19 Sep 2011

Is Social Security a Ponzi Scheme?

Shameless Self-Promotion 47 Comments

I say yes, then I say no.

47 Responses to “Is Social Security a Ponzi Scheme?”

  1. Tel says:

    In this respect, Social Security isn’t a Ponzi scheme after all. It’s more analogous to mobsters shaking down people for protection money, because otherwise “bad things could happen.”

    I disagree. Ordinary income tax is a protection racket (or mobster shakedown if you prefer). Ponzi schemes are fraud. In its current US implementation, Social Security is both a shakedown, and a fraud.

    • scineram says:

      Who is defrauded? How?

      • Bharat Chandrasekhar says:

        The people in general, because politicians have been taking away the surpluses and spending them while telling them there’s a “Social Security lockbox.” Meaning in order to finance it for the future, they’ll have to inflate (inflation tax), borrow (future tax), or tax more, which is akin to fraud, because the people aren’t told explicitly.

      • Bharat Chandrasekhar says:

        In addition, there’s an “inflation correction” for SS. But because these inflation numbers are fake and obviously lower than the real inflation, the people receiving benefits are defrauded because they expect to not be harmed by inflation.

      • Tel says:

        I’ve posted this one before, but it’s pretty much the same as Murphy’s mises article…


        The Congressional Budget Office and Democrats make the mistake of believing that Social Security has $2 trillion of assets without examining and realizing that these assets predominately consist of receivables from the general fund. These receivables aren’t collectible unless additional taxes are imposed on the populace. (As an aside, what type of return would an investor enjoy if he or she had to ante up the cost of the investment not once but twice?)

        Republicans led by Bush make the mistake that privatization solves the problem. Emphatically, it does not. It will still require about $2 trillion to clean up this accounting scandal whether or not privatization occurs. This amount will continue to climb until Congress repeals the unified budget act. (What is attractive about privatization is that it will force Congress’ hand since the cash from Social Security is no longer available for its members to loot. Also a plus is that it will start the evolution from an unsound defined benefit plan to a sound defined contribution plan.)

        The only thing I could add to that is a comment that Ketz is being amazingly kind to call those events “mistakes”, because I’m sure that all concerned knew exactly what they were doing.

  2. Secret Agent says:

    In fairness, Matt Yglesias points out that the pipeline method can yield a positive rate of return. If the workers at the left end of the pipe always pump in, say, 15 percent of their paycheck, then (if productivity grows over time as it normally does) 50 years later, when they are on the other end of the pipe, there will be more dollars shooting out.

    I know this is not your line of reasoning Bob, but I want to say that it is flawed.

    Productivity of goods and services on the one side, and the quantity of money and volume of spending on the other, are two inter-related, but nevertheless different phenomena. Assuming one changes does not entitle one to assume that the other automatically changes.

    It does not follow that increased productivity of real goods and services over time will accompany a larger quantity of money and volume of spending as well. Only if the money supply is chosen by the Federal Reserve System to be increased will there be more dollars in circulation. More production of supply, of real goods and services, can rise and fall independently of changes in the money supply. Yglesias is presuming that inflation necessarily accompanies productivity growth, when it doesn’t.

    The assumption that SS will pay out a “positive rate of return” in DOLLARS is possible only if there is inflation of the money supply in DOLLARS. Government taxes 15% today when they tax and spend fewer dollars, and pays back 15% in the future when they tax and spend more dollars, leads to a nominally positive, but not necessarily real positive, return in DOLLARS. But if productivity rises, then it cannot be assumed that there will be more dollars as well, or the same percentage increase in dollars as real goods.

    What Yglesias is actually saying, unintentionally, is “the pipeline method can yield a positive rate of return if the workers at the left end of the pipe always pump in, say, 15 percent of their paycheck, then (if the quantity of money grows over time as it normally does) 50 years later, when they are on the other end of the pipe, there will be more dollars shooting out.”

    • Rob R. says:

      I can see a situation where even with a 0 % (or negative) rate of return someone may “benefit”: from social security due to productivity increases and I am wondering if this is what Bob may have had in mind:

      Assume a system where everyone pays in 15% of their money income and all payment out are indexed linked to inflation. If productivity doubles over 50 years then a worker who retires after 50 years will received a payment that will buy twice as much stuff as people received 50 years before. So even if he gets a smaller $ amount back in real terms than he paid in – it might buy more.

      However he would have got way more benefit from a private scheme where he would likewise have benefited from productivity but also have been rewarded for deferred consumption so Yglesis’s comparison to a real 401(k) is scandalously misleading.

      As far as I can see the reason why a “pay as you go” system is unsustainable is entirely down to current demographics and not at all to economic performance as Yglesias claims.

  3. Secret Agent says:

    The confusion in popular discussions of Social Security partly rests on the general ignorance of how an entire community can actually become richer through saving and investment. In other words, a lot of people believe (whether or not they’ve really thought it through carefully) that for every Sally out there who’s saving $10,000 per year, there must be some Jim who’s racking up $10,000 in debt. Therefore, whenever Sally starts living off her savings, people imagine that Jim must be cutting back on his own standard of living. At the communal level — so the thinking goes — everything is a wash, and we’re just changing the distribution of “total output” based on which people were frugal and which were spendthrifts.

    This is the exact mistake MMTers make in 2011, which is based on the ancient myth that in voluntary trade, if one party is better off, then it allegedly means the other party is worse off.

  4. Bonnie says:

    Thank you so much for this. My (homeschooled) high school junior is reading “Lessons for the Young Economist” this year. And he is avidly watching the Republican presidential debates. Educating him is my number one priority, and this article will help. Can’t thank you enough for your writings. I highly recommend “Lessons” for anyone.

    • Bob Murphy says:

      Thanks for the kind words. BTW the teacher’s manual to Lessons should be coming out soon.

  5. Silas Barta says:

    Excellent piece, Bob! You’ve articulated very well the things that I’m screaming whenever I see elementary fallacies spreading around about investment, retirement saving, and Social Security.

    People constantly try to equate SS with real retirement planning by saying that, “Gosh, some way or another, workers are going to have to shell out money for non-workers, the only question is how.” But like you said, if someone actually _invests_ their savings, then they have amplified productivity by more than the amount they draw in retirement. Sure, the later workers would love to get the capital for free, but it was those “parasitic” “non-workers” who enabled the capital to exist at all. (Had the earlier workers not expected such security in their property rights, then they definitely would not have provided for the capital to be available to begin with.)

    Since SS schemes don’t do this, the non-workers really are a drain.

    The only thing I would have added is to carry your point to its logical, enlightening (but counterintuitive) conclusion. People often insist that, in any case, *someone* has to be “the worker”, and we can’t “all retire”. But no, if this is what everyone plans to do, and everyone is aware of this, then entrepreneurs will invest all savings into projects that eliminate the need for all but a token amount of labor (provided the retirees are okay with the level of consumption that can be provided for that way). Then, everyone can be retired, doing only some token work to maintain the capital, without any “full time” worker class.

    • Bob Murphy says:

      Thanks Silas. Yeah you’re right about taking it to the Wally (Disney movie) conclusion.

  6. kavram says:

    The best part of Social Security is how it got started. The initial justification was that private citizens couldn’t be trusted to save for retirement, therefore, out of sheer benevolence, the government would appropriate a fraction of their income on their behalf. Fast forward 75 years and we see that Congress has mercilessly blown through this money like there’s no tomorrow; turns out politicians aren’t as prudent as they originally thought.

    • Tel says:

      Who cares?

      The perpetrators long ago got what they wanted, walked away, and left it in the hands of someone else. Welcome to the lack-of-ownership society.

  7. Joseph Fetz says:

    I would say yes in that it is based upon an unsustainable foundation, that in order for it to continue you need to find (force) the next sucker and that those who got in early got far more than they put in while those that get in later may get less than their contribution. However, a Ponzi scheme is a voluntary endeavor, of which social security is not. So, I would say no in that respect.

    My personal opinion is that social security was primarily instituted in order to offer the federal government supplemental revenue. So, in this respect, it is merely another wealth transfer.

    • Joseph Fetz says:

      Bob, the above reply was made before I read your article. After having read your article it seems that you are making some of the same claims, albeit you are doing so with more elaboration. It seems that the “gang of thieves writ large” created a Ponzi-like system, but the prime difference is that the contributors to such system aren’t in a position to choose. You pay or you go to jail. As odd as it may seem, Ponzi’s scheme was far more ethical. Who woulda thunk?

  8. Ben Kennedy says:

    Another similarity between Social Security and the classic Ponzi scheme is how the funds are dealt with after collection. In the same way that Ponzi took the “investments” and bought himself a mansion, the federal government just turns around and spends the “surpluses” on guns or bombs or whatever.

  9. MamMoTh says:

    SS is not Ponzi. Gold is.

    • Anonymous says:

      And I assume it will be revealed “at some point”.

    • Bala says:

      Care to explain how?

      • Rick Hull says:


      • MamMoTh says:

        The government is the only entity that can guarantee a social security nominal income regardless of how many people are participating in the program. Of course the government can decide to run it as a Ponzi scheme if it wants to. Gold is Ponzi by definition.

        • Tel says:

          What do you mean by “nominal” ?

        • Casual reader says:

          “Gold is Ponzi by definition.”


          • Secret Agent says:

            More crickets.

        • James E. Miller says:

          “The government is the only entity that can guarantee a social security nominal income regardless of how many people are participating in the program.”

          In other words, government trumps the law of scarcity by being the sole issuer of currency. As in “it doesn’t matter how many people collect SS or how few workers there is to support them, just print off more sheets of Benjamin Franklins and put them in the mail!”

          • MamMoTh says:

            In other words, my ass.

            Real resources do matter obviously. However, the government is the only entity that can guarantee a social security nominal income regardless of how many people are participating in the program.

            • Dan says:

              How is that different from what James said?

            • James E. Miller says:

              In other words, I am correct. Thanks for confirming.

              • MamMoTh says:

                No, it means that the government is the only entity that can guarantee a social security nominal income regardless of how many people are participating in the program.

            • James E. Miller says:

              Come on Mammoth, what you are saying that because government can print as much money as it wants, it guarantees payment of Social Security no matter what. That’s it, plain and simple.

              The question is whether grandma’s $900 check keeps its purchasing power.

              • MamMoTh says:

                OK, I thought the question was if social security was a Ponzi scheme.

              • Bala says:

                Yes. But the answer cannot be “Oh!! But then government can print any amount of funny money to meet the nominal obligations of SS. So it’s not a Ponzi scheme”.

                So, in any case, your response is silly.

              • MamMoTh says:

                Right, the answer is that the government is the only entity that can guarantee a social security nominal income regardless of how many people are participating in the program. So it’s not a Ponzi scheme.

              • Bala says:

                This is hilarious. For this

                “the government is the only entity that can guarantee a social security nominal income regardless of how many people are participating in the program”

                to be “the” answer to the question

                “Is SS a Ponzi scheme?”,

                it is necessary that the definition of a Ponzi scheme be that nominal payments be guaranteed irrespective of the number of participants. Are you saying that that is how a Ponzi scheme is defined? I somehow get the sneaky feeling that the definition of a Ponzi scheme is one in which earlier contributors are paid out of the contributions of later contributors. I wonder where the ability to guarantee nominal payments comes into this definition. My understanding says that it doesn’t come in. What’s yours?

              • MamMoTh says:

                My understanding is that you don’t understand what “regardless of how many people are participating in the program” means.

  10. Watoosh says:

    Bob: how do you feel about George Reisman’s claim (2005) that people could save for retirement if it weren’t for that pesky fiat money, but that stock market investment is just too complicated for most people?

    “The truth, of course, is that the average person, and the great majority of people even of substantially below-average ability, certainly could do this much, provided that they could take the future buying power of their savings for granted. But the government long ago destroyed the gold standard, and the resulting chronic inflation has left an enormous number of people in a situation in which they really are unable to cope with the requirements of saving and investing on their own. They are unable to cope precisely because investing in the stock market has been left as practically the only viable form of investment, since it at least offers hope of keeping up with the rise in prices. Such people—tens of millions of them—do not possess the necessary knowledge or, indeed, the necessary time, to seriously follow the ever changing conditions of the stock market and of the individual companies and industries whose shares are traded.”


  11. Desolation Jones says:

    I’m told by libertarians that mobsters would not exist it wasn’t for government policies. So government has to exist before mobsters. So wouldn’t government be acting like government and mobsters be acting like government, not the other way around?

    • Casual reader says:

      You’re told wrongly, mobsters will exist anyway. The State is just their wildest wet-dream come true.

      Government is the mobsters’ gang with the best PR (a.k.a. propaganda).

      “Government acting like government” is a tautology no need to comment. Regarding mobsters acting like government acting like mobsters acting like government acting like mobsters… well that’s true as it is and in any way around that you like.

  12. yahya says:

    I thought to be a ponzi scheme, the people involved wouldn’t know how it worked. but at this point in time, virtually everyone knows how social security works. it’s not voluntary, but i dont know if it would be classified as a ponzi scheme.

    • Casual reader says:

      Concur, Forced-Ponzi or Enforced-Ponzi would be more accurate terms.

  13. qwester says:

    Robert Murphy, you repeatedly disparage the amount we put in into the pipe as if the dollars were all that we did. Where came the historically successful economic machine that this nation is, in spite of the horrendous mismanagement by its leaders, from some idiot economist professor? We who collect now built this beautiful contraption which generates the trillions of dollars in fees and taxes that do nothing real but fuel the avarice of bureaucrats and their predatory staffs whose main job it is to protect the reputations of their mentors, humpty dumpty’s all. As an employed engineer I invented many products my employers patented and are still selling 35 years after I left their employ. I estimate, conservatively that their taxable profit annually on those sales amounted to three million taxable dollars. I have been drawing $1200 a month from SS for 15 years. Do the math, the US Treasury is way ahead even when you discount the 5 years of tuition and books of my GI Bill paid degree from Northwestern which for a 6 year hitch in the Regular Army was a further entitlement. Shove your Ponzi up you assets. I don’t complain because many paid in far less than I and get far more out. There is no promise of equality or fairness in this life. The satisfaction I enjoy in knowing that there are many that did much more than I and that as citizens we are a team of givers, not whining takers, who, Shylock like, demand our pound of flesh. Thank God there are so few of you. If you must write then excoriate the lobbyist that blocks legislation to properly mainain a successful economy and a culture of cooperation like that of the rural farm community in which i grew to manhood. Today’s urban chaos of vanity has lost touch with sustainability. CO2 is not the enemy, we are.

    • Dan says:

      You do realize that ss is in the red, right? And whatever should have been stashed aside during the surplus years has been spent. So regardless of what you feel you are entitled to the ss system is broke and the problems only get worse from here.

    • Joseph Fetz says:

      Northwestern must have a truly outstanding English department. Kudos to them…


    • MamMoTh says:

      Well said!

    • Bob Murphy says:

      Qwester, correct me if I’m wrong, but you are here:

      (1) Complaining about powerful people ripping you off,

      (2) Admitting our system screws the little guy,


      (3) Chastising me for complaining about powerful people screwing the little guy.