The Great Social Security Debate

By Charles Krauthammer

Of course it's a Ponzi scheme

Proposition 1: In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants.

This cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new to old. The merry-go-round stops, the scheme collapses, and the remaining investors lose everything.

Now, Social Security is a pay-as-you-go program. A current beneficiary isn’t receiving the money she paid in years ago. That money is gone. It went to her parents’ Social Security check. The money in her check is coming from her son’s FICA tax today — i.e., her “investment” was paid out years ago to earlier entrants in the system and her current benefits are coming from the “investment” of the new entrants into the system. Pay-as-you-go is the definition of a Ponzi scheme.

So what’s the difference? Ponzi schemes are illegal, suggested one of my colleagues on Inside Washington.

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