Elon Musk has been on a mission to reduce government waste through the Department of Government Efficiency (DOGE). As of April 18, the agency estimates that it has saved $155 billion in total.
And Musk’s recent comments on the “Joe Rogan Experience” suggest the age of radical reform is just getting started. The DOGE leader said, “ Social Security is the biggest Ponzi scheme of all time.”
Social Security recipients and people who are a few years away from the program may feel anxious about Musk’s comments. Is the tech billionaire spot on, or is Social Security a financially sound program?
How Social Security Works
Social Security converts wages from workers into retirement income for people who have claimed their Social Security benefits. The idea is that a 30-year-old who pays $4,000 into Social Security will receive benefits from the next generation. Meanwhile, the $4,000 payment goes to a retiree who has opted to collect their Social Security paychecks.
The core promise of Social Security is that if you pay into the system, the next generation’s taxes will eventually provide you with income when you are retired.
What Is a Ponzi Scheme?
A Ponzi scheme is a type of investment fraud . People are convinced to put their money into an investment that does not actually exist, and their returns are funded by later investors. A constant influx of new investors — and new money — keeps the scheme afloat, but when investors choose to cash out or new investors stop coming in, the scheme collapses.
Using this definition alone, Social Security may appear to be a Ponzi scheme, but there are some important differences.
How Social Security Is Different From a Ponzi Scheme
One key difference between Social Security and a Ponzi scheme is clarity: Ponzi schemes use unrealistic returns as a way to attract capital, while Social Security payouts are more realistic. Low-income households tend to get more out of Social Security than they put in, while high-income households usually get less out of Social Security than what they put into the system.
The Social Security Administration (SSA) also publishes updates on the program’s finances and how long its funds are expected to last — transparency you won’t get from a Ponzi scheme.
The federal government also has ways to address fiscal shortages in the program, such as raising taxes or printing more money, which could increase inflation. While neither of these outcomes seems ideal for consumers, action can be taken. A Ponzi scheme has no such options, nor would it use them if it could. After all, the point of a Ponzi scheme isn’t the payouts — it’s enriching those who started it.
Social Security Is Struggling
Although the SSA isn’t promising outlandish returns, it still seems a house of cards that may endure the same eventual failure as a Ponzi scheme.
Census data shows that the United States had a population of 132 million people in 1940, five years after President Franklin D. Roosevelt signed the Social Security Act. The 2020 Census indicated that the country had a population of 331 million people. Meanwhile, U.S. fertility rates have been below the replacement level — meaning the rate at which the population would replace itself — since the Great Recession, and fertility rates sank to 1.64 in 2020, as reported by The Harvard Gazette .
Fewer people paying into the system would mean lower payouts for those who already paid in and the possible failure of the system if no action is taken to bolster it, which may be Musk’s meaning in calling Social Security a Ponzi scheme.
Other Countries Have Programs Like Social Security
One argument about Social Security not being a Ponzi scheme is that all of the other countries are doing it. However, other countries are also facing long-term sustainability issues with their retirement programs.
South Korea, China, the U.K. and Germany are among the countries that have pension programs similar to Social Security in the U.S., and they are all facing eventual insolvency as low fertility rates become normal and populations age.
Is Elon Musk right to call Social Security a Ponzi scheme? They share some similarities, but have one major difference: A Ponzi scheme is intended to defraud its participants, while Social Security is intended to support them — though, admittedly, its future does not seem stable.
