Source: Dr. Mike Walden, NCSU COLLEGE OF AG & LIFE SCIENCES, 10/10/11
 

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In a recent national political discussion Social Security was referred to as a Ponzi scheme.  N.C. State University economist Mike Walden explains what this means and whether it’s accurate.

“It certainly doesn’t sound good.  I think people who don’t know what a Ponzi scheme is have heard about it, and it’s always been used in a negative connotation.  Specifically, a Ponzi scheme is an investment model that is intended to defraud investors by paying returns on those investments not from money made by the investments but by using money from new investors.  And so eventually that … scheme is going to collapse.

“And some argue that Social Security is … like a Ponzi scheme because when you put money into Social Security and I put money into Social Security, it doesn’t necessarily get invested with our name on it.  In fact, a lot of the payments now going out to folks who are receiving Social Security comes from our money that we put in.  So, some say, 'Hey, therefore Social Security is like a Ponzi scheme.’

“On the other side people say, 'No, it’s not a Ponzi scheme.’  Number one, it was never intended to defraud people, and, number two, Social Security does earn some money on its investments.  It’s just not earning enough.

“So, I … think these labeling of programs is really not useful.  The issue here in Social Security has to do with the fact that we’re an aging society.  Social Security right now has an investment kitty.  They have over $1 trillion dollars in the bank, so to speak, in Treasury securities.  They will be able to continue to make payments to recipients of Social Security.

“However, they’re eventually going to have to start to dip in to that investment pot.  And the current investment from Social Security trustees is that by 2036 Social Security will only be able to pay about three-fourths of what it had promised.

“So, we do have a long-run problem in Social Security.  There are a number of fixes that have been suggested — raising retirement age, changing how payments are adjusted to inflation.  But I do think it’s wrong to say that Social Security was set up to defraud people.  I think Social Security has simply been caught up in changing demographics.”