It’s A Ponzi Scheme!

Certain sorts of people are quite angry that GOP hopeful, Gov. Rick Perry called Social Security (SSI) a Ponzi scheme. Yet, despite their claims, SSI bears a great resemblance to a Ponzi scheme.

Madoff on SSI
It’s Not Illegal When The Government Does It?

Most, though not all, of the arguments against Gov. Perry’s characterization of Social Security as a Ponzi scheme have their only objective basis in legalism and semantics, not factual analysis of the systems in question or their respective function.

The Securities & Exchange Commission (SEC) defines a Ponzi scheme as:

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.


Fraud is by definition wrongful or criminal deception. Since the creation of SSI and all the changes to it since its inception were done through the law’s fiat, it can’t be fraudulent from a legalistic standpoint. There’s been a great deal of deception and disinformation about SSI’s solvency, independence from the government’s general fund, and trust fund operations over the years though.

As a matter of legality and semantics SSI doesn’t meet the fraud requirement of being a Ponzi scheme.  From an ethical standpoint however, the matter is in some doubt.

Promise Of High Returns

This is one point where SSI absolutely fails to meet the standards for being a Ponzi scheme. Social security doesn’t claim to generate high returns for it’s “investors” because the government doesn’t need to lure in new investors. Participation is mandatory and the rate of “investment” is completely controlled through force of law. The government has absolutely no need to lure anyone in.

Payment Structure

While SSI has “investments” they’re of limited return and 100% of them are in IOUs from the federal government, meaning that each new generation of forced investor is paying for the returns for the previous generation and all the taxpayers are making up the difference as needed.

Given that returns to existing investors are from funds contributed by new investors and there’s a certain lack of honesty in how SSI’s trust fund interaction with the federal government’s general fund is portrayed, there’s little functional difference on this point between SSI and a Ponzi scheme.


What it boils down to is that SSI is what the average private sector fraudster wishes that they could turn a Ponzi scheme into. The real differences between the two things are all a result of the government being the promoter of the scheme in case of Social Security.

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