Difference Between the Ponzi Scheme and Social Security

Introduction

We're all aware of the monetary scams that have been present forever now. Businesses have existed since forever, and so have false schemes and scams.

In this continuously evolving world, we need new measures of safety and protection for us to be safe, especially when it comes to one of the most sought-after things - Money (kaching!). In this article, we'd like to shed some light on two subjects related to money, which may not seem interconnected but share a few closely similar traits - Social Security and the Ponzi Scheme. We will retain our focus on highlighting the key differences between the two. 

Ponzi Scheme vs. Social Security

Ponzi schemes and social security do not seem quite related to each other and are not. Yet, the two share certain similar traits, and we must educate ourselves to distinguish between their functioning.

A Ponzi scheme is a fraudulent investment scam. It involves paying returns to old investors with the money acquired from investments made by new investors.

Social security is a system established to protect households or individuals belonging to the vulnerable population in a society.

More than half of the world's population lacks social security protection of any kind.

Social Security has faced criticism, calling it illegitimate, fraudulent, and another Ponzi scheme.

One of the reasons why some people find it illegitimate is that its proper functioning is affected when one of the generations is less in number than the other. For instance, the transfer system can be affected when there are more boomers than the young generation.

Difference Between the Ponzi Scheme and Social Security in Tabular Form

Parameters	Ponzi Scheme	Social Security
Solvency	Ponzi schemes are not solvent.	It is not obligatory to participate; all the participants voluntarily get involved.
Voluntary participation	Ponzi scheme promoters promise very high returns in a short time.	Funds are invested legitimately
Fund are invested legitimately	As Ponzi schemes are just fraudulent, the funds they receive are not legitimately invested.	Social security systems are legitimate as they’re overseen by the government of a county.
Enormous returns promised	Ponzi scheme promoters promise very high returns and in a short time.	Returns or benefits of a social security system may not be very high, but one is sure to receive them.
Withdrawals	Withdrawals are usually discouraged in a Ponzi scheme.	Withdrawals in social security are also often discouraged, as it is a legitimate investment for one’s own future.

What is a Ponzi Scheme?

As mentioned above, a Ponzi scheme involves fraudulent investment. It has always been quite a prevalent scam. Ponzi schemes owe their name to an infamous con artist, Charles Ponzi.

Under a Ponzi scheme, its organizers take funds from voluntary participants and assure you that they'll invest it. They entice potential investors with the promise of high returns on their investments; instead, they pay their previous investors back with the funds acquired and often keep some for themselves.

Ponzi schemes hardly have any legitimate earnings. In order to survive, a persistent flow of new funds is a must. A Ponzi scheme is insolvent as it usually ends with the organizers' absconding or due to a lack of availability of new investments.

The reason why a lot of people fell for such Ponzi schemes before was due to the absence of awareness and education about investments.

 People believed that investments were only meant for businessmen, and laymen could not evaluate all the math that came with it. The present-day circumstances are slightly better. Internet and technology have facilitated laymen to get their heads around investing. People are exposed to ample information about funds, investments, markets, etc., and even have the facility to make direct investments, nearly eliminating the need for middlemen. However, this does not imply that Ponzi schemes are history now. They persist as they're sometimes difficult to identify. The best way to avoid getting into a Ponzi scheme is to not yearn for outsized returns and to be careful. 

Some peculiarities of Ponzi schemes one must look out for before committing are:

• There might be unregistered investments with state regulators (or other concerned authorities). A registered investment gives insight into a company's management, services, finances, etc.
• They promise high returns with negligible or no risk. Each investment has some level of risk attached to it. No investment guarantees high returns, especially the ones with a considerable amount of funds.
• While all investment professionals are required to be registered or licensed, Ponzi schemes involve unlicensed organizers.
• Complex or secretive strategies that are hard to make sense of are another sign to be cautious before making an investment.
• Paperwork issues, incorrect account statements, issues with receiving payment, or very consistent returns are more signs to watch out for.

Examples Of Ponzi schemes

1. Charles Ponzi Scam ($15 million): This infamous scam was unsurfaced in 1920. He was said to have made an estimated $15 million within eight months by persuading investors with a promise to make them rich quickly.
2. Bernard Madoff ($20 billion): Madoff is said to have fabricated the largest Ponzi scheme in history, conning hundreds of investors and lenders of about $20 billion! He got arrested in 2008.
3. R. Allen Stanford ($7 billion): Stanford sculpted a 20-year scam with investments from more than 30,000 lenders hailing from about 100 countries.
4. Tom Petters ($3.7 billion): Tom Petters was a businessman accused of stealing from several hedge funds and missionaries.

What is Social Security?

Social Security is a system established by countries across the world to provide social protection to households and individuals against multiple issues.

Social security ensures access to adequate healthcare facilities and guarantees income security chiefly in old age, sickness, unemployment, work injury, loss of a breadwinner, maternity, etc.

Social security benefits might be available in cash or kind for people with disabilities or sickness, retirement, unemployment, legal aid, rehabilitation, etc.

Social Security acquires its funds through payroll taxes. This is paid by employers and current workers in equal amounts. Those who are self-employed are required to pay both the above-mentioned taxes.

Social Security also gathers its funds through income tax, which retirees with high benefits are entitled to pay. Aside from these, social security also acquires funds from the interest the government pays for various bonds, funds, etc.

Children can also benefit from social security schemes to cope with their educational expenditures. One such program in India is the 'Integrated Child Development Program'.

Social securities around the world are identified by the following criteria established by the International Labour Organization –

• A security system must serve the objective of granting medical assistance and maintaining income in case of its inadvertent loss to people with responsibilities of their families.
• Must be established by legislative bodies that impose certain obligations on the various bodies administering the system
• The system must be orchestrated by a public, semipublic, and autonomous body.

A social security system can comprise multiple programs such as social insurance programs, mutual fund schemes, universal programs, national provident funds, and various other market & investment-associated measures. All such programs or schemes under social security are run per the laws and regulations of that specific country. Unlike a Ponzi scheme, social security is not fraudential. All investments and funds deposited in it are legitimate and safeguarded by the legislative authorities of a country.

Types of Social Security Benefits

1. Disability benefits: These benefits are for individuals with sickness or a permanent condition that restricts them from taking up any sort of employment for almost their entire lives. An individual eligible for disability benefits is paid the same amount they would get at their full retirement age.
2. Retirement benefits: The retirement benefits one receives are based on the age at which they first take them. One gets 70% of what they're eligible for at the age of 62, 100% if they wait till the age of 66 or 67, and an escalated benefit of 125% by waiting till the age of 70.
3. Survivor's benefits: Survivor's benefits are meant for people who used to depend on a deceased family member who paid for social security. Minor children, children who were diagnosed with a disability before turning 22. widows(ers) with children aged below 16, widows(ers) over the age of 60 or 50, who became disabled within 7 years of their partner's demise.
4. Auxiliary Benefits: Retirees' family or dependents, so to say, are eligible for monthly assistance in certain cases which comprise having minor biological or adopted children; adults who were diagnosed with a disability before they turned 22; and current or former spouses aged 62 or above. The upper limit of monthly benefits to a spouse is 50% of the retired spouse.
5. Supplemental Security Income:  Supplemental Security Income is not exactly a social security program, even though it has 'security' in the name. It's a welfare program for the population that cannot reap the social security benefits due to insufficient work history. Low-income families with disabled children receive a monthly benefit for each child who is dependent on household income.
6. Social Security Retirement: The eligibility criteria to receive a full monthly benefit without any reductions is the Social Security full retirement age (is it the age at which one becomes eligible to claim the benefits). One can choose to start claiming benefits from the age of 62 as well, but with a reduced benefit amount. A person can acquire extra credit on the benefit amount if they prefer to wait to claim the benefits beyond the full retirement age.
7. Some social security benefits also exist in kind. A few examples would be - Health schemes, educational schemes, etc.

Main Differences Between Ponzi Schemes and Social Security in Points

Many critics believe that social security is similar to a Ponzi scheme. This is, however, not true. Social security is a pay-as-you-go process that pays current beneficiaries with the taxes collected from current workers. One might jump to conclusions with this one trait that a Ponzi scheme and social security share but are considerably different from each other.

• Ponzi schemes do not have any legitimate or licensed organizers (or professional investors). Social Security, on the other hand, is administered by legislative bodies (or other authoritative bodies varying from country to country).
• Organizers of a Ponzi scheme entice investors, allowing for voluntary participation. Participation in social security is involuntary as it is meant to ensure the welfare of the participants.
• All the funds acquired in a Ponzi scheme are either invested illegitimately (or not invested at all), while (government)social security is administered by lawful authorities. Therefore, funds deposited in social securities are safe.
• Ponzi schemes promise enormous returns on investments. Social securities provide returns to all the participants even though they're not massive.
• Social Security benefits can be claimed from the age of 62. Those involved are encouraged to delay claiming the benefits, as one is expected to get higher returns later. Ponzi scheme facilitators discourage the redemption of funds to participants, usually by manipulation.

Conclusion

After a thorough read on the two subjects now, it is safe to say that Social Security is a well-established system directed at providing protection and adequate benefits to those associated with it. A Ponzi scheme, as we know it, is just a scam fabricated by illegitimate investors or organizers with the intent of robbing people of their money and satisfying their agenda. Despite the immense knowledge available to us in the present day, scams and fraudulent schemes persist. Investment is a great way to expand our wealth, but it always comes with a risk. We must carefully analyze every aspect possible before investing anywhere, whether it's a government-backed scheme or a private company's investment opportunity. Understanding that every investment is a risk, one must responsibly and carefully invest after proper research instead of being kindled by greed.  

References

• https://www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme
• https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_067588.pdf
• https://www.forbes.com/advisor/retirement/what-is-social-security/
• https://edition.cnn.com/2021/04/24/business/famous-ponzi-schemes-generation-hustle/index.html