Is Social Security a Giant Ponzi Scheme?

Jim Cramer has called Social Security the largest Ponzi scheme in history. To an extent, he's making a valid comparison. Like a Ponzi scheme, Social Security pays its benefits out of new contributions, rather than out of investment returns.

Also like a Ponzi scheme, Social Security is in the process of collapsing under its own weight. According to its most recent annual report, the Social Security trust fund is expected to exhaust itself by 2037. With similarities like that, it's no wonder Cramer felt he could make the comparison.

Surely that's not right?
But Social Security isn't exactly a Ponzi scheme, no matter how similar it may seem on the surface. For one thing, Social Security is a mandatory program. With few exceptions, if you're a working American, you're paying into the system. That helps shore up its foundation far more firmly than a typical Ponzi scheme.

For another, Congress has the authority to increase the taxes you pay into Social Security -- and it has, on numerous occasions. When the program started, taxes for retirement benefits were set at 2% of the first $3,000 of your earnings. That figure now sits at 10.6% of your first $106,800 of income (half paid by you, half by your employer on your behalf). That's quite an adjustment, and it's a big part of the reason Social Security hasn't collapsed yet.

And of course, while Ponzi schemes attract clients by promising impossibly high returns, Social Security promises no such nonsense. On the contrary, on average, Social Security's promised payout is about the same as a minimum-wage job. Not promising the moon and the stars also helps keep Social Security from quickly falling apart, like a Ponzi scheme would.

It's still not enough
Perhaps the biggest difference between the two is that Social Security admits its shortcomings in a way no Ponzi scheme ever would. Regarding what you can expect from the program, here's what the Social Security Administration itself says:

"For an average worker, Social Security replaces about 40% of annual preretirement earnings. Since Social Security will only replace part of your lost earnings, your savings and investments play an important role in ensuring adequate income for you and your family."

And even that 40% level won't be reached after the trust fund is exhausted in 2037. Once again, Social Security has this to say on the matter: "Even if modifications to the program are not made, there would still be enough funds in 2037 from taxes paid by workers to pay about $760 for every $1,000 in benefits scheduled."

In other words, you shouldn't depend on getting more than about 30% of your preretirement earnings from Social Security, starting around 2037.

What can you do?
The traditional thinking dictated that your retirement would be funded by a "three-legged stool" comprising Social Security, employer pensions, and your own personal savings. Unfortunately, all three legs are under assault. Social Security is on the rocks, and employer pensions are a vanishing breed as well. And of course, with the market meltdown we've just lived through, you may be wondering whether it's still worth your while to invest.

With the deck seemingly stacked that far against you, is it even worth it to try to retire?

Of course!
Traditional pensions may largely be lost forever, but even under the worst-case scenario, Social Security is still expected to pay some benefits -- about three-quarters of the scheduled amount. And while the market may be down, it's not out. Many publicly traded companies are still profitable and still pay dividends. Over the long haul, earnings and dividends drive stock prices and investors' total returns. So as long as the ability to earn a profit and pay dividends is not forever lost, long-term investors should be able to earn capital gains and investment income.

In fact, even in the short run, and amid this economic malaise, there are still strong, profitable businesses that continue to pay dividends to their shareholders. Here are just a few:


Earnings per Share

Dividends per Share

Intel (Nasdaq: INTC  )



Pfizer (NYSE: PFE  )



Hewlett Packard (NYSE: HPQ  )



Philip Morris International (NYSE: PM  )



Schlumberger (NYSE: SLB  )



Qualcomm (Nasdaq: QCOM  )



United Parcel Service (NYSE: UPS  )



Data from Yahoo! Finance.

These companies are making -- and handing out to their shareholders -- this kind of money amid what has been called the worst economy since the Great Depression. That should give you hope for their futures, once a recovery finally takes hold.

At the very minimum, it should help you continue to invest through this mess. After all, your investments make up the one part of the three-legged retirement stool that you control. It'd be a pity to relinquish that control based on a single year's slipup -- no matter how disastrous that year may have been.

Use the tools you have
At Motley Fool Rule Your Retirement, we know how frustrating it is to plan your future when the cornerstones upon which it was supposed to be set seem to be crumbling before your very eyes. That's why we'll give you a free 30-day trial to check out our service and see for yourself the tools and strategies we've amassed to help you make the most of the reality we live in today. Simply click here to get started.

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This article was originally published on July 21, 2009. It has been updated.

At the time of publication, Fool contributor Chuck Saletta owned shares of Intel. Intel and Pfizer are Motley Fool Inside Value recommendations. United Parcel Service is a Motley Fool Income Investor pick. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Intel and has a disclosure policy.

Read/Post Comments (17) | Recommend This Article (17)

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  • Report this Comment On October 15, 2009, at 5:42 PM, texjammer wrote:

    Social Security is another example of a FAILED Socialist program, just like MediCare and MedicAid. If you take money from those that are EARNING IT and give that money to those that DO NOT EARN IT, the system will collapse as the Earners stop paying in and become Takers. Even as the Congress keeps upping the taxes paid into the system, eventually there will be more paid out than can be paid in.

    This is the simple and UNDENIABLE FLAW of the Socialist/ Marxist system. If you can get paid for NOT working, why in the world would you keep working? There eventually (maybe years or decades down the road) become fewer and fewer people paying into the system, because there is no incentive to make money, when your profits are simply confiscated to fund a program that rewards those that have NOTHING TO CONTRIBUTE TO SOCIETY. Just look at most of Western Europe. France, Germany, Uinited Kingdom, etc. are all in dire straits for paying more and more people for NOT WORKING. It's not just the Socialized Medicine, it's paying people to stay home and watch TV, instead of going to a productive job.

    We have the same Socialist program in the United States. It's called Welfare. We have paid for generations of low to no income inner-city minorities to stay home and watch TV and reproduce more and more Welfare dependent kids. And as soon as the Socialists get 51% of the registered voters on their programs, it will only pick up steam and the United Socialist States of America will be.

    The Liberal Left screams about the "success" of their current programs in the US, and wants us to buy into the fact that the Government knows best how to give Healthcare to everyone. If they run it the way they run Medicare, MedicAid and Social Security, the country we now know will cease to exist in a few very short years.

    Enough Socialism. We are a Republic. It's time to tell the Socialists/ Marxists that we want NOTHING FOR NOTHING. We are Americans and we built this country by giving an honest day's work for a decent wage.

  • Report this Comment On October 15, 2009, at 6:06 PM, ozzfan1317 wrote:

    With all due respect but I guess you have missed the horror stories about some of the insurance company practices. If you want to know how much they charge my grandparents per year I will happily tell you its outrageous.

  • Report this Comment On October 15, 2009, at 6:11 PM, handslap wrote:

    Dear Texjammer,

    Now be honest here. Have you ever traveled to these "european'' countries you seem to know so much about. Let alone live in any of them?.......

    Well i have. I've lived in Ireland, Germany, UK and currently reside in New York.

    If I am to be honest here I have to inform you that the most ''failed" system is right here in the U S of A.

    The Europeans are much happier believe me.

    They work less, have on average 5 weeks paid holiday a year, enjoy healthcare, much finer education and are healthier.

    My right wing friend never confuse obese with happiness.


    Manley Handslap

  • Report this Comment On October 15, 2009, at 6:16 PM, ozzfan1317 wrote:

    The only reason they can afford my grandmothers medicine is because of medicare. He worked all his life so not ever person using a public program is a lazy minority.

  • Report this Comment On October 15, 2009, at 6:23 PM, texjammer wrote:


    If you love the other countries so much, go back! Oh, that's right, they're all GOING BANKRUPT!

    I'm sorry I don't buy into your ONE WORLD UTOPIA, but I happen to believe that the freedom we have in America has brought more significant changes to the Human condition than all other countries combined. How many significant medical advances have come from your beloved Socialist countries in the past 50 years? The majority have come from the US or from grants given by US companies or foundations.

    The point of your post is insignificant in refuting the fact that Socialist programs fail, since there is no incentive to produce any profits that will be immediately taken from you for the benefit of others that have not produced.

    “You cannot bring about prosperity by discouraging thrift.

    You cannot help small men by tearing down big men.

    You cannot strengthen the weak by weakening the strong.

    You cannot lift the wage-earner by pulling down the wage-payer.

    You cannot help the poor man by destroying the rich.

    You cannot keep out of trouble by spending more than your income.

    You cannot further the brotherhood of man by inciting class hatred.

    You cannot establish security on borrowed money.

    You cannot build character and courage by taking away men’s initiative and independence.

    You cannot help men permanently by doing for them what they could and should do for themselves.”

    Presbyterian minister William J.H. Boetcker (1873-1962)

  • Report this Comment On October 15, 2009, at 6:58 PM, hmgerard wrote:

    What can you expect from "Tex"?

    More 'Wingnut' rhetoric about Marx, Socialism and American "Failures", of course!

    Fortunately, 'Texas Opinions' have widely merited the ridicule they have blown so hard to earn.

    Ponzi schemes are fraudulent BECAUSE they collect money with stated business purposes that DO NOT include using the collected funds to pay dividends to prior investors or profits to the perps.

    Either Ponzi=Fraud, or Ponzi=Insurance; after all, insurance companies collect money from policy holders to pay other policy holders.

    In common usage, "Ponzi" is a denigrating term that is consistent with Fraud.

    There is one broad interpretation by which Social Security might be considered "Fraud" over the long term; but this one could never be considered as a "Socialist" doctrine (as Tex has blasted).

    The Federal Government (Republicans + Democrats)has borrowed and spent much of the Social Security Trust Fund, as a crime family might have done upon taking over control of a community's reserves fund. The main question of FRAUD revolves around the paying back or this debt!

    Two possible future scenarios are outlined below:

    O--Scenario 1 (Trust Fund is an accounting fiction, a FRAUD ):

    1980: $1 payroll tax collected in 1980

    1980: $1 lent by Social Security to the federal government

    1980: Federal government increases spending on government programs by $1

    2020: Federal government raises taxes by $1 plus interest to repay the loan to Social Security

    2020: $1 plus interest transferred from Federal Government to Social Security.

    O--Scenario 2 (Trust Fund represents real economic savings, NOT a FRAUD):

    1980: $1 payroll tax collected in 1980

    1980: $1 lent by Social Security to the federal government

    1980: Federal government increases spending on government programs by $0

    2020: Federal government raises taxes by $0 to repay the loan to Social Security. Any tax increases that occur in 2020 would have happened anyway without Social Security.

    2020: $1 plus interest transferred from Federal Government to Social Security.

    So, whether the loan of Social Security Trust Funds to the Federal Government was or wasn't a FRAUD remains to be determined!

    If the loaned (1980) funds were used in lieu of raising taxes, thereby stimulating a more robust economy, the loan could be considered a "Productive Investment" (NOT a FRAUD).

    But, if our Free Market Capitalists squandered or embezeled the wealth, ("busted") this robust economy, the Federal Government may not be able to repay the Social Security Trust Fund (in 2020) without raising a special tax (a FRAUD).

    Social Security loaned their savings (surplus) fund to us Americans, enabling us to operate without raising taxes. In the midst of 'Hard Times', it looks like that wealth may have been 'lost'; but if the economy can recover sufficiently to support the payback of the loan without a special tax increase, then the loan would NOT be a FAILURE.

    1- It is TOO SOON to call Social Security (or the Trust Fund Loan to Government) a FAILURE.

    2- The (wise or unwise) use of the Social Security Trust Fund to invest in the American Economy is an example of CAPITALISM, NOT SOCIALISM!

    3- The term "Ponzi Scheme" is way off the mark!

  • Report this Comment On October 15, 2009, at 7:11 PM, binary64 wrote:

    Sorry, but your data on INTC is incorrect. INTC does not earn $4.55/sh and it does not pay out $1.96 in dividends. Are you referring to another company???

  • Report this Comment On October 15, 2009, at 7:41 PM, prose976 wrote:

    Yes, it is a Ponzi scheme. Just like gold. Eseentially, a Ponzi is a situation where if everyone cashes out, there is not enough to cover eveyone who has put in. So, Social security is highly dependent on early deaths, uncollected benefits, rolling retiring population, etc.

    The money, which was supposed to be set aside as a nest egg for those who would be retiring down the road, has becomea slush fund from which politicians feed voarciously.

    I find it increasingly ironic that the MBA, Doctorates and other so-called "intellectual" elit fantasies themselves as being able to know what the general population needs and wants, when these mornonic, privileged intellectuals can't even recall Aesop's fabel about the ant and the grasshopper.

    It goes to show that the paid for diplomas that colleges sell to students are looked at as passports to wisdom and leadership when it is actually the dying (or maybe even dead) lifelong wisdom of common sense that should be the foundation for all decision-making.

    No faith in government. No faith in elected officials of any kind. Run ALL the bums out on a rail. Replace them with regular people. Get rid of the elected judges, lawyers, politicians, etc. with extreme term limits and a "No Confidence" vote on all our ballots. We should be able to vote against candidates as well as voting for them.

    Think about this...if there is more than one idiot running for an office, but I must cast my vote or lose it, I must choose at least one of the idiots. But, if I can vote against a candidate, and neither gets a specified majority votes, then they are both disqualified.

    With a No Confidence vote, my vote can truly be counted.

  • Report this Comment On October 15, 2009, at 8:22 PM, handslap wrote:

    My dearest entertaining texjammer.

    I presume by "beloved socialist countries" you mean every country but america.

    Now, the reason i dont "go back" to said countries is because i choose to live in various lands so i can arm myself with the relevant experience required to comment on forums like this and actually know what im talking about instead of quoting some book, tv news item etc.

    I'm sorry to say it my friend but you are a victim of your own propaganda.

    Finally, regarding "bankrupt", ehem excuse me ,and the USA is in good financial shape..Yes?

    Admit it you're just greedy.

  • Report this Comment On October 15, 2009, at 9:12 PM, Indiota wrote:


    I'm not an American neither an European, but like you I had the opportunity of living for a long time in both places.

    Europe is a good place for wealthy people to spend vacations, but to start an enterprise, I would say that the US is a better place.

    Going back to the point of this article. The European Social Security is bankrupted already. They are accepting young people from everywhere to become citizens, therefore, pay taxes. Why? Europeans are aging and do not work enough. I got my citizenship in 3 weeks, lived there for 5 years, and gave up the citizenship after figuring out that they wanted me to finance their social welfare.

    No, merci.

  • Report this Comment On October 15, 2009, at 9:14 PM, Indiota wrote:


    How many european companies do you have on your portfolio? What about American Companies??

  • Report this Comment On October 15, 2009, at 9:20 PM, TMFBigFrog wrote:

    Hi binary64,

    Thanks for calling out the Intel earnings and dividend data to my attention. I must have made an error in my data collection. I'll point it out to my editor and ask that the table be corrected.

    Best regards,


  • Report this Comment On October 15, 2009, at 11:19 PM, ReadEmAnWeep wrote:

    Yes, it is a ponzi scheme. except it is mandatory.

    The only thing we can really do is treat it as another useless tax. If it is around when we can claim it then great. But, it wouldn't be a good idea to plan for it.

  • Report this Comment On October 16, 2009, at 11:57 AM, handslap wrote:

    Dear indiota,.

    I think you've just showed us your ignorance by painting all of europe simply as ''a good place for wealthy people to spend vacations''.....Shall we then say that India is a good place for a meditation, or America is a good place for burgers and fries, oh, and Africa is a swell place drums. Is that it!.........And regarding your "but to start an enterprise, I would say that the US is a better place''....Who mentioned any ENTERPRISE! The fact that you spent 5 years in europe and all you can say is america is a better place to start an enterprise is honestly quite sad. Take a day off. Go to the park. Read a book. You'll feel better.

  • Report this Comment On October 16, 2009, at 12:34 PM, pondee619 wrote:


    "because i choose to live in various lands so i can arm myself with the relevant experience required to comment on forums like this"

    You are jolking, right? You move from place to place to arm yourself with info to comment on forums like this? What is it like to be so wealthy that you place of residence is based on the quest for local knowledge? Or, is the above statement B.S?

  • Report this Comment On October 16, 2009, at 1:04 PM, Counterparty wrote:

    (I agree with) Handslap..

    I think you're trying to handle this discussion factual (and with dignity), but it's like talking to a brick wall sometimes on TMF.

    The simple fact is that sometimes government regulation, not even control, is the best and easiest solution to control cost. The healtcare system in the Netherlands is also insurance based, but we don't need a public option or something of that nature because the government mandates that everybody is entitled and obligated to have and pay for affordable healtcare, regardless of any pre-condition. Subsequently they regulate what this basic healtcare package should include and the maximum montly cost which the insurance companies can charge.

    To see that we pay 90 euro for our basic healtcare package, including doctors visits, hospitals, medication, etc and maybe 30-50 Euro's more for the complete package including dental, fysio, etc, have good facilities, reasonable waiting lists, a maximum deductable of 250 Euro per year and nobody will ever go bankrupt, I think it is a prime example of what good government can accomplish.

    Of course all western countries will have to scale back some aspects of the social safety nets, as fewer children are born and people get older, but if you have a culture of a relatively high savings rate and relatively low consumer debt level, like many european countries have, I'm confident the social welfare system can be maintained and it will still be around in 30-50 years. I hope the same can be said for social security and medicare in the US.

  • Report this Comment On October 21, 2009, at 12:21 AM, thisislabor wrote:

    actually, just to clarify, I am under the understanding that:

    Ponzi = fraud.

    SS = generational wealth transfer system.

    thought I would clarify that.

    take a moment to think about it.

    and hand slap from the statements tex made leads me to believe that he IS NOT the greedy one. by your own admission it would be you that is.

    just say'n that's the way I interpreted it.

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