Elon Musk has called Social Security a “Ponzi scheme,” comparing it to a scam in which a con man must keep finding new suckers in order to disguise the financial unsustainability of his enterprise. This term has also been used by libertarian commentators at Reason and the Hoover Institute, who try to convince people that the program is fundamentally broken and unsustainable. Because both Social Security and Ponzi schemes take money in from new contributors which they pay to old ones, it is easy to craft a superficial resemblance between them. But Social Security is not a Ponzi scheme, and it’s important to understand why, because the comparison is used to generate the illusion of a Social Security “crisis” that can be used to justify major benefit cuts or even the elimination of the program altogether. By understanding the differences between old age insurance and Ponzi schemes, we can train ourselves mentally to resist the propaganda that is used to try to convince the public to support undermining one of our most important social welfare programs. 

Let’s think about a few different cases in which money is pooled and paid out. First, let us imagine a company has a pension scheme. (I realize this may be difficult to imagine these days, but stick with me for a minute.) Workers pay 5 percent of their income. The employer pays in an amount equivalent to 15 percent of the worker’s income. When the worker retires, they get a fixed benefit every year for the rest of their life, equivalent to some percentage of what their salary was. We are going to call this Scenario A. 

Now let us imagine a different scenario: five (uncommonly astute) middle schoolers create a rudimentary insurance scheme to guard against being punished by their parents. The children all go to the mall every week to play arcade games together. They each get an allowance of $10 per week, which they spend at the arcade. What they decide to do is spend $9 each week instead and put $1 per week into a fund. If one of them has their allowance taken away by their parents, the fund will pay their arcade money for the week. That way, nobody in the friend group is ever deprived of the ability to go to the arcade. We are going to call this Scenario B.

Finally, let us imagine a scenario in which a fraudster tricks a group of old people into giving him their money. He says that if they invest their retirement money with him, he can guarantee them a 20 percent per year return, risk-free. They invest. He provides them with statements showing that their money is indeed growing at 20 percent per year. When they ask to pull a portion of their money out so they can spend it, he disburses it. But what he is actually doing is spending all of their money and providing fake statements. He is able to keep paying withdrawals because he is constantly recruiting new suckers, just enough to cover what people are withdrawing. Eventually, people get suspicious, too many try to withdraw their money at once, and he flees the country. This is a Ponzi scheme, named after the Italian con artist Charles Ponzi, who fleeced people in this way. We will call the Ponzi scheme scenario C.

Notice that there are similarities and differences between our three scenarios. A similarity is that there is a fund that some people are paying into while others are being paid. Another similarity is that all three are potentially unstable. If, in Scenario A (company pension), employees start living a very long time in retirement, the amount of money in the pension fund might not be able to cover the promised benefits, necessitating an adjustment of the contributions from the next generation of workers so there is enough in the fund to cover obligations. Or if, in Scenario B (middle school arcade money insurance), one of the kids might be so unruly that his parents are suspending his allowance every other week, requiring an adjustment of the rules for payouts or contributions in order to keep the fund sustainable. Scenario C (Ponzi scheme) is the most unstable of all, because it depends on an elaborate fraud, on fake accounting that disguises the fact nobody has the amount of money that they are being told they have. It can only last until people try to actually use the money they supposedly have. But scenarios A and B could also collapse if they are not managed well.

We can see that despite the commonalities (pool of money, potential for collapse), there are fundamental differences between scenarios A and B and scenario C. The first two are legitimate ways for people to pool and distribute money, and they can work just fine at accomplishing their intended purpose. The third is a fraud in which people’s money is being stolen. The difference is more important than the similarities.

I have laboriously laid out these examples in the hopes that we can better understand why Social Security can be made to look like a “Ponzi scheme” but isn’t like one at all. “Social Security is the biggest Ponzi scheme of all time,” said Musk. “People pay into Social Security, and the money goes out of Social Security immediately. But the obligation for Social Security is your entire retirement career.” Now, it’s true that in an insurance system, the incoming payments from new people might be used to fund outgoing payments to people who were already part of the system. But that’s not what makes a Ponzi scheme a Ponzi scheme. Musk, not for the first time, doesn’t know what he’s talking about.  

One of the reasons Social Security can be made to seem like a Ponzi scheme is that people may misunderstand how it works. People might think that Social Security saves their money over time, and then when they retire it pays “their” money back. That is not how it works. It’s not like a savings account. The money I pay in is not saved up for me, it’s paid out to today’s beneficiaries. When I retire, my benefits will be paid by the money coming in from the next generation of workers. Discovering this fact can make people think Social Security is Ponzi-like, because in a Ponzi scheme the new customers pay for the fake returns of the old customers. 

But again, a Ponzi scheme is a fraud in which the returns are fake. There is nothing fake about Social Security. As long as enough money is in the pool to pay out the beneficiaries, the operation is sustainable, and perfectly honest. The only reason it matters that retirees do not pay for their own benefits, but depend on the payments of the next generation of workers, is that if there isn’t a next generation of workers, we do in fact have a problem. But fortunately, there is every reason to believe that human beings will continue to exist, work, and pay Social Security taxes.

Now, what Musk and others who claim Social Security is a “scam” or in “crisis” say is that in the future, there will not be enough workers per retiree to pay the promised benefits. Musk says:

“If you look at the future obligations of Social Security, it far exceeds the tax revenue… There's our present-day debt, but then there's our future obligations… So, when you look at the future obligations of Social Security, the actual national debt is like double what people think it is because of future obligations…. Basically, people are living way longer than expected, and there are fewer babies being born, so you have more people who are retired and that live for a long time and get retirement payments… However bad the financial situation is right now for the federal government, it'll be much worse in the future.”

But while he’s trying to get you to think this is a major problem or some deep fundamental flaw with the architecture of Social Security, it isn’t. Every insurance plan has to make adjustments over time. If there are a lot of wildfires burning down houses, a company selling fire insurance might have to raise premiums in order to sustain itself (and its profits, but for simplicity’s sake let’s think about not-for-profit insurance plans right now). The increased premiums might be small, but without them the program would go bankrupt. That doesn’t mean, however, that we’d be justified in saying that fire insurance plans are a “Ponzi scheme” destined to go bankrupt. 

The adjustments needed to make Social Security sustainable in the long term are minor. Yes, people are living longer and having fewer babies. That means there ultimately has to be some kind of adjustment to either how much is being paid in, how much is being paid out, or both. Republicans want to cut benefits. Defenders of Social Security, instead, want to raise the money going into it by increasing taxes paid by the wealthy. The amount of taxes that would need to be raised in order to make Social Security solvent is negligible (the Social Security Administration has estimated that “increase in the combined payroll tax rate from 12.4 percent to 14.4 percent” to make the program sustainable for the next 75 years). As Dean Baker and Mark Weisbrot put it in the introduction to 1999’s Social Security: The Phony Crisis: 

“The only real threat to Social Security comes not from any fiscal or demographic constraints but from the political assaults on the program by would-be ‘reformers.’ If not for these attacks, the probability that Social Security ‘will not be there’ when anyone who is alive today retires would be about the same as the odds that the U.S. government will not be there.”

Of course, in the 25 years since this was written, the chances that the U.S. government itself someday “may not be there” could conceivably have gone up. Musk is certainly trying to make sure as little of it remains as possible. But the point remains. The theory behind Social Security is sound. It is not at all like an unsustainable con, although it’s also not like a savings account. It can easily be sustained indefinitely, with some minor adjustments to ensure that enough money is coming in to keep it going. (It is also the case that even the need to keep enough money flowing in is artificial. As Stephanie Kelton explains, the restrictions on Social Security’s ability to pay out are created by a legal choice, not an actual financial constraint facing the U.S. government, which could keep paying benefits even when Social Security’s funding “runs out” if it was authorized by Congress to do so.) Beware the rhetoric of those who describe it as in a “crisis” or being a scam. They either do not understand the fundamentals of how it works or they are deliberately trying to deceive you. (I cannot say for certain whether Musk is knowledgeable enough to understand the basics and is lying or simply cannot wrap his head around the basic way an old age insurance program works.) 

As Alex Lawson of Social Security Works explained to me, the right has been trying to destroy Social Security since its inception. This is for a few reasons. First, a lot of vultures stand to benefit from privatization, just as the privatized “Medicare Advantage” program has enriched insurers like UnitedHealth. Second, the right, believing that individuals should be responsible for their own fates, has an ideological opposition to government social welfare programs—even if this results in a bunch of old people being poor. They see Social Security as an offensive “Big Government” intrusion into the free market, something that compels people to put money into a retirement program whether they want to or not. The problem is that most of the public doesn’t share this hatred for the concept behind Social Security, and the program is overwhelmingly popular. Because they have failed to win the ideological argument, the right must therefore convince the public of a different argument: that the program is collapsing and doomed and can only be “saved” through major benefit cuts, which will be stated as the euphemism of “raising the retirement age.”

Hence the propaganda about unsustainability and Ponzi schemes. This can be effective because if you don’t know much about how Social Security works, it’s easy to be convinced that there’s something fishy about its payment structure or that it is heading for some dire financial apocalypse. But this is not the case. Baker and Weisbrot are right that the threats to Social Security come from those who say they are trying to “save” it from a crisis. We need to have a clear understanding of what is going on so that we can fight to save a program that works just fine and can easily be made to continue providing retirement benefits to every subsequent generation of Americans, ideally ensuring that nobody has to endure old age in poverty.