And Those Guaranteed Benefits?
But what about those "guaranteed benefits"? Don't those make a difference? Well, let's think about this. Imagine if an investment advisor came to you and said:
"Hi there! I want to sell you a retirement vehicle for which you will be provided a guaranteed benefit of x dollars per year after the age of 65. But the money you contribute will be paid to current beneficiaries, while your money will be paid by future beneficiaries. If there's ever a shortfall, we'll just borrow money from China in order to keep the guaranteed benefits coming -- or force future contributors to provide more money. Alternatively, we might increase the age at which you'll receive benefits. And we might even think about means testing your benefit."
All of those supposed "guaranteed benefits" sure come with a lot of caveats, don't they? Is it even fair to call those benefits guaranteed? For all we know, the U.S. could continue to run into deficit problems for the next few decades and could feel compelled to do away with Social Security altogether. We have no real guarantee that political whims won't change.
So when provided that deal would you say, "That sounds great! Sign me up!"? I know I wouldn't. Of course, this is precisely the way Social Security works, and it's mandatory, so we've got no choice but to comply.
There are several other arguments for why Social Security actually isn't like a Ponzi scheme. They're all weak.
No One Is Being Misled
First, don't people know exactly what they're getting into with Social Security? There's no shady investment manager promising lucrative returns, like we saw with Bernie Madoff's Ponzi scheme, for example.
But aren't Americans being somewhat misled by Social Security? If the benefits age rises, then people were misled. If the government decides to means test benefits, then Americans were misled. Just because, deep down, we might realize that Social Security will be a pretty raw deal for future generations doesn't mean it's suddenly far preferable to a regular old Ponzi scheme.
Not Doomed to Fail
Next, in an alternate world Social Security might have been just fine. If population growth had continued to increase forever, then it would never have run into money problems, and it all would have been sustainable.
True, but the same could be said of a Ponzi scheme. It's only when investor growth slows that a problem arises. Of course, this is exactly the problem that Social Security faces: population growth slowed, and now it's running out of money.
Social Security Is the Moral Opposite of a Ponzi Scheme
But what if Madoff's heart was in the right place? What if he had designed his Ponzi scheme specifically for non-profit firms? They contribute and that money was provided to other non-profit beneficiaries.
Would that have made it any less of a Ponzi scheme? The idea that Social Security is somehow exempt from any criticism because it's meant to help people is just bizarre.