Is Social Security a Ponzi Scheme?

Table of Contents

Thesis statement2

Introduction2

Discussion2

What Should Be Done?4

Conclusion5

References7

Is Social Security a Ponzi Scheme?

Thesis statement

Social security and Ponzi scheme come from the same family.

Introduction

Global financial crisis has led to frenzy in general public who did not only lose their jobs but also their investment returns. Chaotic situations like these provide the most perfect chance to schemers like Bernie Madoff, who make promises of magically providing high returns on investment, regardless of the economic conditions. The bottom line of these fraudulent investment plans is nothing but taking money from a group of investor, recruiting new investors and using their money to provide returns to an earlier recruited group of investors; in other words, taking money from one and giving it to others. This mere concept of wealth transfer has also been observed in the US Social Security system; however, a systematic opinion can be formed after a critical comparison between Ponzi and Social Security Scheme, which this brief essay intends to present.

Discussion

Bernie Madoff has been sentenced to a 150 year imprisonment with damages of $170 billion for having committed a fraud of $64.8 billion (Henriques, 2009). He is accused of implementing one of the largest Ponzi Schemes in the world. The name Ponzi is after Charles Ponzi, who scammed New England residents in 1920s; when he encouraged people to invest money in postage stamps speculation and promised to pay 50% of return within 3 months. His scheme was to take advantage of the arbitrage opportunity available after World War I, when the postage stamps were bought at cheaper rates in countries like Spain and sold at higher rates in the USA; (a concept very similar to trading in international currency markets today). Ponzi did initially invest in international mail stamps to support his scheme, but later on conveniently used new investors' money to provide returns to earlier investors. The schemes formulated by Madoff or Ponzi collapse when inflow of money or recruitment of new investors ceases and returns cannot be provided to investors.

A similar scheme which involves taking money from one and giving it to another has been going on at government level in the shape of Social Security. It requires young working population to pay taxes which are then used to give benefit to current retirees. In other words, one generation receives more than it has invested. Supporters of Social security system believe that it is not a Ponzi scheme, because the latter is a criminal activity in which the scheme operator falsely promises higher return, and lies about his investment plans. On the other hand, social security is quite transparent and honestly conveys the returns it could provide. However, in actuality, only 10% of American public was aware that social security taxes paid are not utilized for social security payments (Lind, 2011). In fact, the majority believes that the taxes they pay will be utilized after their own retirement.

Moreover, social security system is also in line with Ponzi scheme's characteristic of promising to pay ...