Social Security

Admittedly, I am not well-versed in the intricacies of Social Security policy. But an off-handed comment made by my Labor Law professor during a recent lecture got me thinking about the need for serious reform of the system.

"When you think about it, Social Security is really a giant Ponzi scheme."

The comment itself was one of those asides that could easily be missed or forgotten over the course of the hour and a half lecture. With the ongoing financial crisis and the oft-discussed Bernard Madoff Ponzi scheme, however, the comment became poignant. It struck me that the U.S. government, thorugh the Social Security system, is engaging in actions strikingly similar to those for which it is prosecuting Madoff.

Under his Ponzi scheme, which is worth about $50 billion, Madoff would pay investors not with profits made from the money they invested, but with the money paid by subsequent investors. When the financial markets started going under, Madoff's scheme collapsed and he was arrested for securities fraud. He now faces up to 20 years in prison and a $5 million fine if convicted.

Considering my professor's comment, an argument could be made that the U.S. government is operating a giant Ponzi scheme in the form of Social Security. The Social Security system operates (basically) in this manner: current employees pay into the system in the form of payroll taxes, which the government then distributes to retired individuals in the form of Social Security benefits. Thus, Social Security fits nicely into the definition of the Ponzi scheme: earlier investors (i.e. retirees who paid in while they were working) are receiving benefits out of the money that is being paid in by later investors (i.e. current members of the workforce).

My point is not to defend Madoff, who should certainly pay for his crime, but to point out the hypocrisy of the U.S. government prosecuting an individual for engaging in certain activities while the government itself could be said to be engaged in the same type of activity.