Social Security is a Mandatory Ponzi Scheme

Rick Perry made headlines for calling Social Security a “Ponzi scheme” in last night’s presidential debate. Mitt Romney and statist media sources predictably attacked this position claiming that the insolvent program is A-Okay. To be fair, Rick Perry isn’t the only Republican candidate with the courage to speak truth to fiction about Social Security. Ron Paul has likely been calling the entitlement program a Ponzi scheme long before I was even born. It’s suddenly become popular to call Social Security out for what it really is: a compulsory Ponzi scheme.

Social Security is the definition of a Ponzi scheme with a few notable differences. Charles Ponzi started a money making scam that would later be known as a Ponzi scheme back in 1916. He persuaded people to allow him to invest their money but he never made one investment. He simply transferred money from his later investors to his earlier investors. The unsustainable system inevitably collapsed. Charles Ponzi was then convicted of fraud and spent years behind bars.

Social Security has many similarities to a Ponzi scheme but it’s even worse. The main difference is that Ponzi schemes are voluntary and Social Security is mandatory. Everyone is forced to pay Social Security payroll taxes whether they want to be part of the system or not. Just like Charles Ponzi’s fraudulent scheme, money from “later investors” or young workers is transferred to “earlier investors” or retirees.

Ponzi schemes are always great for earlier investors but rip off those who invest later on. The number of retirees is growing far faster than the number of new workers. The ratio of workers to retirees has grown from 42 to 1 in 1940 to just 3.3 to 1 today. Social Security is facing more than $20 trillion in unfunded future liabilities. Young people actually believe that they have a better chance of seeing UFOs than a Social Security check made out to them when they retire.

Some people especially those on the left wrongly call us “cruel.” But think about it: how cruel is it to force a young person who believes they will get nothing in return into a system? Why should young workers who are just starting out in their careers be forced to pay for the Social Security benefits of elderly millionaires and billionaires? Seniors are much wealthier than young people on average.

Individuals should be free to opt-out of Social Security if they wish. People could then stay in the insolvent Social Security system or invest on their own. If Social Security is so “great”, why is it mandatory? Private sector retirement plans can provide safer plans with higher benefits than Social Security. Unlike Social Security, the assets in the private retirement plans can be rolled over to a surviving spouse or other family member. We need more retirement choices instead of being forced into a terribly mismanaged government monopoly.

The Venn diagram above made by The Examiner’s Tim Carney shows the difference between Ponzi schemes and Social Security. Bernie Madoff, who was responsible for the largest Ponzi schemes in history, was sentenced to 150 years in prison back in 2009. But the federal government’s Social Security scheme is somehow mandatory. Politicians who criticize Social Security are indeed considered pariahs. Think Progress says that it is “nuts” to even compare Ponzi schemes and Social Security.

The Social Security scam disproportionally hurts the working class and African Americans. Tim Carney says that, “given that black men have a lower life expectancy, they get shortchanged on the benefits end.” The life expectancy for an African American male is just 69.7 years—versus 75.5 years for white men. The Social Security retirement age is 65. This means that close to half of African Americans males will die before every receiving a dime of Social Security benefits despite paying into the system all of their working life. How is that for cruel?

Social Security is a compulsory Ponzi scheme. As Cato Institute scholar Roger Pilon says, “a private company that ran such a scheme would be prosecuted in less than a New York minute.” Social Security is a hopelessly bad deal for today’s worker. Americans should be allowed to invest in their retirement as they see fit—not be forced into a mandatory Ponzi scheme against their will. We need more presidential candidates with the guts to propose allowing individuals to opt-out of Social Security.