Is MLM a Scam Like a Ponzi Scheme?

What is a Ponzi scheme and is MLM a similar scam?

Ponzi Scheme

The word Ponzi comes from Charles Ponzi who made this type of scheme well-known.


A Ponzi scheme is an illegal investment scheme that involves paying returns to investors out of the money paid in by later investors, rather than from net revenues generated by any real business. According to the FTC (Federal Trade Commission), “…there is an expression that nicely summarizes this scheme: It’s called “stealing from Peter to pay Paul.”

Charles Ponzi’s basic idea was that he would take money from person #1 and tell him that he would give him a high interest on his money. When person #2 gave Ponzi money, Ponzi would take part of that money and give it to person #1 – thereby fulfilling his obligation to give him a high interest. When person #3 came in, Ponzi would take some of that money and pay off person #2 – thereby fulfilling his obligation. If there were no #4, then Ponzi could not fulfill his obligations to #3.

The government claims that these schemes run out of people and collapse.

Charles Ponzi learned this scheme while working at a bank in Canada. He noticed that the bank “knew” that at no time would everyone walk into the bank and withdraw all their money simultaneously. Therefore, the bank could loan out other people’s money to potential borrowers. Banks still operate on this fundamental principle today.

Personally I believe that banks operate an “organized” Ponzi scheme:

When a bank pays you interest on the money you have deposited with them, where do they get that interest? Perhaps from money they’ve earned in the stock market or business investments, as well as from other people’s money. Isn’t that “borrowing” from Peter to pay Paul?” 😉

What would happen if people stopped putting money into banks? Would they collapse?

A Ponzi scheme is different from a Pyramid scheme in that in a Ponzi scheme the money goes back to one person (such as Charles Ponzi), hence the person at the top is making all the money. By contrast, in a pyramid scheme, each “level” makes money.

The Federal Trade Commission states that what’s wrong with a Ponzi Scheme is that there’s no “real” business attached to it and, “When the scheme collapses, most investors find themselves at the bottom, unable to recoup their losses.” (Debra Valentine, General Counsel for the U.S. FEDERAL TRADE COMMISSION)

MLM is not a Ponzi scheme because it has a real product and it is a real business. Make sure you review: How to evaluate an MLM company.

Is MLM a Ponzi SchemeAdditional thoughts on the subject…

Based on the way the FTC defines a Ponzi scheme, the US Social Security system is just such a scheme. The Social Security Administration calls it “Pay-As-You-Go.”

Here is the Social Security Administration’s response to this claim:

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.

Obviously Social Security is “legal” because the government makes the laws. If you have a hard time believing that the government could run a scheme, read this. But it certainly seems like they are borrowing from Peter to pay Paul. Their analogy of a pipeline seems a whole lot like what Charles Ponzi was doing. …”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… Perhaps I’m just missing something.

Now, looking at it historically, I think Social Security did a great job at helping to break the Great Depression. But it appears to me (and this is just my opinion) that the government used the concept that Charles Ponzi was arrested for.

The largest proof that it operates similar to a Ponzi scheme is that it appears to have “not worked!” The current talk coming out of the government is that they are going to drop Social Security because it will be bankrupt in a few years. Meaning, it’s going to collapse. The reason for this, they claim, is because there are not enough new people paying into the scheme to pay those who’ve been contributing all their working lives. So evidently there are not enough Peters to pay Pauls.

Allow me to restate the comment from the FTC: “Every pyramid or Ponzi scheme collapses…. When the scheme collapses, most investors find themselves at the bottom, unable to recoup their losses.” (Debra Valentine, General Counsel for the U.S. FEDERAL TRADE COMMISSION)

No matter how one twists the details, the facts are that at a minimum some people in the government have used Social Security to run a fraud. In 1983 the government predicted this “demographic change” of the Baby Boomers would occur and bankrupt social security. To prevent it from happening, Congress raised payroll taxes and reduced the benefits given to retirees (Peter pays more, Paul gets less). As a result, the government collected more money, $667 billion in excess was brought in between 1983 and 2001, and the government spent it! The definition of fraud it to trick someone. So is Social Security collapsing because there are not enough people paying into the scheme, or is it because of mismanagement of funds?

Personally, I’ve been paying into the Social Security scheme for 27 years. I don’t think I will be able to recoup my losses. Hopefully you “got in at the beginning” and will get more out of it than me.

MLM is not a Ponzi scheme because it has a real product and it is real business. Make sure you review: How to evaluate an MLM company. If you’ve already read that, go to the recommended next page: Is MLM a scam like a chain Letter?

Tim Sales

About the Author

Tim Sales

Tim’s experience in building his own downline of 56,000 network marketers helped him develop his signature training series. A public relations ambassador for the network marketing industry, Tim has also dedicated his time to debunking the false information spread about the network marketing industry.

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Anne Long

This is an insightful article that should dispel all concerns about MLM being a Ponzi scheme. Thank you for your excellent information. I love MLM and I’ve made my living in this industry for years.

Patti Roney

I LOVE this article! We need to uncover truth and be realistic about what we’ve been accepting and are willing to accept. My success in MLM has been very much due to the integrity of my company in this fabulous industry! Others need to be able to get a grasp on this concept!

Francesca Monte

It takes an open mind to be a watchful citizen. This article helps people understand and helps them make better decisions for their life.

Steve Stearns

Tim, Thanks for making us think a little more carefully about some other aspects of our economy. Let’s see, MLM or Social Security, which can insure my retirement?

Joe Kresser

And now you know why our Government “Leaders” are not on the Social Security System. Good information Joe K

Kelly S.

Great way to simplify a complex concept!

Valencia Burton

Wow! Nice to know where that came from!
Thank you Tim.

Gavin Chapman

By design, scams take from Peter to pay Paul… and Peter has very slim chance – if any – of receiving any form of value back in return. Some scams are even legalised by government (gasp!) However, to be legal, an MLM company just cannot be designed like that – as a scam. A rule of thumb when considering an MLM company – in this order of priority – is to check whether there is a product and/or a service, whether customers get ‘value’ – particularly those who are not distributors – whether there are many times more customers than distributors (big clues can be whether there’s a product or a service you would value even if you were never to join as a distributor – and whether ‘getting customers’ is emphasised as the basis of your remuneration as a distributor) and, last… Are the distributors being paid? Don’t hand money over to join without substance in return and if there’s hype such as ‘quick and easy’, or ‘we’ll do the work, you collect the money’ – hold on tight to your cheque book or credit card!
Also… “Is this scheme really designed to make peoples’ (i.e. all customers’ and all distributors’) lives better?” is an easily remembered test. Thanks to Tim for the clever clarity of that one.

Chuck P., Florida

Our government had better elevate Charles Ponzi to “Sainthood” after the scamming the American people with the social security system.

Rolf Hefti

Tim’s definitely thinking out of the box. And he’s not afraid to do it, and express it.

Lauren Blaine

Thanks, Tim. I love the derivations of words and knowing where things originated. Over the years of doing multi-level, I would have this question asked of me (Is it a Ponzi scheme) and I had to tell them that I didn’t know what that was.

Guess it’s about time I cleared the word, huh? 🙂


You are missing something here. You took the definition of a Ponzi scheme from a simplified phrase: borrow from Peter to pay Paul. To be more accurate, it should be borrow from Peter and Mary to pay Paul, because the problem with Ponzi schemes is that the debt increases exponentially with each new member. If Paul wants high interest, we will have to borrow more money to pay him than he paid us. So we will borrow from perhaps 2 people. Now there is twice as much debt.

If the system pays out the same amount that it requires as an investment, then it is sustainable.

If any of you have passed Algebra, you should know that geometric series with a factor less than one converge. There is a cap basically. While those with a factor greater than one diverge, and increase exponentially to infinity. If you are paying out the same as you’re taking in, as with social security, it is sustainable. However if each new person who joins a system for a price of $100 expects even a return of $200, we have a problem. Each new person requires 2 people to join to be payed off, so the system eventually fails.


thanks for the insight…it is an eyeopening…being vigilant and curious…thanks…

Ryan Hilton

One thing I’d like to mention is that perhaps the social security system is a little different than a Ponzi scheme in that with the Ponzi, he has to keep finding investors, whereas with social security, there will always be working citizens, and since the government makes the laws they can always make people pay into the system. Perhaps it’s more stable because they can always count on people paying in, since it’s the law. (If indeed it can be called stable).


In my opinion every distribution system is a pyramid whether it is MLM or Traditional Business. But the difference in both of these systems is that in MLM app. 25% persons will earn as app. 50% are in last but in traditional business only 5% people will earn from the 95% people consumption.

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