Some free-market economists, such as Thomas Sowell have argued that national social security systems, such as the Social Security system in the United States and the National insurance system in the United Kingdom, are actually large-scale Ponzi schemes.

Sowell and others point out that, under these national systems, incoming payments, made up of taxes and/or other kinds of non-voluntary contributions, are neither saved nor invested. Instead, current contributions (from one set of individuals, due benefits at a later time) are used to pay for current benefits (to another set of individuals).

Sowell and others claim that this "pay-as-you-go" system has begun to show its inherent flaws as North American demographics trend toward more pensioners and fewer workers, because of declining birth rates and increasing life expectancy.

Retirement programs run by national governments, though they involve the taxes paid in by workers being redistributed to pensioners, nevertheless differ in a number of basic features that are usually found in Ponzi schemes, but are not fundamental to them:

• Retirement systems, like Social Security, are openly declared for what they are. In a genuine Ponzi scheme, the perpetrators falsely claim that there is some business that generates the promised revenues. In Social Security, people know where the money comes from, and actuaries supply written predictions of future cash in-flows and out-flows.

• Retirement systems promise a stipend to the country's retired persons, not the quick and exorbitant profits to current investors that Ponzi schemes invariably offer.

• Retirement systems rely on the taxing power of the state to ensure continuous funding. In practice, this taxing power has been used primarily for dedicated revenues (taxes), although in theory general tax revenues could be used to supplement worker payments into the systems. (Historically in the U.S., Social Security has almost always been in surplus, so this has never been an issue.) If the political process were used to raise required contributions via retirement taxes, or to reduce benefits (including raising the retirement age), either across the board or just for the better-off, there would certainly be opposition from those who would pay more or get less, but politicians have only those two choices (plus borrowing) if revenues are inadequate.

• In the long run, retirement systems pay out an approximately equal amount to what was paid in, per contributor, plus interest. In the short run, pension surpluses can be used to cover a government's current general-revenue shortfall, as has been happening in the United States since Social Security contribution rates were increased in 1983.

• Retirement systems are in many ways insurance rather than investment systems. A person who dies before retirement gets no money back (regardless of what he/she paid in). Someone who lives to a very old age continues to get payments regardless of the amount of money he/she has paid in. And someone disabled, even at a relatively young age (well before he/she can make significant payments into the system, or have significant private investments), still receives payments until the end of his/her life. Due to this, the typical retiree who does not become disabled early sees a lower rate of return than the risk free rate.

• Unlike a Ponzi scheme, government receipts (taxes) and payouts (entitlements) can be calculated quite accurately in the short term (five to ten years), and predicted (with a range of assumptions) for periods beyond that timeframe. A sudden collapse is therefore unlikely.

The U.S. Social Security Administration provides the following analysis of this "Ponzi scheme" charge as applied to a pay-as-you-go system like Social Security:

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go insurance programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. So we could [imagine] that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary. (There does not have to be precisely the same number of workers and beneficiaries at a given time--there just needs to be a stable relationship between the two.) As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.

If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security). During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems.