The comparison in some political and policymaking circles of the U.S. Social Security system to a Ponzi scheme worries experts who want to see genuine bipartisan collaboration to address the social insurance program’s looming insolvency.
Last month, Sen. Mike Lee of Utah took to X to lambast Social Security, likening it to a Ponzi scheme set up to cheat the American people out of freedom and security in retirement.
More recently, two researchers at the Cato Institute published an analysis on a popular Substack channel that also used the Ponzi scheme analogy. Their criticism of the program, while more even-handed than Lee’s, nonetheless called on lawmakers to transition to a flat benefit approach that would cut benefits and reduce the payroll tax burden on current and future workers.
Such an approach would be more fair to younger workers, the authors argued, while returning the system to its roots as an anti-poverty program. Otherwise, these workers will be pressed into paying more in taxes to stabilize the pay-as-you-go system as the over-65 population expands.
Jason Fichtner, a senior fellow at the Bipartisan Policy Center and head of the retirement income institute at the Alliance for Lifetime Income, told ThinkAdvisor that a serious debate about the size and structure of Social Security is in order. The program is less than a decade from insolvency, and he credited the Cato analysis for raising potential policy options that could help right the ship.
Yet, as the former chief economist for the Social Security Administration emphasized, making inaccurate and misleading statements about the program will do more harm than good. Social Security may have solvency problems, but it is not a fraud.
“Social Security is just not a Ponzi scheme, and I don’t think using that term is very helpful,” Fichtner said. “In this context, the term is not only misleading — it’s inaccurate and it does not help the narrative for us to get true Social Security reform on the table.”
What Is and Isn’t a Ponzi Scheme
As the term is commonly understood, a Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.
Organizers often promise to invest money and generate high returns with little or no risk. But in a Ponzi scheme, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.
“Social Security is a pay-as-you go system, not a fraudulent investment scheme,” Fichtner said. “With a Ponzi scheme, there are no real investments, but Social Security invests in Treasurys — which are real investments that you and I can go out and buy today.”
For comparison, there are recent examples of Ponzi schemes affecting investors.
In July, the Securities and Exchange Commission barred an advisor over a $24 million Ponzi scheme that lasted two decades. In August, the SEC accused a former advisor of a $300 million scheme that affected over 2,000 investors and funded the advisor’s lavish lifestyle.
“Ponzi schemes, again, involve fraud and lies,” Fichtner said. “It’s misleading and unfair to suggest Social Security operates this way.”
Potential Reform Strategies
Among the arguments shared in the Cato analysis is a proposal to modernize and reduce cost-of-living adjustments. Specifically, the article suggests that the Social Security Administration should replace the “outdated” Consumer Price Index for Urban Wage Earners and Clerical Workers with the chained Consumer Price Index for All Urban Consumers for calculating COLAs.
“This index covers a broader share of Americans and factors in the substitution effect, in which consumers opt for cheaper alternatives when the prices of goods rise,” the authors explain. “The CBO estimates that this adjustment would reduce Social Security spending by $175 billion between 2024 and 2032.”
The authors further argue that Congress should consider eliminating COLAs for wealthier retirees, as was proposed in the Social Security Reform Act of 2016. This change, in addition to switching to the chained price index for all other beneficiaries, would erase more than a third of the program’s long-term actuarial deficit.
Another argument calls for raising the program’s eligibility ages to align with longer life expectancies and declining fertility rates. The Cato staffers call for Social Security’s early and full retirement ages to be increased to 65 and 70, respectively, and indexed to increases in longevity.
“This change would enhance intergenerational fairness, distributing the fiscal burdens of an aging population across generations,” they argue.
Fichtner said he is open to increasing the full retirement age but worries about the potential impact on lower earners who need to claim early to make ends meet in retirement.
“Personally, I would like to see a more meaningful and stronger minimum benefit for lower lifetime earners,” he said. “If you simply raise the full retirement age without addressing a minimum benefit, that could cause a lot of strain.”
Pictured: Jason Fichtner
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