Is Social Security a Ponzi scheme? Fact-checking Elon Musk

In an interview with podcaster Joe Rogan, billionaire businessman and White House adviser Elon Musk resurrected a term that Social Security critics have sometimes used to describe the program, calling it a Ponzi scheme. 

During the three-hour Feb. 28 appearance, Musk said, "Social Security is the biggest Ponzi scheme of all time."

Critics of President Donald Trump and Musk, a White House adviser, used Musk’s comment as evidence that Trump was looking to cut Social Security, something that Trump repeatedly said he would not do in his second term. 

Musk is not the first person to make this comparison. In 2011, PolitiFact evaluated a similar statement from former Texas Gov. Rick Perry. At the time, we noted that a half-dozen left-of-center columnists also called Social Security a Ponzi scheme. However, the statement is inaccurate, as we concluded about Perry’s comment and other times. 

Although Social Security and Ponzi schemes have some superficial similarities, experts told PolitiFact that crucial differences undercut the comparison.

"Social Security is a transparent, legally mandated, government program that can remain solvent through adjustments to both funds flowing into the system and flowing out of the system," said Eric R. Brisker, finance department chair of the University of Akron’s College of Business.

We contacted the White House to ask if Musk wanted to comment, but received no reply.

The term originated with Charles Ponzi, a Boston swindler who conned investors out of millions in 1920 by promising returns of up to 100% in 90 days on investments in foreign postal coupons. After first-round investors harvested those profits, others flocked to Ponzi, unaware that his "profits" consisted of money paid in by other investors.

The continuous flow of new investors Ponzi needed was unsustainable. A Ponzi scheme must keep signing up more and more investors to pay off earlier members, but sooner or later, getting large numbers of new investors becomes impossible. In Ponzi’s case, it failed after about 200 days.

Charles Ponzi in 1935. (AP)

Some Americans may envision Social Security as a program where their payroll tax dollars are held for them, awaiting the time they retire and begin drawing on those dollars for their own benefits. But that’s not how it works. 

The Social Security system, which started in 1935, works on a "pay-as-you-go" basis that transfers current workers’ payroll tax payments to people who are already retired.

"The vast majority of those taxes have always been paid out immediately from the young to the old, with the promise that tomorrow’s old will in turn receive benefits covered by the taxes paid by tomorrow’s young," said Eugene Steuerle, a fellow and Social Security specialist at the Urban Institute think tank. 

This structure has some similarities to how new Ponzi scheme investors provide payouts to earlier investors.

"If there are no longer enough workers to provide enough payroll tax contributions to pay out benefits to retired workers, then the system would fail similar to how a Ponzi scheme would fail in the same manner," Brisker said.

This hasn’t happened to Social Security, though the forecast isn’t good. American life expectancy has increased since Social Security’s creation, and so has the number of eligible recipients. As workers of the baby boom generation (born from 1946 to 1964) enter retirement, fewer workers are paying into the system. At the current pace, Social Security’s trust funds won’t be able to pay 100% of benefits by 2035, the 2024 Social Security Trustees Report said. The trustees have issued similar warnings for more than a decade. 

Finance and Social Security experts listed a half-dozen key differences between the government’s program for seniors and Ponzi schemes.

No. 1: Social Security is not fraudulent. 

A Ponzi scheme "is a fraud intended to mislead investors," said Christina C. Benson, an Elon University associate professor of business law. "Social Security is a legally mandated system that has been in place since the 1930s to serve as a critically important social safety net that allows working Americans to save towards retirement."

In fact, "nearly every major developed country in the world has a similar safety net and retirement system in place," Benson said.

No. 2: Social Security’s operators do not take a cut. 

Unlike with Ponzi schemes, Social Security is not a profit-generating  operation, and the officials who run it do not "cream off money for themselves," Steuerle said.

No. 3: Social Security is operated in the open. 

"Social Security is a transparent, government-run program with clear funding mechanisms, compared to Ponzi schemes, which are fraudulent and based on deception," Brisker said. 

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No. 4: Social Security has built-in oversight.

Unlike a Ponzi scheme, Social Security has "many layers of oversight, regular auditing, regulation, and legal and financial systems in place to ensure accuracy and transparency," Benson said. 

Although Social Security has been found to have made improper payments, which generally have amounted to around 1% of outlays, these problems were identified because of oversight mechanisms, including the Social Security Administration’s inspector general’s office, the Government Accountability Office, congressional oversight committees, and the boards of trustees of the Social Security trust funds.

No. 5: Social Security offers realistic returns. 

Social Security faces a stiff demographic challenge. But its goal is to provide basic income replacement, not to generate get-rich-quick returns.

"Social Security was founded on the idea of providing a minimum sustainability of retirement income," Brisker said. "It never promised unrealistically high gains, unlike Ponzi schemes."

No. 6: If financially stressed, Social Security is able to adjust its funding or benefit streams. 

Unlike a Ponzi scheme, a fiscal imbalance in Social Security can be corrected. 

"The adjustments could be very painful, including benefit reductions and tax increases, but they can be done to keep the system solvent," Brisker said. "Ponzi Schemes are fraudulent by design and will eventually fail, with no alternatives to keeping them solvent."

In addition, beneficiaries can't demand to be paid a "balance" in their "account" immediately, said Rick Antle, a Yale School of Management accounting professor. "So there can't be a bank run on Social Security, and problems can be worked out over time."

Musk said, "Social Security is the biggest Ponzi scheme of all time."

There are some superficial similarities between the two, and given demographic trends, Social Security will need an overhaul in the coming decade to keep benefits flowing.

But experts say the similarities are undercut by several crucial differences.

Social Security is not fraudulent, is transparent, has multiple layers of oversight and doesn’t promise unrealistic returns. Congress can act to address the program’s fiscal imbalance.

We rate the statement False.