Is Social Security a “Ponzi Scheme”?
September 8th, 2011




I’d argue that it is (I’ve got a whole section of the America’s One-Child book on this). But reasonable people can certainly debate the sentiment. What has amazed me over the last week or so is the silliness of those who treat the argument as if it’s somehow out of bounds just because Rick Perry is making it. Believe it or not, Rick Perry is not the first person to view Social Security as a “Ponzi scheme.”

The first person I’ve found drawing the parallel is economist Paul A. Samuelson. In the November 13, 1967 Newsweek Samuelson defended Social Security by pointing out that it was linked to population growth and that “A growing nation is the greatest Ponzi scheme ever devised. And that is a fact, not a paradox.” (I found this quote in Phillip Longman’s excellent essay “Missing Children,” in the latest issue of the journal The Family in America. I can’t find the original Newsweek cite to provide full context, but Longman says that Samuelson was defending Social Security and I’m happy to trust him because Phillip Longman is stone-cold awesome.)

Now, Samuelson is not a crank. He won the Nobel Prize for economics in 1970. The New York Times calls him “the foremost academic economist of the 20th century.” If you majored in econ during the last 30 years, there’s a good chance that you used his textbook, Economics.

Nor is Samuelson a conservative. Remember, his likening of the underpinnings of Social Security to a Ponzi scheme were meant as a defense of the institution. And in 2003 he was one of a group of economists to sign a letter inveighing against the Bush tax cuts.

You might argue that the Samuelson/Perry view of Social Security is ultimately incorrect–but you cannot argue that it is troglodytic and beyond the pale. Anyone who does so either misunderstands economics and demography, or is playing an angle.

Update: Ed Driscoll pulls the full original Samuelson quote. As expected, Longman’s characterization was completely accurate:

The beauty of social insurance is that it is actuarially unsound. [italics in original] Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in. And exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired…

Social Security is squarely based on what has been called the eight wonder of the world — compound interest. A growing nation is the greatest Ponzi game ever contrived. And that is a fact, not a paradox.



  1. Walter Manley II September 8, 2011 at 2:02 pm

    Try 60 years in regard to his textbooks and influence in thousands of classrooms. His textbook, Economics, was first published in 1948 and has been revised 18 or more times. Best regards–W.W. Manley II

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  3. Jim Treacher September 8, 2011 at 2:42 pm

    The main difference is that a Ponzi scheme is voluntary.

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  5. mrmandias September 8, 2011 at 3:21 pm

    Who on the right is arguing that it is out of bounds? Mostly they are arguing that attacking Social Security is politically stupid.

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  7. nohype September 8, 2011 at 3:46 pm

    Samuelson’s view is not radical in economics. Here is Laurence Kotlikoff in Jimmy Stewart Is Dead: “For its part, economics places no moral stigma on the words: “Ponzi scheme.” Indeed, there is a significant economics literature concerned with the question of whether Ponzi schemes–chain letters–are preferred investments for everyone.” (p 61.) He goes on to say that if population or productivity is growing faster than the rate of interest, social Ponzi schemes work well. However, when population growth or productivity slows or comes to halt, the programs run into trouble–which is what we are seeing now.

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  9. knick49 September 8, 2011 at 5:38 pm

    The main difference is that it is known from the outset that a Ponzi scheme will inevitably damage someone whereas Social Security was always intended to benefit anyone who participated.

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  11. Roy September 8, 2011 at 5:49 pm

    “I’d argue that it is (I’ve got a whole section of the America’s One-Child book on this).”

    A Ponzi scheme is a fruadulent investment vehicle. Social Security is not, by definition, an investment. They can’t be the same thing.

    The only point of Perrry’s comment is to try to set up a self-fulfilling prophecy where people think SS can’t work, and therefore end it.

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  13. Barry Elledge September 8, 2011 at 7:44 pm

    Social security was sold to Americans from the beginning as a retirement scheme; FDR described it as a form of pension. Most taxpayers who have been forced to pay for SS their entire working lives think they have in fact paid into an investment. Their SS taxes were supposed to be paid into retirement funds. Of course government immediately spent the revenue rather than investing it in anything.

    If any private firm acted with its “investments” the way the SSA does, the principals would be treated exactly the way Bernie Madoff was.

    Perry does want to fix SS. The beginning of an honest solution requires us to first admit the obvious truth.

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  15. Roy September 9, 2011 at 1:36 pm

    >Perry does want to fix SS. The beginning of an honest solution requires us to first admit the obvious truth.

    Calling Social Security a “Ponzi Scheme” is not an obvious truth. Lying rarely leads to an “honest solution”. There is nothing that Perry has said that even could imply he wants to do anything other than end the “monstrous lie”.

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  17. steve baker September 9, 2011 at 9:10 pm

    And there nothing that Perry has said that could imply that he has ever ceased beating his wife, whether the question has ever been asked or not? Give it up “Roy” Whoever, and include your last name if you wish to be taken even half seriously.

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  19. Sean Greene September 8, 2011 at 5:55 pm

    problem. we are NO LONGER a growing nation. We have less then 2 births per woman which means Each Worker must fund more then one retiree. The founding of social security was for a people who had 7 births per woman, that is no longer reality.

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  21. Roy September 8, 2011 at 6:02 pm

    BTW…

    The author of this article is citing another author who cited a quote by Samuelson from a Newsweek article from Fall 1967. But, the article’s author can’t find the original article to provide full context of which Samuelson was speaking to about Social Security.

    It’s also fairly apparent that Samuelson that it was great and worked, which is the opposite of an actual Ponzi scheme, which can’t work by definition.

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  23. JorgXMcKie September 12, 2011 at 10:09 am

    Feeling a little dim(mer) now that the full context has been posted? “Another beautiful theory, slain by an ugly fact.”

    Or are you arguing that Samuelson would say that SS can be supported even with a declining number of youths to retirees and in an economy that is barely expanding at all?

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  25. Audio: Romney unloads on Perry over Social Security again « Hot Air September 8, 2011 at 6:11 pm

    […] cover if he wants to stick by the “Ponzi scheme” talk, both among populist heroes and influential academics. But GOP primary voters skew old, and like I said last night, some undecideds may come to view this […]

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  27. Ed Driscoll » ‘The Beauty of Social Insurance is that it is Actuarially Unsound’ September 8, 2011 at 6:21 pm

    […] as if it’s somehow out of bounds just because Rick Perry is making it. Believe it or not, Rick Perry is not the first person to view Social Security as a ‘Ponzi scheme:’” The first person I’ve found drawing the parallel is economist Paul A. Samuelson. In the November […]

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  29. knick49 September 8, 2011 at 7:24 pm

    I’ve re-thought it. Reducing it down to its most basic level, the difference between a Ponzi Scheme and Social Security is that a Ponzi Scheme is created with the primary purpose of benefiting a single person whereas Social Security was created with the primary purpose of benefiting all those who participant.

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  31. Barry Elledge September 8, 2011 at 10:44 pm

    You aren’t thinking clearly. Every Ponzi scheme purports to benefits each of its investors, just as SS purports to benefit each taxpayer who is forced to contribute his SS withholdings. SS compounds the fraud by sending older taxpayers biennial letters estimating how much in SS benefits they should expect to receive based on how much they have contributed in taxes. Bernie Madoff sent his “investors” quarterly letters detailing how much they had earned on their investments. Their paper “earnings” induced them to keep their money in Madoff’s fraudulent scheme.

    Taxpayers do not have the option of withdrawing their money from SS, even if they recognize that they are being defrauded. That is the sole difference between SS and the usual Ponzi scheme.

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  33. Roy September 9, 2011 at 1:38 pm

    The Difference is that Madoff was lying about the money, and the U.S. government is not.

    The U.S. government can also raise taxes and print money, Bernie Madoff cannott. Bernie Madoff also lived a very good lifestyle by taking out the premiums. He never actually invested money. This is like saying a picture of pipe is the same thing as a pipe, which only makes sense if you are smoking curious things in a pipe.

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  35. JorgXMcKie September 12, 2011 at 10:12 am

    “Madoff was lying about the money, and the U.S. government is not.” Seriously? You mean the govt can just send me a check that can’t be cashed, or that can be cashed at only 1/1oth of the promised value and that’s actually the same a paying me the money promised?

    I have a couple of great investments I’d like you to look at, then.

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  37. sg September 11, 2011 at 7:59 pm

    Have you read that biennial letter? Right there in black and white it states that when I retire there will not be funds to pay my estimated benefits it lists the letter. Remember, that letter isn’t written by a cynical right wing blogger. It is written by the folks sending the checks.

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  39. knick49 September 8, 2011 at 8:40 pm

    I’ve re-thought it. Reducing it down to its most basic level, the difference between a Ponzi Scheme and Social Security is that a Ponzi Scheme is created with the primary purpose of benefiting a single person whereas Social Security was created with the primary purpose of benefiting all those who participate.

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  41. Steve D September 8, 2011 at 9:45 pm

    Everybody’s missing the real point. A growing nation is a Ponzi scheme. People who dismiss overpopulation because they want more workers and people paying into SS are the Ponzi schemers. Nothing in a finite world can grow forever.

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  43. Jason O. September 8, 2011 at 10:13 pm

    I think Knick49 actually plays for the Knicks.

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  45. Jenn September 9, 2011 at 1:02 am

    The reason this is being compared as a Ponzi Scheme is because those at the bottom pay money into the system and the trickle down effect is used. HOWEVER, in this case, those between the ages of 18-30 are paying in and will never see a dime of what they pay in. The money they are paying in is currently being used to pay those already on SSI/SSD. Social Security will never benefit all those that pay into the system as long as it is used as a personal piggy bank by the government (Thank you JFK). If SS went back to the original roots, and the government kept their grubby grease stained fingers out of it, then maybe it would be solvent after a few years of funding into it.

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  47. Roy September 9, 2011 at 1:40 pm

    It’s been solvent for over 75 years, with tweaks it is solvent forever. Without tweaks it only reduces benefits, but doesn’t have to end them.

    >HOWEVER, in this case, those between the ages of 18-30 are paying in and will never see a dime of what they pay in.

    This wil only be true is you allow Rick Perry (or someone else) to steal the money you’ve already put in, renege on the promises made, and end the system.

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  49. Barry Elledge September 9, 2011 at 4:11 pm

    Neither Rick Perry nor any other politician could possibly “steal the money you’ve already put in,” for the simple reason that such money was already spent long ago. SS has never had a “lock box” into which money could have been put. SS has never been allowed to invest its former surpluses in assets like stocks, land, gold bullion, corporate bonds, or any other form of actual investment. Instead, the surpluses went directly into the general treasury and were used to fund our long national government spending binge.

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  51. sg September 11, 2011 at 8:02 pm

    Steal the money? We have a huge debt!! There is no money. There is debt, debt service and unfunded liabilities, all of which exceed cash flow.

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  53. DYSPEPSIA GENERATION » Blog Archive » Is Social Security a “Ponzi Scheme”? September 9, 2011 at 10:22 am

    […] Jonathan Last cuts through the crap. What has amazed me over the last week or so is the silliness of those who treat the argument as if it’s somehow out of bounds just because Rick Perry is making it. Believe it or not, Rick Perry is not the first person to view Social Security as a “Ponzi scheme.” […]

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  55. jgk September 9, 2011 at 10:37 am

    Actually, SS works. It keeps people out of poverty when they are older – and if you raised the FICA tax cap above 90K like it is now, you’d make SS solvent for 75 years.

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  57. JorgXMcKie September 12, 2011 at 10:14 am

    And if frogs had wings, their butts wouldn’t hit the ground when they jump.

    I’ve heard of innumerancy, but it’s worse than I thought in the comments here.

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  59. Silverlock September 9, 2011 at 11:20 pm

    The FICA CAP is 106,500, and it pretty much won’t matter what you do because the more money that goes in the more money that will be available to be borrowed to fund worthy causes. Politicians all believe that government should do things (that’s why they went into government). It’s always one more tax increase and we’ll have all of the money we need. And then the goal posts move.

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  61. Lavaux September 10, 2011 at 2:17 am

    Back when ObamaCare was working its way through Congess, those who called it unconstitutional were characterized as lunatics. Now that the 11th Circuit Court of Appeals has ruled that the individual mandate is unconstitutional, ObamaCare is headed to the Supreme Court, who may follow suit. The lunatics were at least partly right, and all those who castigated them now seem statist fools and stooges.

    Gov. Perry and Prof. Samuelson are right about SS: It is a Ponzi scheme. Let the statist fools castigate Gov. Perry for telling the truth. They’ll be exposed as statist fools when SS collapses of its own weight, as all Ponzi schemes must.

    Regarding Samuelson’s analysis, it demonstrates that he’s also a statist fool. Who am I to insult a Nobel Prize winning economist? Two words: Paul Krugman.

    The business cycle periodically wipes out much of the economic growth Samuelson relies on to characterize it as “compound interest”. What’s more, Congress spent all of the money in the mendaciously denominated SS “lock box” or “trust fund”, leaving behind IOUs that must tax future economic growth, thereby reducing it. Finally, when the worker/pensioner ratio reaches 3/1 or lower, as it already has, the workers will pay far more into SS than they’ll collect when they retire, if SS exists by then. Around this point, SS will collapse of its own weight.

    One more important point: SS represents one of the most regressive and unjust wealth transfers known to mankind. Households receiving SS benefits extracted from the paychecks of young households are on average far wealthier than those young households in terms of net wealth. The SS tax & transfer maintains this net wealth gap between young and old, putting the young on a treadmill to generate income for the old so that they don’t have to dip into their savings. To a certain extent, the young don’t seem to mind because the alternatives seem less appealing. But I’m sure this will change when the worker/pensioner ratio goes to 2/1.

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  63. Anonymous September 10, 2011 at 8:25 am

    […] […]

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  65. sinz54 September 10, 2011 at 8:51 am

    Samuelson’s quote makes clear why SS is *NOT* a Ponzi scheme.

    In a Ponzi scheme, the universe of possible players is exhausted and the newest players never receive more than they pay in.

    Social Security is different because it depends on *all* the players getting richer over time. And that has indeed worked because the long-term trend of the U.S. per capita GDP has been to keep increasing.

    What would make SS (and Medicare and most other entitlements) collapse is if U.S. per capita GDP stops growing. Unfortunately, there are reasons why that could happen: China eventually displaces the U.S. as the world’s largest economy, leaving the U.S. as a poorer debtor nation; or the need to sharply reduce greenhouse gas emissions leaves America a less mobile and less affluent nation; or both. (The notion that reducing greenhouse gas emissions will lead to a net increase in wealth is a fantasy, of course. You can’t take something that’s been free–the atmosphere–and put a heavy price on it without taking that wealth away from other uses. )

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  67. More on Social Security as Ponzi Scheme — Jonathan Last Online September 12, 2011 at 6:57 am

    […] Kurtz does the actual research that I couldn’t be bothered with. It’s a great piece and it acquits Perry […]

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  69. Is Social Security a Ponzi Scheme? - Page 11 September 12, 2011 at 11:30 pm

    […] Scheme? As per the OP: people who have described Social Security as a Ponzi Scheme include Nobel Prize Winning Liberal Economist Giant Paul Samuelson who called it "the greatest Ponzi scheme ever devised". the argument (put forth by more […]

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  71. Rick Perry Ponzi Scheme Claim Wasn't the First | Liberally Conservative September 13, 2011 at 12:27 pm

    […] Newsweek column by liberal economist and Nobel laureate Paul Samuelson as perhaps the earliest use of the Social […]

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  73. CNN Rates Perry’s “Ponzi Scheme” Remark False Because Social Security Isn’t Illegal | Tea Party Tribune - Tea Party & Political News September 18, 2011 at 9:06 am

    […] Times as "the foremost academic economist of the 20th century" (Jonathan Last has more on this here):"Social Security is squarely based on what has been called the eighth wonder of the world – […]

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