Social Security: A Ponzi Scheme?

Jim Cramer says it is.

“To everybody in the press, who’s calling Bernie Madoff’s alleged $50 billion scam the ‘largest Ponzi scheme ever,’ I say give me a break,” Cramer said on his Dec. 17 show.

According to Cramer, the largest Ponzi scheme in history is run by the federal government – Social Security.“We know the truth about Ponzi schemes,” Cramer said. “We all know the name of the biggest Ponzi scheme in history and it’s not even illegal. In fact, it is run by the U.S. government. And the name of it – well they call it Social Security.”

Oh, please. Social Security is not a Ponzi Scheme. I’ll define a Ponzi Scheme as a fraud that has zero investments; it merely pays off initial investors with funds from new victims, I mean, “investors.”

First, the funds from social security do go into Treasury securities, which are real investments. Plus, social security is currently running a very large surplus. How much longer will it continue to run a surplus? Well, that’s a good question. But the system can stay healthy as long as there are adjustments to benefits and how much is paid in. Those choices aren’t easy but that’s a big difference from what Bernie Madoff was doing.

Think of it this way: If no new money was allowed into social security, it would still run. When the same happened to Madoff and Ponzi, their frauds were over.

Social Security has a lot of problems, but this talk of it being a Ponzi Scheme is just silly.

Comments

[Moon Kil Woong:]

Ponzi schemes are forms of fraud similar to pyramid schemes where there is no intention of paying back the unfortunate last investors in such a fraud. Considering anyone who is young and smart never intends on getting a dime back from their investment in social security, you may not call it a ponzi scheme because it's solvent right now, but it's hard not to call it a fraud.

Like Bernie, the US government has been siphoning money from it for years to pay for its excesses. If it was anyone but the US government, the people running social security and the federal government playing the accounting rules to embezzle its assets would have been shut down and their executives would all be sitting pretty in prison. So call it what you want, but almost everyone knows it to be a farce.

The sad fact is, providing entitlements, especially ones you paid for for retirements is a very beneficial thing. Abusing such a system is just outright crookery.

2008 Dec 30 02:23 AM

[Anthony Alfidi:]

It may not be a scam, but Social Security in its current form will not survive the Baby Boomers' retirement years. Perotcharts.com (yes, he's back) has some excellent illustrations.

2008 Dec 30 02:28 AM

[mauijeff:]

Social Security is not a Ponzi scheme because nobody will be allowed to stop paying into it. It will not run out of money. The benefits will be lowered in the future due to less money coming in due to demographics. I suspect that Social Security will become a more important part of peoples retirements. Among elderly Social Security beneficiaries, 20% of married couples and about 41% of unmarried persons rely on Social Security for 90% or more of their income.The real trouble in entitlements is Medicare which has it's own fund.

2008 Dec 30 02:53 AM

[Paul Price:]

Saying that treasury bonds [IOUs from yourself - to yourself] are real assets is a joke.

Surplusses that are already spent on current expenses are NOT surplusses that can be used in the future.

What have you and Al Gore been smoking?

2008 Dec 30 06:40 AM

[biomedlives:]

Social security is NOT running a surplus if one considers the future claims against the fund. It may not fit the narrow definition of a Ponzi scheme, but it's very far from sound from an actuarial point of view.

2008 Dec 30 09:22 AM

[don miguel:]

These Treasury securities which are held in the SS Trustfund are not marketable as other are;therefore...having no marketability and no liquidity....there is value only if Treasury pays itself....What?

2008 Dec 30 09:30 AM

[viva:]

The system supports the retirement payments of one retiree by taxing five workers currently.

With one American babyboomer turning age 60 every 8 seconds it will move the tax-distribution ratio to 1:1 within 20 years.

That's one retiree supported by one worker.

The current generation of workers will never get their contributions back in total.

And that's not Ponzi?

2008 Dec 30 09:49 AM

[Jason Rines...:]

I have to say I agree with you. My other 38+ colleagues and I expect little or nothing from Social Security. Medicare will also be downsized over the next 20 years as Boomers retire and receive the lion's share of benefits. There are now a few items for 2009 no longer covered under Medicare. I expect each year there will be less and less. I expect slightly higher taxes in my future as well. That's a shame about all this but I do not get to choose the era I live in. Those that expect the government to pay for it all are delusional. I expect to self-fund a very comfortable retirement.


On Dec 30 02:23 AM constructe wrote:

> Ponzi schemes are forms of fraud similar to pyramid schemes where
> there is no intention of paying back the unfortunate last investors
> in such a fraud. Considering anyone who is young and smart never
> intends on getting a dime back from their investment in social security,
> you may not call it a ponzi scheme because it's solvent right now,
> but it's hard not to call it a fraud.
>
> Like Bernie, the US government has been siphoning money from it for
> years to pay for its excesses. If it was anyone but the US government,
> the people running social security and the federal government playing
> the accounting rules to embezzle its assets would have been shut
> down and their executives would all be sitting pretty in prison.
> So call it what you want, but almost everyone knows it to be a farce.
>
>
> The sad fact is, providing entitlements, especially ones you paid
> for for retirements is a very beneficial thing. Abusing such a system
> is just outright crookery.

2008 Dec 30 10:36 AM

[Guero:]

Finally someone exhibiting some common sense around here.

If SS is a Ponzi scheme, then by that same definition so is the stock market & real estate. After all, you are always looking for the next sucker in those places too.

2008 Dec 30 10:43 AM

[Yogidad:]

Really - where does this ridiculous outrage come from? The American taxpayer has always been on the hook for the aged who cannot finance their own retirement. The bottom line will not and never has changed whether social security exists ot not. Medicare is an obvious example of the taxpayers ongoing obligation. Social security merely supplies individual incentive during working years and increases the possibility that individuals will remain in control of their lives after retirement. Thus providing savings only because the management process is handled by the individual rather than the state. Social security is merely a segregated tax payment. It does not matter at all if social security fails because the obligations will be paid by taxes as it always has been. No one survives on social security alone now and never has.


On Dec 30 10:43 AM Guero wrote:

> Finally someone exhibiting some common sense around here.
>
> If SS is a Ponzi scheme, then by that same definition so is the stock
> market & real estate. After all, you are always looking for the
> next sucker in those places too.

2008 Dec 30 12:04 PM

[Rob Viglione:]

We're getting hung up on semantics here. The fact is that SS is a forced redistribution scheme with severe financial problems.

You cannot sanely label a system that forces wealth out of people in exchange for a fraction of it in future returns as an "investment."

At best, this is extortion and forced inter-generational wealth transfer.

2008 Dec 30 12:17 PM

[epeon:]

Here is what has happened and what will happen. First, half of social security will become taxable if you had retirment income above some threshold (done under Bill Clinton). Secondly, all of it will eventually become taxable. Third, the threshold of income necessary to trigger taxes will become, in relative terms, lower and lower. Fourth, at some point if a person has sufficient retirment income it will be decided that he benefited from the system and he will be "means" tested out of any social security at all. Fifthly, the sufficient retirement income will become lower and lower.

So, is it a ponzi scheme? Maybe not according to your definition, but damn close. All of the above is inevitable given the trillion dollar committments the government is now doing. Party on with tomorrow's dollars.

2008 Dec 30 12:20 PM

[Smarty_Pants:]

For once Cramer is right. Social Security is the biggest ponzi scheme ever put over on the face of the planet with the notable exception that everyone is required to participate.

The unfunded liablility is over $11 Trillion. The fact that it hasn't been allowed to go bankrupt yet (as it would have if it were a private pension plan) doesn't mean that it's viable. The only way it can continue is to keep watering down the benefits to the point where they are worthless due to inflation eroding the dollar's purchasing power.

Sure, you'll get your Social Security check, but it will only buy you a sandwich and a cup of coffee.

Even FDR counted on the natural tendency of participants to get what they were "owed" to discourage having the program ever discontinued, implying he knew that it was financially unteneble in the long run.

2008 Dec 30 12:24 PM

[CaptainJJack:]

I disagree with Cramer. There are plenty of legal "Ponzi schemes"; they're called insurance companies, and they serve a public good: spreading risk.

The office of Chief Actuary of the Social Security Administration issues a report each year that gives the health of the "Ponzi scheme" called Social Security, and while there is currently a fund that is invested in Government Securities, it is not funded like a defined benefit pension plan.

The funding relies on the taxation of current workers to pay benefits to retirees, and the system is underfunded because retirees are living longer and benefits are indexed to adjust for more than inflation. So, the system will run out of money by 2050, if nothing changes.

But, if you want to get all lathered up over SSA, worry about Medicare. That is another "Ponzi scheme", but it is subject to health cost inflation. According to the SSA actuarial reports, Medicare will run out of money LONG before the cash benefit plan will.

2008 Dec 30 12:58 PM

[fran:]

God bless your naivette.


On Dec 30 02:53 AM MauiJeff wrote:

> Social Security is not a Ponzi scheme because nobody will be allowed
> to stop paying into it. It will not run out of money. The benefits
> will be lowered in the future due to less money coming in due to
> demographics. I suspect that Social Security will become a more important
> part of peoples retirements. Among elderly Social Security beneficiaries,
> 20% of married couples and about 41% of unmarried persons rely on
> Social Security for 90% or more of their income.The real trouble
> in entitlements is Medicare which has it's own fund.
>

2008 Dec 30 01:12 PM

[henarl:]

The main difference between Madoff's scheme and the Social Security/Medicare scheme is that the former was voluntary and the latter is mandatory. A Ponzi scheme that you are forced to invest in is far worse!

2008 Dec 30 03:30 PM

[Tedspick:]

The view looks different from inside SS than from outside. If I were an administrator of SS I would say, "look at all these government bonds I have! no problem! I can continue sending checks to recipients after SS tax income is less than what we owe to retirees". The problem occurs when I try to cash in that bond. The money is not in a bank account, in fact it is not even sitting in a Fed account. Instead I take the bond to congress and THEY must get the money from the tax payers all over again or ask the Fed to crank up printing presses. Even though we already sent in excess SS taxes, the Government took that excess money and spent it, replacing it with these so-called "bonds". That's why SS is like a Ponzi scheme. The "trust fund" is just so many pieces of paper warning tax payers to BEND OVER!..... AGAIN!

2008 Dec 30 04:09 PM

[notsosmart:]

i have said it a long time.all of wall st is ponzi.this is a downhill slide for this country,sadly.as other,across the world, increase their lifestyle it will diminish ours. a society that shuffles wothless AAA rated paper cannot continue to exist.

2008 Dec 30 04:55 PM

[Gedankonomist:]

"First, the funds from social security do go into Treasury securities, which are real investments."

Oh, please. From which bizarro universe did you just come from?

It goes to foreign aid, and other brilliant government programs. There are about $50 trillion in IOUs in that proverbial file cabinet.

But don't worry, when you are 65 and you can't get your ponzi payout, remember, we all owe it to "ourselves!"

2008 Dec 30 08:42 PM

[TruthSayer:]

Maybe not directly a Ponzi Scheme depending on how you define it.

This is true: Our debt is made out 30% domestic holders 30% foreign holders and the rest IOU to social security and medicare ($4 Trillion for those who dont know).

A great analogy is GM and the US government. Make promises knowing you cant deliver but only worried about the moment - too much benefits in the longterm. Does it ALL go away? - probably not but certainly not what was promise - which will be the same with GM employees. The will get a double dose now from GM and eventually also the US government. Society mirroring government or vice versa....

I am planning on not getting a penny from my social security and all of you who are less than 50 would be prudent to plan the same way...Oh know I am going against the government plan - they want me not to save and spend my money....

2008 Dec 30 10:55 PM

[kevinm:]

It is amazing to me how many posters believe that Social Security should be defended.

It is insolvent. It is dishonest. It is government coercion, limiting our freedom.

Why does the government not put future Social Security obligations on its balance sheet? Why is the current "surplus" spent, rather than invested in real assets? Why are citizens not allowed to opt out and elect to provide for their own retirements? If we must have it, why are the benefits not guaranteed by law?

Cramer is not right very often, but he could not be more correct about this one.

2008 Dec 30 11:52 PM

[scotty1560:]

Ponzi scheme or open "cookie jar" for a corrupt administrators, gotta
pay for those deficits and bailouts somehow.

Smarty Pants and epion and others reflect my opinion.

Need to prepare a "fresh salad" and get a "good night's sleep"- to stay to stay healthy and keep working- don't forget to include some vitamin B17 to keep
cancer at rest.

2008 Dec 31 01:49 AM

[Taxifornian:]

Hey, hey, hey, ... quit yer complaining.. the author is right... those Treasury Securities are worth something... Why I just recently took a pile of scrap newspaper to my local recycling center and got $6.17 for a big ol' pile. I figure those securities might fetch at least $9.57. With that now we only have to make up slightly less than $4 trillion... Things are not so bad......

2008 Dec 31 01:13 PM

[econjunkie:]

Of all the things you could disagree with Cramer about...

The US government was forced into a pyramid scheme through the existence of another pyramid: the population's age distribution. Baby boomers will take far more than their kids can supply in terms of benefits, and they plan on living a very long time.

www.ac.wwu.edu/~stephan/Animation/py...

Longevity and population growth have already put into question the future solvency of all defined benefits programs in nations where fertility rates (plus immigration) have declined below replacement and healthy 80+ year olds have been promised such massive pensions.

A simplistic numerical example assuming a constant benefit stream from 65 until 85 instead of 75 will see total benefits to the recipient increase by 100%. From 80 to 85, still 33%.

Regardless of intent, how could this not be a Ponzi scheme?

Jan 02 12:18 PM

[John Hagelgans:]

"A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned. The Ponzi scheme usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases."

Is Wikipedia's definition of a Ponzi scheme.

How does SS fit the definition...

1. While there is an apparent profit from Social Security's investment in Treasuries, in a backhanded way this is your own money paying you off.

2. Subsequent investors are paying off earlier investors. Instead of being enticed new investors are coerced.

3. Social Security promises an unrealistic return to investors. Retirees from early on in the program have seen their initial investment pay off very nicely.

4. Returns are extremely consistent. Enough said.

5. It pays an ever-increasing dividend which is taking an ever increasing amount of income (taxes) to support.

6. The imminent collapse of SS has been talked about for many years; the day of reckoning keeps being forestalled by increasing the tax burden.

7. Unfortunately, the legal authorities are in charge of the nuthouse. I think everyone is aware of the problems, many are still in denial.

How does it not fit the definition.

1. It is a trust fund. It holds securities to cover it's liabilities.

2. There is a possibility that the system will be able to keep up with it's payments. Stay tuned.

3. The Federal government is in charge they can tax almost at will, what remains to be seen is at what point will the populance become discouraged and stop working for their meager handouts.

Apr 05 12:44 PM