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Social Security is Not a Ponzi Scheme, but in One Way It’s Worse

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May 23, 2025
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Social Security is Not a Ponzi Scheme, but in One Way It’s Worse
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In a recent interview with Joe Rogan, Elon Musk said, “Social Security is the biggest Ponzi scheme of all time.” This was hardly an original comment. More than a few people from all walks of life have said this over the years.

But if Social Security is a Ponzi scheme, then we certainly shouldn’t promise not to touch it. We should eliminate it. But if it’s not a Ponzi scheme, then we should not even insinuate that it is.

Long ago, con artists like Charles Ponzi figured out that they could use new investor money to pay handsome dividends to earlier investors. This would attract new investors, but it needed an ever-growing list of new investors to keep going. When the newest set of investors became too small to make all the required dividend payments, the jig was up, and the con artist would take all the money and disappear.  

Here are some key attributes of all Ponzi schemes:

1.    Participation is voluntary.
2.   The con artist benefits from the money that victims lose.
3.   Most who invest in a Ponzi scheme lose everything they invested. 

But with Social Security:

1.   Participation is not voluntary.
2.   Those who created it don’t benefit financially from harm to those in the program.
3.   Unless they die young, those in the program don’t lose everything they paid in.

Social Security is simply not a Ponzi scheme. Those who claim that it is are likely alluding to the fact that when there are many contributors relative to the number of beneficiaries, beneficiaries can get better terms than when there are few contributors relative to beneficiaries. In the 1940s, for example, there were about 42 workers for every beneficiary. That ratio has fallen steadily over the years. Now there are about 2.6 workers for every beneficiary. 

This is why the Social Security payroll tax has been increased 20 times since Social Security was created. It is also why the rate of return for all but the poorest contributors fell steadily over the twentieth century. 

Source: President’s Blueprint for New Beginnings, State of the Union Address, 27 February 2001. 

Younger people are not getting as good a deal as older ones, but that’s because the American population’s age distribution has changed over time. The baby boomer generation obviously presents an extraordinary challenge to the program. But the Social Security program doesn’t manipulate the population’s demographic profile.

In one important way, however, those who are cynical about Social Security are right. It takes an act of Congress to change the program in a substantive way. Politicians eager to secure votes by backing changes that made the program more generous to current voters were jeopardizing its long-term viability — an impact that would only become clear to everyone else long after their political careers were over. 

But that problem is not a product of the program itself; it is a product of self-serving behavior on the part of politicians. Unfortunately, a long list of ad hoc changes to Social Security made by politicians over the years has, in one way, made the program worse than a Ponzi scheme.

Because participation is not voluntary, Social Security effectively coerces citizens into participating in a program that is cheating future generations. To ensure that politicians will keep getting votes cast by those alive today, it is increasingly cheating the unborn as baby boomers move through the system. Even though a trust fund was built up to deal with this baby boomer problem, it is filled with special securities that must be presented to the Treasury for redemption, which the Treasury can only do by issuing new debt dollar for dollar.  

So, what looked like prudent savings turns out to be merely a way station to the issuance of new debt that will ultimately be paid by future generations. That new debt is on top of future unfunded liabilities. According to the most recent data from the Financial Report of the United States, as of 2024 the unfunded liability for Social Security over the next 75 years is now over a staggering 25.4 trillion dollars. 

These additional layers of complexity that help hide the harm Social Security is doing to future generations can excuse uneducated voters, but it cannot excuse the politicians who created them.

Most people believe that Social Security was created with the best of intentions, but over the years it has become an apt example of the aphorism “the road to hell is paved with good intentions.” Ponzi schemes are certainly not rooted in good intentions, but at least they are not devised to fleece unborn children.

David C. Rose

David C. Rose is a Senior Research Fellow at AIER, an Emeritus Professor of Economics at the University of Missouri-St. Louis, and a member of the US Commission on Civil Rights. He was formerly Senior Fellow and Vice President for Curriculum at the Common Sense Society. For 14 years he was president of The Discussion Club. He has a PhD in Economics from the University of Virginia and a BS in Economics from Missouri State University.

Dave has published empirical and theoretical scholarly articles in a wide range of areas and his research has been funded by the National Institute of Mental Health, the Weldon Spring Foundation, the HFL Foundation, the Earhart Foundation, and the Templeton Foundation. In recent years his work has increasingly focused on how moral beliefs provide the basis for the cultural foundation of free societies by supporting institutions like the rule of law, property rights, contracts and their enforcement, and the presumptive extension of trust. His book, The Moral Foundation of Economic Behavior, was selected one of CHOICE’s outstanding titles of 2012. His newest book, Why Culture Matters Most, is also from Oxford University Press. His most recent work provides an account of the coevolution of rationality, cooperation, property, and freedom.

Dave also frequently contributes to policy debates through podcast, radio, and television interviews, as well as in Op-Eds on topics ranging from social security, monetary policy, fiscal policy, judicial philosophy, the rule of law, education reform, healthcare reform, and freedom of speech.

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