Social Security is NOT a Ponzi Scheme

By NCPSSM | December 18, 2008

FDR once said, “Repetition does not transform a lie into the truth”. Even so, in their coverage of Bernard Madoff’s con of his investors, some business bloggers and journalists who should know better continue to equate Social Security with a Ponzi scheme. So we’ll say it again… Social Security isn’t a Ponzi scheme. It’s a pay-as-you-go social insurance system with very clear distinctions from the Madoff scheme or any other investment ruse.

We’ve written about this many times. Our own Social Security advisor and columnist, Mary Jane Yarrington, usually gets questions from her readers after yet another Ponzi scheme viral email campaign makes the rounds. Here’s a portion of her most recent response to a reader’s question:

“Anyone who tells you Social Security is a Ponzi scheme either doesn’t understand what a Ponzi scheme is or their mother’s didn’t teach them not to fib. This myth is a favorite of conservatives who just hate the idea of social insurance in general. The Social Security Administration has a good history describing why this is nonsense.

Social Security is not a Ponzi scheme. Social Security is a pay-as-you-go system with the contributions of today’s workers going to today’s retirees or into the reserve to pay benefits to future retirees. The ratio of workers to retirees has changed over time, but unless this nation allows the system to be abolished, there will never be a time of no workers paying into the system. The most recent report of the Social Security Board of Trustees forecasts that even with no changes in the system, reserves will last through 2041 and even after that, 75% of promised benefits could be paid with incoming payroll taxes.

And don’t give any credence to the nonsensical comparison that in 1940 there were 40 workers to each retiree and today it is only three to one. Of course, there were fewer beneficiaries. 1940 was the first year a benefit was paid so millions of then-retired workers didn’t have the opportunity to contribute payroll taxes and earn benefits. Many of those ineligible for benefits in 1940 then relied on public assistance or their children to survive their retirement years. Hardly the “good old days” those who hate Social Security should be so eager for us to return to.”

So when someone describes Social Security as a Ponzi scheme please take just a moment to consider this person’s understanding of economics or better yet, his agenda.