Social Security Is Not a Ponzi Scheme
Once again, people are comparing Social Security to a Ponzi scheme. That's a bogus comparison. (See also: Don't Despair Over Small Retirement Savings)
A Ponzi scheme is a lie. Named after Charles Ponzi, it's a fraudulent investment where the operators report fake profits — and then support those illusory profits by paying out cash from new investors. Ponzi schemes always collapse eventually, because they depend on an ever-increasing number of new investors to provide enough cash to make payments to the old investors.
The reason that Social Security isn't a Ponzi scheme is that it isn't a lie. It keeps accurate books, attested to by a board of trustees and an actuary.
What Social Security is, is an inter-generational transfer. To solve a problem (old-age poverty), we as a society decided to transfer some income from workers to the elderly.
That worked pretty well for several decades. Then, in the early 1980s, the trustees realized that the baby boomers presented a problem. They were going to expect to receive a lot of money in two or three decades, but the workforce was going to be shrinking and there wouldn't be enough.
That problem was fixed in 1983. Benefits for younger folks were cut slightly, Social Security taxes were increased slightly, and for the next three decades money was set aside, with a plan to pay it out when the baby boomers retired. That money will have all have been paid out in just a few decades — but that's fine, because the next generation doesn't have the same kind of bulge of retirees.
See the difference? The Social Security Administration never pretended that investment returns were going to fund everyone's pension. They never lied and said that your contributions were waiting to pay your pension when you retired.
The issue keeps getting raised — usually by people who object to the whole idea and say "Ponzi scheme" to inflame emotions. But anyone willing to do a little research comes up with the same answer every time — as, for example, our own Xin Lu did in her 2008 post Is Social Security is Just a Grand Ponzi Scheme?
Social Security: Not a Ponzi scheme; an inter-generational transfer.
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