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is Social Security a Ponzi scheme? Yes it is, in its own way, but that doesn’t quite cover it. In reality, Social Security is much worse than a Ponzi scheme. The analogy to a Ponzi scheme is accurate and necessary, because it captures the basic economic unsustainability of the program. A Ponzi scheme is unsustainable because the returns it promises are backed, not by any underlying productive investment, but solely by the scheme’s ability to recruit an ever increasing number of new suckers to contribute to it. Some have objected that Social Security is not a Ponzi scheme because it has the power to coercively recruit new contributors. But even that does not guarantee that the mathematics will work out. From its very inception, the number of contributors forced to pay into Social Security has been declining relatively to the number of beneficiaries. The numbers are well-known, and Charles Krauthammer rehearses them succinctly: “When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.” Krauthammer describes the results. To keep the scheme going, the amount that has to be wrung out of each new victim keeps increasing: “in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent.” Correspondingly, what each new contributor gets back from the program keeps decreasing. As Andrew Biggs observes, this is another thing that Social Security has in common with a Ponzi scheme. [L]ike a Ponzi scheme, Social Security paid early participants incredible returns on their money, because they contributed to the system for only a few years but received a full retirement’s worth of benefits. A person who retired in 1950 received around a 20 percent annual return on the taxes he paid (which happens to be exactly the same return that [Bernie] Madoff promised to his investors)…. [A]n average wage earner born in 1950 will receive around a 2.2 percent return from the system, which is less than what you could earn on guaranteed government bonds. A person entering the workforce today will receive only around a 1.7 percent return. At some point soon, that return is going to become negative, meaning that Social Security will present every young person with the prospect of forty years’ worth of dead loss the moment he enters the work force. From this perspective, the fact that Social Security can coercively recruit new contributions makes it worse. At least a private Ponzi scheme is self-liquidating. It collapses the moment its victims realize they are being defrauded. Social Security is a Ponzi scheme with no escape, as if Bernie Madoff had been exposed—and then promoted to Secretary of the Treasury.
