Ask The Advisor: Social Security v Ponzi Schemes

Ask The Advisor: Social Security v Ponzi Schemes

Is Social Security A Ponzi Scheme? How Much In Social Security Income Can I Expect To Get?

Q: I’ve been hearing a lot recently that Social Security is a Ponzi scheme. Just how much in Social Security benefits can I expect? I just turned 62, but I’m still working and haven’t started benefits yet.

A: The amount you get from Social Security may surprise you. While the amount you receive depends on how many years you worked, your earnings, and the age at which you start benefits, the average monthly Social Security payment today is about $1,100. People who retire with average benefits will receive about $13,200 in 2011 prior to Medicare premium deductions. With people spending as much as 25 years in retirement, people who retire today with an initial benefit of $1,100 can expect to receive more than $466,800 in Social Security over 25 years. But that assumes no changes to cost-of-living adjustments (COLAs).

How is Social Security different from a Ponzi scheme? Interestingly, the Social Security website has a research note comparing the two. Charles Ponzi became infamous in 1920 when he used the money he received from later investors to pay extravagant rates of return to early investors to entice more people to invest in his phony investment scheme. This only works when there’s an ever-increasing number of new investors coming into the scheme. Eventually the scheme runs out of new investors and collapses, taking everyone’s money with it.

One big difference between Social Security and a Ponzi scheme is the establishment of Social Security by law. Both the amount paid out and the financing coming in can be, and frequently has been, adjusted by Members of Congress. Unlike Ponzi schemes that are supported by voluntary investments, Social Security is supported by tax revenues from working individuals and taxes on a portion of Social Security benefits paid by seniors, both of which are required by law. While Ponzi promised phony payouts, Social Security payouts are established by law as well. They too, have been adjusted over the years.

While Ponzi relied on keeping his financing scheme secret, Social Security’s financing is well known. The Social Security trustees issue a detailed report every year that outlines the projected financing and outlays and funding problems of the program.

Perhaps the single biggest difference between Ponzi schemes and Social Security is you and your vote. Voters have a tremendous influence in the choices that elected Members of Congress make to ensure that the program remains sound today and in the future. Social Security has been in continuous operation since 1935. Ponzi’s scheme lasted barely 200 days.

Sources: Monthly Statistical Snapshot, August 2011, Social Security Administration, September 2011. Social Security: What Would Happen If The Trust Funds Ran Out?, Christine Scott, Specialist in Social Policy, August 2, 2011.