The Luckiest Ponzi Scheme

When Charles Ponzi was defrauding investors in 1916 Boston, little did he know that within 20 years his particular dodge would be embraced as the official policy of the U.S. government.

Ponzi convinced people to let him invest their money, but he never made any real investments. He just took funds from recent “investors” and gave it to the early birds, paying the latter a handsome profit on what they had paid in. He then ballyhooed the early birds’ “success” to get still more “investors,” using their money to pay the previous crop and so on.

Of course, to keep paying “profits” to his earlier marks, Ponzi had to continue finding more and more pigeons. Eventually, unable to find enough of them, his system collapsed and Ponzi went to jail. Because he had never made any real investments, Charles Ponzi never had any real money with which to pay back earlier entrants into his system. Consequently, when he couldn’t recruit enough new suckers, the earlier ones discovered the calamitous nature of the scam to which they’d entrusted their earnings.

Today whenever an investment “opportunity” is found operating on these same dire principles, it becomes known, naturally enough, as a Ponzi scheme. The reason Social Security is in trouble is because it is such a scheme.

Just like Charles Ponzi, it makes no real investments. It simply takes money from recent people forced to pay into the system and gives it to earlier people, now retiring. Congress then blows whatever is left, and federal IOUs for it all get deposited in a Parkersburg, W.Va. filing cabinet—the real home of the mythical Social Security “Trust Fund.”

Also like Ponzi, Social Security eventually will be unable to recruit new “contributors” fast enough to pay out the benefits the government has promised. Since fewer workers enter the system annually, versus those who retire, Social Security—if not reformed—will also mimic Ponzi’s con by collapsing.

Indeed, that day grows ever nearer. The federal Board of Trustees of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds noted last year that the Social Security program’s projected tax income “will begin to fall short of outlays in 2018.” In other words, in just over 12 years the program will be technically insolvent.

If it offends your sensibilities to hear Social Security described as a mere Ponzi scheme, famed economist Paul Samuelson, an enthusiast for the New Deal, was positively gleeful over the flimflam nature of the program. “The beauty of social insurance,” he wrote in Newsweek in 1967, “is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in…. How is this possible? … Always there are more youths than old folks in a growing population…. A growing nation is the greatest Ponzi game ever contrived.”

Despite his candor about Social Security’s unsound nature, Samuelson was completely wrong on its demographic future. Since families are having fewer children and people are living much longer, for 60 years the number of retirees has been growing faster than the number of workers. In 1945, a retiree was supported by payroll taxes from over 40 workers; in 1960, a retiree was backed by only 5.1 workers; today it is just 3.4, and by 2035, it will be only two. This is the crisis looming over the Social Security system.

It is also the reason that Social Security—if the program is to survive—must replace its cheesy Ponzi-scheme architecture with a realistic method of retirement financing. In short, Social Security must join the modern world and—like IRAs and 401Ks—access the time value of money, sometimes called the “magic” of compound interest.

Notwithstanding shameless demagoguery from die-in-the-last-ditch Democrats, personal retirement accounts are essential for bringing Social Security into solvency. The Ryan-Sununu bill, for example, has been scored by the Chief Actuary of Social Security as a way to bring the system into permanent balance, while offering significant personal accounts and requiring no benefit cuts or tax increases.

Its merit is that real benefits, available from the personal accounts, would substitute for the Ponzi-scheme pay-outs of the existing Social Security system. As the system’s benefit obligations are increasingly transferred over to the personal accounts, Social Security would be brought into solvency.

Recently, panicky partisans have been proclaiming Social Security “is the most successful government program in history.”

Not true. Just the longest running—and luckiest—uninterrupted Ponzi scheme.

Steven Miller is policy director for the Nevada Policy Research Institute.