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Social Security a Ponzi? – I think so

Bruce Krasting's picture

Rick Perry teed this up. I’m amazed at how much traction this has gotten. Clearly both sides of this issue are stirring the pot.

I’ve looked up a few definitions of what a Ponzi scheme is. This one is from an excellent source. The Securities and Exchange Commission defines a Ponzi as:

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Does Social Security  constitute a Ponzi based on that definition? I think it does.

There are two ways to look at this:

I) If there are no changes in the current laws regarding Social Security does the projected future financial results support the conclusion that it is a Ponzi?

II) If changes are made to Social Security will the consequence of those changes result in the conclusion that it is still a Ponzi?

(I) is easy to answer. Based on the SEC definition, Social Security is a Ponzi. If you want proof of that go to the Social Security Trust Fund May 2011 report to Congress. On page 10 (of the report) you find the following chart. Somewhere around 2036 (I think much sooner) SS benefits will be cut by 25%. That is the law as it is written today.

Conclusion: Anyone under 45 today is paying for something that they should expect to get 75 cent on the dollar. Clearly a Ponzi.

To answer (II) requires that one make some assumptions regarding what changes to SS are coming. I rely on the recommendations from a variety of sources. Both Republicans and Democrats (including the President) have supported the recommendations made by the Fiscal Commission report. SS has it’s own set of recommendations. “Independent” private groups have made their thoughts public. While it is not clear what (if any) changes are coming at SS, the following covers the options that are being given serious consideration:

1) Gradually raise the age limit to 70.

2) Gradually increase FICA taxes.

3) Change the formula that indexes SS benefits to inflation. The consequence would be to slow the current projected growth rate of SS payouts.

4) Gradually increase the cap on incomes subject to FICA. (Currently $106,500).

Of all of these options the one that has had the most support is to gradually increase the age limit to 70. What does that do for SS on the charge that it is a Ponzi?

Assume I am 65 and getting $2,000 a month from SS. On paper I should die at age 77. By the numbers I will get 12 years of benefits.

Now assume that the age limit is extended to 70. Assume further that this will be effective is 15 years. Based on what we know today the average life expectancy of a 65 year old male will be 13 years in 2026.

This means that a person who reaches age 65 in 2026 will not get benefits for another 5 years (70). That same person will die at age 78. They will get benefits for only 8 years while I get mine for 12. I will get benefits for 50% longer than they do.

Conclusion: Anyone who is under 50 today is getting screwed when that age limit goes up. For those folks, SS meets the definition of a Ponzi.


Raising FICA makes things worse. Not only would younger workers pay more into the system as a % of their income, they will get benefits for a shorter period of time.They pay more for less when taxes are raised

Conclusion: Increasing FICA taxes is a solution that forces the conclusion that a Ponzi is afoot.

Changing the COLA formula has lots of support from the “deep thinkers”. I agree that if this were done it would have a very significant consequence to SS over a 30-40 year period.

The desired effect is to reduce the inflation adjusted cost of benefits. I get $2,000 a month. We know what that buys today. In 30 years a retiree will get $4,000 a month, but because of the changes to COLA that $4,000 will have a purchasing power equal to only $1,000 today. This is the objective of the proposed changes.

Conclusion: Changing the COLA formula devalues future benefits versus those receiving them today. Anyone under 40 is going to feel the full brunt of this. For them, SS is a Ponzi.

Increasing the wage cap is just another way of increasing the current tax burden on workers. Yes, this increase will be targeted to those who make a decent buck, so this is a popular approach. The consequences will be felt by about 10% of all workers.

Conclusion: For those in this group the consequences of #’s 1,2 and 3 are just magnified. I don’t feel sorry for those high-income earners but it’s certain that this group is facing the biggest Ponzi of them all.

SS is, and always will be, an inter-generational transfer of wealth. By itself that does not have to mean it is a Ponzi. If the total population were symmetrical across all age groups the inter-generational impact would be both fair and reasonable. But that is not what we have in America today. We have a stable population that is rapidly aging. Given that dynamic anyone who is under 55 (and especially those who aspire for a high lifetime income) are going to get hit with the biggest inter-generational wealth transfer in history. For all in that group, SS is a Ponzi. They will pay in more than they get back. The extent that each age group is impacted varies. Those who are not yet born are the ones who will feel this the most.

I’m not sure if Rick Perry is crazy or just crazy smart. There are 50 odd million Americans who are getting SS checks. That’s a hell of a lot of voters. That’s why SS is called the third rail.

But if Perry asked himself, “How do I win this election?” He could well answer with a strategy that relied on young people who would cheer/support him. He could also look to all those swing voters under 55 who pay a fortune in SS and will not get their fair share back. It's an odd political alliance. But it just might work. Mr. Romney seems to be doing well with the seniors. But he falls flat when he gets to a campus. The base that Perry is chasing after is the same one that got Obama elected.

In my definition of a Ponzi there has to be intent to defraud. I’m not sure that this condition has been met. Every year for the past five the SS Trust Fund has told Congress that significant changes must be immediately implemented. SSA has not mislead anyone, so no fraud from them. The deciders who looked at these reports and chose to ignore what has been written are probably not guilty of fraud either. But they sure were remiss in their responsibilities.



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Tue, 09/13/2011 - 22:02 | 1665996 Bicycle Repairman
Bicycle Repairman's picture

As I mentioned above nominee Rick Perry would run from this ponzi bullshit like a scalded ape.

This from the Guardian:

"Perry moved quickly to pull back from his earlier claims that social security, which includes pensions, is a "monstrous lie" and a "Ponzi scheme".

He said: "The people who are on social security today need to understand something: slam dunk guaranteed that programme is going to be there in place for those."

So there you go Bruce.  How long did it take for your pants to be pulled down?  One day?

Tue, 09/13/2011 - 10:18 | 1663452 ItsDanger
ItsDanger's picture

Currently, its basically a ponzi scheme.  Discussing semantics is irrelevant.  Perry is correct.

Worthy to note that Canada was in a similar situation 15 yrs ago.  To achieve 100% funding was unrealistic.  Immediate target was 20% with long term goal of 30%.  Employee & employer contributions were increased 50% in mid 90's to achieve the same payouts.  It didnt kill the economy just what needed to be done to stabilize the situation.  Probably, taxpayers are overpaying but these are the mistakes of the past.  That is why Im mostly disappointed with the older generation re:financial matters.

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Tue, 09/13/2011 - 00:13 | 1662570 Bicycle Repairman
Bicycle Repairman's picture

Goodnight, Gracie.

Mon, 09/12/2011 - 23:47 | 1662512 geekgrrl
geekgrrl's picture

You're on a roll, Bruce.

I went and took a look at the report. (I think you got the link wrong, it pointed to the SSI report. The SSA trustees report is at  The report title is officially called "The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds."

Anyway, I don't disagree that SS is a Ponzi and that it's going to collapse. But the situation with the disability fund is much worse. The report projects the fund will go below minimum safe assets in 2012 to 2013, depending on the model assumptions. They have a nice chart at  This seems really tragic to me. We're going to throw disabled folks to the curb? The weakest among us? (Meanwhile, what are those wars costing us?)

I find myself conflicted about the whole SS debate. On the one hand, I have paid a lot of money into SS and yea, I think I should see some of that back, but on the other hand, demographic shifts are making the math impossible, and it's obviously unsustainable.

The larger question to me is: why are we shifting around who pays and who suffers to different generations by delaying the day of reckoning? (Older people benefit, younger people suffer) If we are all at fault, then let all the generations living right now take a hit, so that everyone can learn to live with less at the same time. I'd say the same thing about class. There's no reason why the wealthy shouldn't be chipping in (I'm talking capital gains taxes the same as income). And I'll add, if they're so jazzed about opening that new plant in China, here's a suggestion: Move there. Go. Now. And don't come back. We don't want you.

Tue, 09/13/2011 - 00:00 | 1662543 MsCreant
MsCreant's picture

I feel you. Additional points made on this thread, that we assume SS won't be paid, but China will, has a similar kind of "hey wait a minute" flavor to it.

Tue, 09/13/2011 - 00:20 | 1662590 blunderdog
blunderdog's picture

Don't worry.  China won't be paid either.

Mon, 09/12/2011 - 23:21 | 1662450 MsCreant
MsCreant's picture

What a thread. I got a lot out of this. Thanks.

Mon, 09/12/2011 - 23:31 | 1662470 Bicycle Repairman
Bicycle Repairman's picture

Bruce blogs on this every day (LOL), if you check his blogs and the responses there is more.

Mon, 09/12/2011 - 23:54 | 1662534 MsCreant
MsCreant's picture

Never the less, I benefited, from you, Bruce, Bob, nmewn and others. I did not understand the dimensions involved. It is another disillusionment. I still am not sure what I think but I understand that this is another area where I have swallowed propaganda. Not my fault, I refuse to be ashamed, but I do need to process just what it means.

I don't know if I agree, but a sincere thanks.


Tue, 09/13/2011 - 00:07 | 1662559 Bicycle Repairman
Bicycle Repairman's picture

You're an intelligent poster and I respect your opinion.

Mon, 09/12/2011 - 22:48 | 1662361 Bicycle Repairman
Bicycle Repairman's picture

I'll repeat this for all your Rick Perry fans.

Will he end welfare?

Will he repeal ObamaCare?

Will he repeal Bush II's medicare schedule D?

Will he repeal Bush I's ADA?

Will he end the EPA, Education department, Energy department?

Will he restore the Republican party's traditional stance against being the world's policeman?

Will he end the FED?

Rick is a fraud that is looking for some wedge issues.  That's all.

A fraud.


Mon, 09/12/2011 - 23:33 | 1662475 Bicycle Repairman
Bicycle Repairman's picture

I understand Rick Perry shanked a debate tonite.  I guess we don't have to worry about Rick any longer.

Mon, 09/12/2011 - 23:50 | 1662521 Bob
Bob's picture

I just heard Ron Paul tear him a good one.  And he finished it with a joke--and it was funny!

Tue, 09/13/2011 - 00:06 | 1662558 Bicycle Repairman
Bicycle Repairman's picture

Good thing you saw it, Faux News won't report it.

Mon, 09/12/2011 - 23:06 | 1662413 blunderdog
blunderdog's picture

You do know the President can't repeal laws, right?  I mean, you're FAMLIAR with America, aren't you?

You sound like a monarchist.  Not that there's anything wrong with that.

Mon, 09/12/2011 - 23:17 | 1662443 Bicycle Repairman
Bicycle Repairman's picture

I've got a good idea how the constitution works.  To be clear I am asking if you think Rick Perry will espouse these positions as a candidate, and then work for them as President.  I say 'no'.  Not even close.

Tue, 09/13/2011 - 00:19 | 1662584 blunderdog
blunderdog's picture

It doesn't matter what they SAY, anyway. If someone who was running for President SAID he'd do all that shit, that's a pretty damn good reason NOT to vote for him.

Come on, man.

Mon, 09/12/2011 - 22:37 | 1662308 azusgm
azusgm's picture

If the Fed had actually performed according to their mandate and controlled inflation, as in zero inflation, instead of jawboning for a structural 2%/annum rate of inflation, SS would be in much, much better shape. A compounded 1% return on those nonmarketable government obligations in a 0% inflation environment would be looking pretty good by now. In a zero inflation world, there would have been no COLA.

Wright Patman understood.


Mon, 09/12/2011 - 22:09 | 1662233 Buck Johnson
Buck Johnson's picture

I don't even think we will get to this point, because I think the whole fiat game will come crashing down and even the ones right now getting 100% of the money will lose it all when the govt. can't give it out.

Mon, 09/12/2011 - 21:38 | 1662159 windcatcher
windcatcher's picture

One important point that your article failed to mention is that SS would be self sufficient if the money that was stolen from the fund by the government was returned to the fund.

Mon, 09/12/2011 - 22:01 | 1662207 Clint Liquor
Clint Liquor's picture

It wasn't stolen, it's in a 'Trust Fund'.

The 'Trust Fund' consists of several books full of IOUs from the Treasury Dept.. Guess who is going to pay back those IOUs?

Hint: It isn't anyone who belongs to AARP.

Mon, 09/12/2011 - 21:01 | 1662035 Bicycle Repairman
Bicycle Repairman's picture

Let's talk Rick Perry for a minute:

Will he end welfare?

Will he repeal ObamaCare?

Will he repeal Bush II's medicare schedule D?

Will he repeal Bush I's ADA?

Will he end the EPA, Education department, Energy department?

Will he restore the Republican party's traditional stance against being the world's policeman?

Will he end the FED?

Rick is a fraud that is looking for some wedge issues. He is trying to marginalize Ron Paul. 

Ron Paul is the real deal.


Mon, 09/12/2011 - 21:24 | 1662112 nmewn
nmewn's picture

"Ron Paul is the real deal."

So you're outing yourself as a republican???

I'm reminded of old SNL where Belushi & Aykroyd are doing the Tom Snyder battered masturbator

Mon, 09/12/2011 - 21:25 | 1662117 Bicycle Repairman
Bicycle Repairman's picture

Get lost, junior, the adults are talking.

Mon, 09/12/2011 - 21:55 | 1662194 CompassionateFascist
CompassionateFascist's picture

I've got a bicycle that needs fixing. Do it now....I'll pay for it, some other time. The whole US economy is a Ponzi. Ron Paul is an ineffectual pointyhead. Rick Perry is a work-in-progress. So I'll judge him by his enemies: libs, democrats, socialists, the Beltway/Hollywood crowd, MSM, Rove and the Repube establishment.....good enough for me.  

Mon, 09/12/2011 - 22:01 | 1662208 Bicycle Repairman
Bicycle Repairman's picture

Look at my original post above.  How do you think Rick will do on those issues?

Mon, 09/12/2011 - 22:08 | 1662214 Clint Liquor
Clint Liquor's picture

Hitler and Stalin:

One was a Socialist and one was a Communist, imagine that!

I did hear the Bushes hate Rick Perry, which is why they ran Kay Bailey Hutchinson against him in the primary. Having the Bushes hate you is quite an endorsement, in my view.

I hear they hate Ron Paul, also.



Mon, 09/12/2011 - 22:24 | 1662276 Bicycle Repairman
Bicycle Repairman's picture

Lot of hate out there.  I wonder what these people like.  Ummm, maybe not.

Mon, 09/12/2011 - 22:00 | 1662205 Bicycle Repairman
Bicycle Repairman's picture

Do you know Stalin was Hitler's enemy?  Do you judge Hitler by his hate of Stalin?

Mon, 09/12/2011 - 22:46 | 1662350 Bicycle Repairman
Bicycle Repairman's picture

You're a Stalin guy, ain'tcha?

Mon, 09/12/2011 - 21:50 | 1662182 nmewn
nmewn's picture

I think thats been the problem all along...old man.

Nice job of fucking the world up for future generations.

Mon, 09/12/2011 - 20:52 | 1662000 Ned Zeppelin
Ned Zeppelin's picture

What happened to means testing? 

A Ponzi is by definition an investment scam.  Social Security is a compulsory wealth transfer plan. Different animals.

Not buying the premise of this article. Sorry. 

Mon, 09/12/2011 - 21:06 | 1662056 nmewn
nmewn's picture

"What happened to means testing?"

Good question.

Mon, 09/12/2011 - 21:35 | 1662146 rufusbird
rufusbird's picture

I suspect means testing will be imposed by reducing the value of Social Security payments, to the point that it will need to be be supplimented with other programs that will be means tested, and which will require signature allowing invasive inspection of financial status.

Mon, 09/12/2011 - 22:06 | 1662227 nmewn
nmewn's picture

I suspect the same and I think there has been a problem all along.

Getting as many people dependent on a system...any government controlled possible. Many within government recognize it is job security for statists. There was no rational reason to have 1099 disclosures of over 600 bucks a year in a "healthcare" bill.

I don't want to believe it started out that way...but that is what it has become. (Woodrow Wilson, FDR et al aside).

Whatever happened to 200k being branded as rich anyways?...seems like only

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