Professor Ponzi Scheme

Reply to Social “Ponzi Scheme” Security

I was blessed enough to get a few responses to my post about Social Security being similar to a Ponzi Scheme.

Primarily, I was directed to this blog from the Washington Post.

Here’s a good section of it:

The superficial similarity to a Ponzi scheme is that different sets of investors are relying on future investors, or at least future growth, to get paid back. But that defines a Ponzi scheme so broadly as to make the term meaningless. In that definition, any intergenerational transfer system is a Ponzi scheme.
What makes a Ponzi scheme a Ponzi scheme is that it’s a giant fraud. People think they’re investing in postal stamps. Their money is actually being invested in nothing. In Social Security, conversely, it’s perfectly clear what is going on. Every year, Social Security’s actuaries release an insanely detailed report on the system’s finances, its balance of payments, the potential problems it could face, and so on. You can read their report here. In a Ponzi scheme, the finances are a secret, and that’s central to the enterprise. In Social Security, they are, as a matter of law, public.

That makes sense to me.  Enough to make me comfortable to stop calling Social Security a Ponzi Scheme unless I’m trying to be funny anyway.

This doesn’t mean that I’m without concerns though, here’s another tidbit from it:

The other characteristic of Ponzi schemes is that they tend to require huge increases in the number of participants in order to stay afloat. As the Social Security Administration explains, “to pay a 100% profit to the first 1,000 investors you need the money from 1,000 new investors. Now there are 2000 ‘investors’ in the scheme, and in the second round of payouts to pay the same return to these 2,000 investors in the next round, you need the money from 2,000 new investors–bringing the number of participants to 4,000. And to pay these 4,000, you will end up with 8,000 ‘investors,’ then 16,000–and so on.” This type of geometric explosion looks like a pyramid, which is why Ponzi schemes are often called “pyramid schemes.”

Yes, Social Security doesn’t need quite a drastic and rapid increase in its base, but it does need continual increase.  I just have a hard time trusting that anything will increase forever.  The housing market had a long and solid run before it crashed too.

So in short, I believe I was wrong in terming Social Security a “Ponzi Scheme.”  I still don’t think it can be trusted to be an eternal solution, and who knows but that its lifetime will end before mine.  At least not operating at fraudulent levels (probably.)

I love comments, questions, emails, and push-back.  Let’s learn something.  I plan on posting corrections and updates when people give me something good about posts I’ve done.

Keep seeking truth.

You may also be interested in:
Social “Ponzi Scheme” Security
National Debt, Explained by “Weird” Al and Humor U
Dating and Game Theory

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