Social Security Is No More A Ponzi Scheme Than Is Anything Else That Relies On Future Economic Growth

A certain class of “smart set” conservative and centrist types persist on believing that analogies between Social Security and a Ponzi scheme are, though perhaps politically unwise, fundamentally sound. This is nuts.

Consider something that nobody says is a Ponzi scheme — your 401(k). What happens here is that you work while you’re working age. You earn money. You take some of that money to buy shares in firms. Your expectation is that at a future date when you’re not working anymore, you’ll be able to exchange those shares for money. More money than you paid for them in the first place. Why would that work? Well, it could work because you were just stupendously lucky. But the reason we anticipate that it will work systematically is that we anticipate that there will be economic growth. In the future, people will in general have more money, so assets will be more valuable. Save today, sell tomorrow.


Social Security is not a prefunded pension plan or a savings scheme. But it’s actuarial situation is just the same as a stock market investment in this regard. If future economic growth is lower than anticipated, it will be impossible to pay the anticipated level of benefits. On the other hand, if future economic growth is faster than anticipated, it would be possible to pay even more benefits than had been promised. As it happens, over the past 25 years economic growth has been slower than was anticipated a few decades ago. This does create a financial problem for Social Security. But it’s the exact same financial problem as exists for private sector savings schemes. But neither Social Security nor being mildly over-optimistic about your stock picks is a “Ponzi scheme.” A Ponzi scheme is a fraud where in the end the whole pyramid goes bust a bunch of people wind up with no money at all. The absolute only reason Social Security could ever go bust like that would be if elected officials decided they wanted to stop paying benefits.