Is Social Security A Ponzi Scheme?

I was listening to the podcast of NPR's "Planet Money" this week and on the episode about savings (3/30), economist Kent Smetters started talking about Social Security.

When you think about the fact that Social Security does not make any real "investments," but just collects money from workers (its "investors") and uses it to pay the investors who got in earlier... does that remind you of anything else recently in the news? (Clue: Madoff)

Can Social Security keep adding enough new investors (my sons) to continue paying returns to the earlier investors (me and my mom)? It seems pretty evident that at some point the Social Security scheme has to fail.

Now, a Ponzi scheme pays returns to investors from their own pool of money, or money paid by subsequent investors. There are no actual investments. It's pay—as—you—go.

Social Security paid very nice returns, especially to the earliest investors. Here's a nice little piece of SS trivia. Did you know that the first person to get a check from the new "national savings plan" was Ernest Ackerman? He was a streetcar motorman and he retired one day after the program went into effect. He had five cents deducted from his check for that one day he was a 'participant' in the program. He received a lump sum payment of 17 cents. That is a 240% return.

In 1939, a bunch of changes came to the program. People were thinking of this as a a "retirement system" (a dangerous concept that will eventually doom the system). The government moved up the start of monthly payments by two years.

According to Social Security Online, the first monthly Social Security check went out on January 31, 1940. The recipient was Ida May Fuller, a retired legal secretary from Vermont. Her check was for $22.54. After cost of living increases and 35 years of receipts until her death in 1975, she had received $22,888.92 in payments. She had contributed $24.75 to the system.

You figure out Ida May's return on investment. It makes Chuck & Bernie's schemes seem like a lousy investment.

By the way, I thought that this Social security as Ponzi scheme idea was an original thought of mine. Nope. Do a search. Lots of folks have been talking about this for a lot longer than the past few months.