The Social Security Ponzi scheme

In the past several months as the debate over Social Security reform has taken center stage in the theater of the absurd that is modern American politics, the idea has been floated that the entire pay—as—you—go structure of this system closely resembles a Ponzi scheme, albeit one that is about to collapse.

In reality, few people likely have any idea what a Ponzi scheme is, nor how closely America's largest retirement system follows its outlines.  According to the Securities and Exchange Commission:

'Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three—hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.  Decades later, the Ponzi scheme continues to work on the "rob—Peter—to—pay—Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.'

Sound eerily familiar?  Much as in the original Ponzi scheme, Social Security also paid huge returns to its first investors who, whether intentionally or not, led Americans to believe the plan worked marvelously, thereby engendering the support of an exceedingly grateful nation.

For instance, the first American to ever receive a check from this new national savings plan was Ernest Ackerman, a streetcar motorman from Cleveland, Ohio who retired exactly one day after the program went into effect.  For the five cents that was deducted from Mr. Ackerman's check the sole day he was a 'participant', he received a lump—sum payment of 17 cents.  This was a 240% return, which annualizes out to 87,600%.  Nice investing, Ernie.

Then, in 1939, a series of changes were made to this new retirement system that included moving up the start of monthly payments by two years.  As a result, the first monthly Social Security check went out on January 31, 1940 to Ida May Fuller, a retired legal secretary from Ludlow, Vermont. 

This maiden disbursement was $22.54, which, according to Social Security Online, after cost of living increases and 35 years of receipts until her death in 1975, totaled a startling $22,888.92 in payments from a system to which Mrs. Fuller contributed $24.75.

Now, please bear in mind that Mr. Ponzi was only promising people a 40% return on their money in 90 days.  By contrast, the first Social Security recipients received yields approaching 100,000 percent. 

Unfortunately, few participants in a Ponzi scheme ever achieve such spectacular returns, and the whole scam invariably implodes when the real investors have the nerve to ask for their money back.  For instance, when regulators finally shut Mr. Ponzi's operation down in 1920, they were only able to recover $1.593 million.  Sadly, this was a small pittance compared to the $15 million he owed his 40,000 investors, not including the interest he had promised them.

This makes it quite logical that 70 years after our government implemented a Ponzi scheme of its own —— remarkably just fifteen years after the first one imploded —— the real investors (a.k.a., the baby boomers who have paid into this program since they received their first pay checks, while absorbing numerous increases to the required contributions) are concerned that there won't be enough money available to fund their own retirements. 

Naturally, irrespective of the protestations of those who seem able to attain high office in our nation without possessing even the most rudimentary arithmetic acumen, these fears are warranted.  Yet, now that the flaws in this equation have finally been exposed, the debate is unconscionably focused on the machinations of extending this scheme rather than if and how we should unwind it. 

After all, as the best returns from this plan have already been realized by folks like Mrs. Fuller and Mr. Ackerman —— as well as millions of seniors in the past seventy years who received yields on their contributions that can't possibly be replicated —— shouldn't the rest of us who can add one plus one without difficulty be entitled to opt out of this investment nightmare?

Such a question becomes even more appropriate considering the gags yet to be played in this inhumane comedy in the form of neatly disguised —— yet predictable —— Democratic solutions to avert the imminent crisis they maintain is neither imminent nor a crisis.  To date, these options comprise increasing the Social Security tax cap above its current $90,000 threshold, and eliminating the 2003 tax—cuts on the wealthiest wage earners.

As a result, no matter how you slice it, their 'solution' is to once again demand that people pay additional funds into this failing system above and beyond what was originally dictated by statute.  Isn't this despicably akin to regulators asking the folks who were defrauded by Mr. Ponzi to contribute more to his scheme in the hopes that this would avert insolvency and increase the likelihood that they'd eventually get their money back?

Noel Sheppard is an economist and writer residing in Northern California.  He welcomes your comments at