Is Social Security A Ponzi Scheme?

1198 words | 4 page(s)

In 1929, America suffered an economic calamity. On September 20 of that year, the United States Stock exchange “crashed”, figuratively speaking . The crash was this: there was no monetary support behind the stocks being sold. The dollar was almost the equivalent of Monopoly Money, and it stopped an America that was in amazing era of growth cold. America was entering the time period known as the Depression As a country, America was devastated and as a people, the psyche of Americans was fractured. A country with great promise now had a population that was starving. No one knew of a way out. Franklin Delano Roosevelt was elected President in 1932 and the first thing he did was get out in front of the issue. In one of his very first speeches to America he painted a bleak picture, and went the next step and confirmed that it was true. The most remarkable thing though was after telling America the honest state of the world he went that next step and informed his constituents that they were resilient and would pull through this hardship. FDR himself was at a loss and he knew he had to do something. After many policy debates, America was offered the New Deal. This paper is not about the New Deal in itself but actually, one particular point. Social Security. The New Deal created the Social Security System because there were no guarantees, hedge funds, or stocks that could provide for a group that that could never retire. This program though has become the focus of much debate. This paper answers the question is Social Security a Ponzi Scheme, and if it is legal. Social Security is not a Ponzi scheme but there is room to question its legality. Could Social Securty be administered by a private company.

Social Security is was one of the foundations of the New Deal put forth by FDR in the 1930s. Social Securtiy was intended to be a stop gap measure. Prior to the introduction of Social Security, many worked until death. Many just had no choice. This was also the status quo. When the economy collapsed it was in reaction to traders in the market for short term for the few that used it. Up to this point America had not created the concept of the “retirement program”. It was truly every man for himself. That was before the crash. After that, no one wanted to get old and just die. America began to fulfill its mandate of offering life, liberty, and the pursuit of happiness. Did this mean that the program hit the downshift button and become a Ponzi Scheme?

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Every great name has an interesting story, and the Ponzi Scheme is no exception. In the past, Postage stamps were a big deal. Now many don’t know the last time they mailed a letter by the Postal Service. A man named Charles Ponzi basically ran a scheme involving postage in America and Italy. Group A invests, Group B invests and pays Group A until it becomes unsustainable. Each newly inducted (read tricked) group payed for next group. The key was to always work on adding. Currently Bernie Madoff is the poster child for a ponzi scheme. He called everyone into his office one day and told everyone that all this was a big fraud. Social Security is not that by any means though.

Social Security is administered by the Social Security Administration and they have had to deal with the theory that it is a really complicated Ponzi scheme. It became such an issue that on their personal website they lay out all the rules of a Ponzi scheme and show you how Social Security performs. Unlike a Ponzi scheme, Social Security, is a “ transfer payment–transferring income from the generation of workers to the generation of retirees” (Klein, 2011). It is progressive. A great way to think of a college student that graduates and gets a job. The student pays taxes that go toward libraries, roads, sewers, and schools. A single college grad, with no spouse, or children, pays taxes that go toward the future, or progress. Finally, another defining characteristic that makes it not a Ponzi Scheme is that the Social Security system has a transparent operating system. All the documentation you would ever want to read is given. There is one caveat.

The Social Security system is not a Ponzi scheme, and could be privatized although it is not this paper’s recommendation. The Social Security tax is a staple of the American paycheck, and all Americans don’t feel like being this generous. Many people believe that if they were to privatize the social security, all would be fair, while others believe that they can do a better job of holding on to their money. That debate has been had and society as proven that it can get greedy. For example, let’s us say that we had privatized Social Security when President Reagan asked during his eight year tenure as President of the United States. In 2009, America faced a host of economic setbacks, with the Dow eventually falling by 500 points. While that may not seem like a lot, that is a staggering loss in dollars and cents. Personal retirement funds, those held in addition to the promise of Social Security underwent a series of crippling blows. Those that were close to the age of retirement saw themselves remaining in employment positions they had hoped to vacate because the economy took such a plunge. It is only now starting to crawl back, slowly but surely. Where would Americans be if the funds had been privatized? I don’t want to think about that possibility because it almost became a very real scenario.

There is no system that is perfect, and that is especially true of the Social Security System in the United States. Yes, it is progressive, and theoretically each generation transfers money to the generation ahead of it, thus resembling a Ponzi scheme. That is a superficial look though and has little to do with fact. The fact is that right now there is a surplus. It may not be there in ten years. We may see the system crash completely. What can never be said is that it didn’t rely on sound economic principles. It can feel illegal to some because it has to be done instead of the choice to just not do it.

  • Gubler, Z. J. (2013, March). Public choice theory and the private securities market. North Carolina Law Review, 91(3), 775+. Retrieved from http://go.galegroup.com/ps/i.do?id=GALE%7CA327725162&v=2.1&u=tel_s_tsla&it=r&p=AONE&sw=w&asid=a4f71cd185ce333870b325fda2223883
  • Houser, K., & Rosacker, R. E. (2012). A fireside chat on the foundations of social security: a historical and judicial assessment. International Journal of Business and Public Administration [IJBPA], 9(3), 87+. Retrieved from http://go.galegroup.com/ps/i.do?id=GALE%7CA335070892&v=2.1&u=tel_s_tsla&it=r&p=AONE&sw=w&asid=0a36a444aa9b181423b3d8ce50826e94
  • Klein, E. (2011, August 25). Is Social Security a Ponzi Scheme. The Washington Post. Retrieved March 22, 2014, from http://www.washingtonpost.com/blogs/wonkblog/post/is-social-security-a-ponzi-scheme/2011/08/25/gIQA2t0dcL_blog.html

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