Many like to characterize Social Security as a Ponzi scheme.  Is it reasonable to so disparage a sacred entitlement that is the only financial hope for many Americans during their twilight years?  Truth is, Social Security is much worse than a Ponzi scheme.

A Ponzi scheme is an investment program.  Social Security is a government program.

A Ponzi scheme requires a voluntary decision to invest.  Social Security is mandatory.  There is nothing voluntary about the program.

A Ponzi scheme usually costs only a group of well-heeled investors.  Social Security costs all working Americans, and hits low- and middle- income workers hardest.

A Ponzi scheme usually runs for a relatively short timeframe.  Social Security runs for the entire work life of an American, perpetually taking one out of every eight dollars earned each year up to a designated income cap and, in return, promising future benefits that, now for most, can’t possibly be funded under the program.

A person can terminate investing in a Ponzi scheme.  A working American can’t terminate his or her obligation to pay into Social Security.

A Ponzi scheme promises attractive returns on the invested capital.  The projected returns from Social Security are lousy by any standard.

A Ponzi scheme does not terminate an investor’s benefit rights if the investor dies prematurely.  A Social Security participant often gets nothing if he or she dies before retirement age.  The result, for example, is that one-third of African American males will pay into the system for decades and never see a dime because they don’t live long enough.

A Ponzi scheme creates contract and property rights that can be legally enforced.  In 1960, the Supreme Court ruled in Fleming v. Nestor, 363 U.S. 603 (1960) that no property rights are obtained by paying into Social Security, and that Congress at any time can reduce or terminate promised Social Security benefits.

So what does Social Security have in common with a Ponzi scheme?  A Ponzi scheme keeps paying only so long as the perpetrator of the scheme keeps pulling in new investors.  Social Security can keep paying promised benefits only if ever-growing taxes are imposed on a shrinking core of participants relative to those who are receiving benefits.  In 1950, there were 16 persons paying into the system for each person receiving benefits.  Now, the ratio of payers to payees is just over 3 to 1.  By 2030, the ratio will be down to 2.1 to 1.

But, as most know, it’s actually worse.  Since 1983, the government has been collecting excess payroll taxes, primarily from low- and middle-income taxpayers, to prefund the benefits of the baby boomers.  For the past 30 years, trillions of excess payroll taxes have been deposited into the Social Security trust fund, which the government has regularly looted to pay expenses unrelated to Social Security.  As a result, the trust fund now consists of IOUs from the federal government, and no one has a clue as to how these IOUs will be paid in the future to fund promised Social Security payments.  This is what many refer to as the “deceit”, the “shell game”, or the “fraud” of Social Security.

Over the years, there have been various proposals to create “firewalls” or “lockboxes” to stop the raiding of the Social Security trust fund, but they all stalled out.  One of the lockbox bills (H.R. 1259) actually made it to the floor of the House on May 26, 1999.  The House overwhelmingly approved the lockbox by a vote of 416 to 12.  Very few Representatives, when put to a vote, were willing to publically endorse more raiding.  The bill went to the Senate and was read twice.  A cloture vote in the Senate failed by five votes on June 16, 1999.   The raiding continued.

Does all this mean that Social Security is doomed to the junk yard?  No.  It means that it’s time to stop playing games by using Social Security as a tool to confuse and scare the uninformed for political gain.  It means that it’s time to responsibly fund the program for the long-term, talk straight with the American people about realistic benefits, and structure new options for younger Americans who want and deserve something more.

To characterize Social Security as a Ponzi scheme understates the magnitude of the problems, invites more destructive demagoguery, and perpetuates confusion.  And perhaps it entitles Charles Ponzi to an apology.

September 13, 2011