Good question. One that has been discussed ad infinitum this year. As has the entire idea of a Ponzi scheme. Just Google for dozens of cartoons on the subject.
IFO’s definition is this: an investment scheme in which the schemer convinces many marks/investors/dupes to give him money in exchange for a promise of better than average returns.
Another definition we like comes from Investopedia:
A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.
For both schemes, however, eventually there isn’t enough money to go around and the schemes unravel.
Ponzi schemes collapse because there is no such thing as a perpetual motion machine. No matter how much you want it, no matter how virtuous, or inventive, or evil, or brilliant, you, the inventor, are, you eventually run out of money. Anyone who falls for such an invention and invests in it is an example of the triumph of hope over experience, desire over common sense.
So, is Social Security a Ponzi scheme? Notice how those who are shocked, shocked, over such a description never address the root meaning of the term. In the recent Republican debate, Mitt Romney executed an adroit verbal pivot by saying how many seniors had benefited from SSI payments and were currently benefiting from same. And??? That’s a distracting irrelevancy.
Most other government programs are Ponzi schemes, too. That is, any program that promises more money to recipients than is available from contributors.
The differences between Ponzi frauds and Social Security are that one has voluntary investors and are private, while the other is government and relies on coercion. Government program supporters think that because they have the police power of the state behind them that they can’t fail.
Wrong! The end game is the same, as we know from Greece, among many examples.