Social Security Is Not A Ponzi Scheme. Quit Calling It That.

You’ve probably heard it before, the old “social security is a Ponzi scheme” canard.  It sounds good on the face of it, but is Social Security really a Ponzi scheme?  Let’s think about it.

According to the SEC a Ponzi scheme “… is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”  “Ah hah,” you may say, “that’s just like what Social Security does!”  And I say you would be wrong.  Here’s my argument against the allegation that Social Security is a Ponzi scheme:

Ponzi schemes disproportionately enrich the schemer.  So, let’s say we have a Ponzi scheme going.  Who gets the money?  Well, the initial investors need to be paid off to keep the scam going, so some of the cash from the new investors need to go to the old investors.  What about the rest?  It goes to the scammer to support their pimped-out lifestyle.  If the article he’s reading about himself in the gossip section of the newspaper doesn’t use the word “lavish” to describe his lifestyle, then he doesn’t have enough models giving him back rubs.

So, who does Social Security enrich?  To hear some people talk, no one.  But, as it turns out, we can see what percentage of Social Security expenditures go toward administrative expenses.  It’s 0.9% in 2010.  So, in a Ponzi scheme, the majority of the money goes toward “administrative expenditure,” while less than 1% goes out in administrative expenses from Social Security.*

Simply put, Social Security is not a Ponzi scheme, and a half-second’s thought would show this to be true.  Whatever the criticisms that can be leveled at Social Security, this is not one of them.

*  Just in case you’re thinking “0.9% is still a lot,” compare it to an expense ratio for a different investment – say, PIMCO Total Return Fund Institutional Class.  They charge 0.47% to accept funds, pick underlying investments, and then give your money back when you ask for it.  Compare that everything the U.S. Social Security Administration does, and be impressed at their efficiency.

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