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Pensions > analysis 2011
Last revised: January 10, 2013


is social security a ponzi scheme? compare and contrast:

social security

Investment is compulsory (with a few exceptions, especially for U.S. Congress), plus with deception.

Politicians run the system to get votes for re-election.

The fund may pay what it promises, but its promises may change. Raising taxes (to increase contributions) and cutting benefits to reduce withdrawals) are options.

Congress may change the rules, so what do the rules mean?

Social Security began like a Ponzi scheme, with few beneficiaries and many workers paying in. Now, the taxpayers are likely to pay to keep Social Security solvent. They may punish politicians at the polls. However, the guity parties may be retired before the taxpayers get higher taxes.

At some point, the federal govenment will have taxpayers pay to honor promises to Social Security beneficiaries, or (b) tell beneficiaries that they won't receive what they expected.

ponzi scheme

Investment is voluntary, but with deception. It's a "confidence game".

Crooks run the scheme for their own profit.

The scheme relies on new "investors" to provide promised returns to previous investors.

The Ponzi scheme doesn't have rules in the usual meaning. It's a fraud.

This scheme is bound to fail.

When the Ponzi scheme fails, the crook may flee, but usually gets caught and sent to jail.

Defined benefit pension plan

Contribution is voluntary (if you don't like the retirement plan, don't take the job) but with possible default.

Plan sponsors set up the fund as  tax-deferred compensation for beneficiaries.

An honest plan keeps careful records, and pays each beneficiary his fair share of the assets, according to promises in a contract.

The fund's contract specifies rules for contribution and  benefits. However, the definition of "fully funded" is flexible.

If the sponsor underfunds the plan, the sponsor may go bankrupt and default.

If the sponsor has met all requirements, it can go bankrupt and the beneficiaries suffer. In liquidation, they could become unsecured creditors. In reorganization, the bankruptcy court may relieve the sponsor of any obligation for the plan. Either way, the sponsor may continue in business.


The promoter may unilaterally, with impunity, reduce purchasing power of $1.