After reminding us that:
A Ponzi scheme "is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors," according to the Securities and Exchange Commission.Krantz tells us that:
Some investors think that the fact that Social Security pays existing investors with cash collected by new investors makes it a Ponzi scheme.So, someone pays "purported returns" due "existing investors" from "funds contributed by new investors," he's running a Ponzi scheme. Social Security works by paying cash benefits to retirees and the disabled from taxes contributed by those currently working who are, int turn, promised benefits when they retire or should they become disabled. Neither a Ponzi scheme nor Social Security use contributions from "existing investors" to purchase assets that might provide returns to those investors. Instead, both a Ponzi scheme and Social Security depend on the contributions of new "investors" to redeem promises made to "existing investors." As a result, both a Ponzi scheme and Social Security will continue to make good on promises to "existing investors" so long as a sufficient stream of "new investors" are brought into its system. However, both a Ponzi scheme and Social Security will ultimately fail to pay promised returns if inputs from "new investors" are insufficient to cover the payments due "existing investors."
So, in every important, structural respect, a Ponzi scheme is identical to Social Security. So, Social Security is a Ponzi scheme, right Matt Krantz? Nope, says Krantz, quoting Columbia Law School Professor Jack Coffee:
Social Security is not a Ponzi scheme because it wasn't an intentional fraud...Say what?
Social Security is not a Ponzi scheme because it wasn't an intentional fraud...Explain.
[T]he system has worked as expected since its creation in the 1930s. What's happening now is that, like many corporate pension plans, Social Security is running the risk of being underfunded as obligations grow faster than contributions. But again, Social Security wasn't created with this aim, he says. "It was a system that was quite adequate for a long time," he [Coffee] says.So, Social Security is not a Ponzi scheme because it was not intended to defraud its participants, but it is otherwise exactly like a Ponzi scheme.