for retirement, and not lose out too much to inflation. So, my personal experience is that it's possible.

However, I also see my low-income peers cannot save money, and some high-income peers who will only be rescued by the fact that their job has a solid pension (because they cannot save money due to lack of fiscal wisdom).

Today, due to the growth in choices, it's simultaneously easier and harder to invest. It's easier to set up online accounts, move retirement money into different instruments, and so forth. At the same time, returns on "safe" investments seem to be lower compared to inflation, so, to stay afloat, you have to research to invest. Due to deregulation, there's pressure on banks and investment firms to sell riskier products.

It seems this growth in choices, and the erosion of pensions, puts the fiscally unwise at a severe disadvantage. I think it even depresses wages for poor people.

Wages in the working class are set by the cost of living -- that is, when they feel the pain of inflation, they're more likely to seek other work or ask for a raise, so the employer might respond by raising wages. In the absence of labor unions who negotiate more favorable contracts (by trying to negotiate a wage based on profit margins and by establishing pensions), or a very poor local economy where the minimum wage is the wage floor, it's the cost of living that determines wages for the poor.

The fiscally unwise tend to spend all the money they can put into their pockets (or bank account), saving little or nothing for the future, or, going into debt. By putting retirement decisions in the hands of these poor workers, within which there's a large population of fiscally unwise individuals, you will tend to depress wages because you delay the day when they must try to seek more work or ask for a raise.

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Bill Woessner


I reject your false dichotomy. Just because your mind is to small to accept it does not mean it's impossible. This single statement demonstrates your blind partisanship seriously hinders any kind of rational thought.


See above. I can only state my position. If you take it and read more in to it than is there and twist it in to what it's not, well... I certainly can't be blamed for that.


That's exactly the sort of nonsense I expect from people like you. It's not working, so let's spend more money! More money is always the answer. Just ignore the fact that we're already spending more than it would cost to completely eliminate poverty. The fact that the money we're already spending isn't targeting the right people is completely irrelevant. Ignore efficiency issues. Just spend more money. Heaven forbid Warren Buffett should forgo his Social Security check.

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Are we even reading the same post? You ad hominem attacks are far off the mark. You seem to be the "blind" one.

Last thing first - Social Security is not failing. We have many, many years to adjust it. I've read the articles portending its collapse, and articles saying it's stable, and, typically, the latter seem to be more credible. I'm just a layman, but that's my impression.

I didn't say spend more money - but rather to expand SS, and do it through targeted quasi-mandatory savings plans that have tax advantages. Those plans are supported by more by right-wing capitalists than anyone else, but, they can work, and they pass through Congress and the Senate. Not everything right-wingers promote is without merit.

SS is politically feasible. By not means testing for SS, it has wider political support. A targeted welfare program for poor seniors, while it would cost less, would be politically vulnerable to attacks.

I just googled the term "social security collapse" and came across an article that's 13 years old, but rebuts your points... that's weird. Click my name for the article.

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Bill Woessner

Last thing first - Social Security is not failing.

Yes it is. Social Security is a failure. Despite 60 years of ever-increasing taxes and ever-increase base, Social Security has not even manged to solve the problem of senior poverty. The overall success rate of anti-poverty measures in the United States is 45%. This, despite annual spending of $1.5 TRILLION. I don't know about where you come from, but in my class, 45% is a F. That goes double when 100% success is achievable by spending less money.

Furthermore, Social Security now guarantees new workers (those who started working after 1990) a negative rate of return. Given the higher tax rate and retirement age, the average worker simply cannot get out more value than he puts in. It is mathematically impossible. It's like the 3 laws of thermodynamics: you can't win, you can't break even and you can't even quit the game.

We have many, many years to adjust it.

And by "adjust it", do you mean raising taxes and/or cutting benefits? That will make Social Security and even WORSE deal for workers. Yay. Let's do that.

I've read the articles portending its collapse

I see you have not stopped putting words in my mouth. Bully for you. I guess that's what you must resort to when your argument has no merit. I never said that Social Security is in danger of collapsing. Social Security can be made to last indefinitely through further tax hikes and benefit cuts. It doesn't take a PhD in math to realize that.

The problem is that Social Security is a RIP OFF. It costs more than it would cost to completely eliminate poverty and it guarantees a negative rate of return for workers who pay in to it. But I guess that, since it's "politically feasible", that makes it worth while. Racism and sexism were once "politically feasible", too. That didn't make either one good.

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Social Security doesn't exist to provide for retirement and it doesn't exist to keep you out of poverty when you can no longer work. It exists to ensure that those who don't save won't be pennyless dying of starvation on the street. I believe that it does a pretty good job of that, not prefect but that is life.

I agree that the elderly who are currently living off of just social security probably don't have a great quality of life, but they should still have a chance.

Would it be better to leave these people to the welfare system? That I do not know.


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Bill Woessner


At least SSI is an honest welfare program instead of a stealth welfare program masquerading as a wealth redistribution/social insurance/pension/annuity/retirement/whatever-its-zealots-call-it-today program. And SSI is funded out of general revenues, not Social Security taxes. That's kind of nice because it means the wealthy are actually paying for most of it; unlike OASDI, which is paid for by the working class.

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Bill W

Bill, SSI is anything BUT honest!!!!!!!!!!
It is full of crooks. The people that collect SSI are crooks, the physicians that qualify the SSI's are crooks!!
There's nothing good about SSI unless it is for REAL disabled people.
Problem is Bill, that it (SSI) is paying people to sit eat and watch TV all day, get drunk, tweek out on Crank-Meth, and be as worthless to themselves and society as possible.
And if you think for a second that only the Wealthy pay for SSI, that's just a fantasy from your delusional mind Bill.
SSI will bring down everything.
It's a destroyer, not a helper honest Welfare system.
I cannot wait till' it's broke.
I want to see all the lazy people that lie to get a SSI check and have a Kegger party when they get qualified and recieve their big lump sum check in the beginning, I want to see them have to actually do a days work to have a meal, probably for the 1st time in their useless lives.

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Capt. Quahog

Another year older since my lasting posting. Now age 46. Whoops . . . always get that backwards somehow. It should be 64. Wasn’t there a Beatles song? . “When You’re Sixty-Four”?

Anyway, the guy across the street hit age 62 a couple of months ago and at once scampered on down to the government socialist security office. He described the waiting room there as being soviet-like. Said that he had to talk while standing up with the Retirement benefit lady via a speaker device through thick bulletproof glass with the chicken wire inside. That's too good! We figured that there must be some pretty nasty n' rough geezers running around these parts. Who the hell are these government hacks so afraid of, the senior citizens?

Recently came across a number of WEB sites with hordes of pathetic fools yapping and whining about not being able to qualify for socialist security Retirement. The bulk of these despondent clods admit to working at dog crap under-the-table, pay-no-taxes jobs for many years. These dopes are out there now trying to hustle up on-the-books work quarters or some con job deal from a long ago ex-wife or husband's social security accounts. They complain about falling short on their "quarters". Have any of these miscreants ever thought about going back to work and get some more of those things? Maybe a few of them can get work wiping car windshields at traffic lights with greasy rags.

Meanwhile, the duck drops and the buzzer sounds . . . YOU LOSE !!! Should probably go on to a couple of WEB sites and post a response. Think it would peez em off to know that a citizen well qualified to collect S.S. Retirement checks can't even be bothered to sign up? Ha! Ha! Take that you parasites! In fact, just learned that about 7-years of paid-in Railroad Retirement money can be rolled into social security to increase tentative bennies.

As it stands, there are Railroad high buck credit quarters that show up as blank years on the marxist security retirement statement sheets. Never bothered to inform social security about the RR retirement money sitting somewhere. Figured it all to be lost though confiscation long ago anyway. Too many strings attached to socialist security retirement and it's now taxed too. Isn't that double taxation? What a total rip-off! Americans used to have balls, were gallant, highly creative and totally self-sufficient. We're now overrun by hordes of feckless blood sucking rodents. For the most part, these rats grovel at the feet of government bureaucrat thugs to beg for crumbs from the loaf that they bought and paid for decades ago. Take socialist security retirement and shove it up their collective totalitarian arses. Will work and pay my own way til I drop dead, which is probably sooner than later. All I want from government is to be left alone.

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So why is Social Security not a Ponzi scheme?

It is; so you're already incorrect. A ponzi scheme is marked by HOW it does what it does, not by the claims made by/about it, or whether or not it can be avoided.

The rationalizations identified here are the same ones that [surprise!] litter the Social Security Administration's weepy, weepy website in response to all the [justifiable] criticism of the ponzi scheme they operate. They could claim plagiarism, only their own rationalizing words are so embarrassing, I strongly doubt that they'd take it to court




Also irrelevant.

These last two items together are the difference between being robbed by a guy at gunpoint versus being robbed by a guy who promises to re-roof your house after a hailstorm and skips town with your newly-cashed check. Social Security is the guy with the gun. Frankly, that's not an improvement.


Payroll taxes, which means that if you don't work you don't pay. A meaningless quibble


If old Chuckles Ponzi had been able to keep his juggling act going for a few more years, he would very likely have had one of his "coupon" holders die on him, ... and the coupon would then have become part of the dupe's estate, and an heir or assign would have tried to collect on it ... just as "survivors" can collect on a cadaver's SocSec Bennies today.

This is another meaningless quibble.

The Social Security Administration actually calls the program a "pay-as-you-go insurance system"...

The folks who work for them are idiots; what do you expect? This is as idiotic a redefinition of reality as you can find.

"Insurance". Good god!

If it were "insurance" then the payments would be called "premiums" and would be based on an actuarial evaluation of an individual's likelihood of actually collecting: the more likely you are to collect, the higher your premiums.

And as such, women would pay [significantly] more than men, and "certain ethnicities of Asian" [screw PC; let's be specific here: Orientals] would pay more than whites, and whites would pay more than blacks. Because on the longevity-scale -- which is ultimately what we're talking about here -- the longer you are statistically likely to live, the greater chance you have of collecting SocSec bennies, and the more you would pay in taxes when you "contribute"...


But it's not. Which means that their equivocative descriptions are entirely hooey, and meant to appease the simpletons.


Bingo. And you've just answered your own rhetorical question, albeit in the way you didn't want to.

This is EXACTLY what makes a ponzi a ponzi: the necessary geometric progression of "investor"/taxpayer to recipient, the inability of the real world to sustain that geometric relationship, and the ultimate collapse of the thing.

Another term for this is "pyramid scheme". A ponzi is simply the most well-known pyramid scheme; they are all essentiall the same: they rely on an unsustainable financial model for viability.

But perhaps the most damning bit of evidence hoisting SocSec on its own petard is this:
If you were to implement a pension plan for the Xin Lu Corporation based on the Social Security Financial Model -- current employees fund current retirees' retirement income, with "excess receipts" being channeled back into corporate bonds -- the SEC [Securities & Exchange Commission, at least I believe that's the group; "government regulators" at any rate] would be all over you like pork fat on a Mississippi barbecue for operating a financially fraudulent pension plan. You'd be charged with financial crimes from RICO on down.

Why? Because despite the flowery rationalizations the government throws out in order to convince us all the SocSec is a fine, fine program, they know very well that it's not. They just hope to keep the juggling balls in the air long enough that some "wisdom of the future" can fix it all.

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Defenders of the ability of Social Security to make good on its obligations perpetuate the slimiest rationales for why the system is secure - that it is backed by the most rock solid investment in the universe--US treasury bonds. Protected by the full faith and credit of the U.S. Governemnt, eh? All that means that the government is able to either print money or tax the very people they owe - the tax payer. How about if I guaranteed your investment in my retirement fund by writing checks against your bank account? And if you don't have enough money in your bank account, I can liquidate your assets to pay you back. And if that is not enough, I can write checks against your children's bank account.

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You gotta love subjective arguments riddled with semantics, when an objective perspective is required. Objectively, Social Security is quite simply Ponzi. Subjectivly, a plethora of argument exists why SS is not a Ponzi Scheme.

Initial investors get more than they put in--both Ponzi and SS.
Requires incoming funds equal to or greater than the current payout--both Ponzi and SS.
SS is universal requiring everybody to pay in, while a Ponzi Scheme is not.
A Ponzi Scheme is destined to fail because it cannot find sustainable amounts of investors, while because SS is universal (thus having large funds) there is time to tweak the system so it does not fail.
Blah, Blah, Blah.

The crux of the question in whether SS is Ponzi is really asking whether or not SS produces a return on an investment, or ultimately robs contributors? Well at least that's my between the lines. In my humble opinion, SS has grown into the largest Ponzi Scheme ever in that it robs Americans of wealth. So many of the arguments presented already mention SS is only intended to be a safety net. I don't disagree that SS WAS intended to be a safety net for the poor during the Great Depression, when payrolls were only taxed a total of 2% (1% each by employee and employer) on the first $3000 of income.

SS was intended to be a safety net, but SS is a failed attempt at a good deed. What SS effectively has done since its inception has incrementally taken a larger portion from Americans' payroll which may be used for savings, or mortgage payments, or car payments, etc. and has moved that money into SS where there may in fact be no return. Imagine an American economy where the taxpayers had 5.2% more of their paychecks (avoiding Medicare in the argument) and employers had 5.2% more to offer employees in benefits?

This year, I will be lucky enough to cap out on SS contributions, which is a figure roughly $12K between my and my employer's contributions. This is a contribution roughly $10K greater than the inital 2% deduction that SS was established on. Figure a conservative 30% tax on the now taxable $10K and you have a remaining $7k to invest, or spend, or pay medical bills, pay off a loan, etc. (Not to mention still $3000 in tax money that I don't know, maybe could be used to help out the poor.) I could pay off an auto loan and save another $2k on financing over the next few years...or imagine this--had I had the extra take home pay all along, I could have paid cash for said auto out of an interest bearing savings account.

I love the arguments postulated in previous posts about what happens to privatized savings accounts if/when the bottom drops out of the market. My answer to that is that whether it is a penny or a million bucks, wealth is wealth. When I die before I get any positive return on my SS contributions, and then my wife dies before she can get a positive return on my contributions, and my kids are all 18+, my SS contributions leave no wealth to be handed down.

To anybody that understands the power of compounded interest, even a 1% payroll deduction devoted to privatized investment with a nominal return outperforms what SS does in the long run.

I don't expect SS to go away, or for it to be underfunded when I retire, but I do expect a larger SS tax in the future (or combination of reduction in benefits and increased tax), so what I see in the future is even less discretionary take home pay, less ability to save, more need to borrow, and an increased need for SS benefits when I do retire. Anybody else see the cycle?

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The issue isn't "make money fast", so much as "let's promise fantastic returns!"  Here is a quote from the article "":

"This maiden disbursement was $22.54, which, according to Social Security Online, after cost of living increases and 35 years of receipts until her death in 1975, totaled a startling $22,888.92 in payments from a system to which Mrs. Fuller contributed $24.75.

"Now, please bear in mind that Mr. Ponzi was only promising people a 40% return on their money in 90 days.  By contrast, the first Social Security recipients received yields approaching 100,000 percent."

The article gives several other examples of how Social Security promised fantastic returns.  It can only pay those returns by paying out what the current payees pay me, that sounds like a Ponzi scheme, if it's anything!

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John Sliverman

Brilliant. So Social Security is not a Ponzi scheme because it's not. Only a liberal can twist such non-sense. So what if the administrators call it a pay go insurance system. I'm sure Madoff called his scheme an "investment". Does that make it so?

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Sorry, but the non-existence of original mal-intent is a frail excuse for Social Security. The behemoth began life with good intent, but transitioned into fraud over the years. Politicians now secretly realize that Social Security is 'effectively' a Ponzi scheme, but most are too gutless to tell the American public.

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