Social Security Is a Legal Ponzi Scheme

[Muda69]

https://www.cato.org/blog/truth-about-social-security-legal-ponzi-scheme

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Ida May Fuller, the first person to receive a Social Security check, worked for just three years before receiving her first benefit (in 1940). Over that time, the total taxes deducted from her salary amounted to a mere $24.75. Yet her first monthly check came in at $22.54, almost matching her entire contribution. Over the course of her lifetime, Fuller collected $22,888.92 in Social Security benefits. That’s equivalent to nearly half a million in today’s dollars and about 1,000 times what she had paid in taxes.

Some people continue to believe that Social Security functions as a mandatory savings system. But that’s not how this program works. Unlike a genuine savings account, where individual contributions accumulate and grow over time, Social Security’s structure is far more akin to a classic Ponzi scheme. Early recipients received far more in benefits than they ever paid in, while future generations face escalating costs to sustain the system.

Fuller’s case is a glaring example of how Social Security was never designed as a true savings system. Early beneficiaries, like her, reaped enormous gains because the program relied on payroll taxes from younger, growing workforces to cover payouts. Today’s workers, however, face an increasingly unbalanced equation. They are being asked to pay ever-higher taxes to support a system that offers far less in return than what earlier generations enjoyed.

The math has fundamentally changed. In 1950, there were about 16 workers paying into Social Security for every retiree. Today, that number has dwindled to just 2.7 workers per retiree, and it’s projected to fall further to 2.4 workers per retiree by 2035. As the worker-to-retiree ratio shrinks, the system faces increasing strain. This demographic shift is one of the primary drivers of Social Security’s financing issues. Fewer workers supporting more retirees means higher taxes or reduced benefits—or both—to keep the program afloat.

The required changes are substantial. The Congressional Budget Office (CBO) estimates that the payroll tax would need to immediately increase from 12.4 percent to 16.7 percent to cover the program’s long-term actuarial deficit of more than $25 trillion. In numbers, a median worker earning $61,000 would need to pay an extra $2,600 in payroll taxes, bringing their total payroll tax burden above $10,000. On the flip side, the CBO projects that benefits would need to be cut by 23 percent in 2035 to meet incoming payroll tax revenues.

Another major reason that Social Security is financially unsustainable is because Congress repeatedly expanded benefits. From including spouses and survivors, to indexing initial benefits to wage growth, to adopting automatic cost-of-living adjustments, Congress has a long history of expanding Social Security, especially come election time.

Even Ida May Fuller herself grew concerned about the program’s unsustainable expansion. When Congress proposed yet another benefit increase in 1970, Fuller voiced her opposition. “It’s been raised as far as it ought to go,” she said. “Every time they raise it, they raise the amount taken away from the working people who pay into it and it’s just getting to be too much of a burden.”

Fuller’s warning rings true today. Social Security extracts significant resources from workers while offering them less in return. Most workers would be better off if Social Security didn’t exist and they had saved the money they paid in payroll taxes in accounts that they owned and controlled instead.

Alas, Congress has made millions of Americans largely dependent on Social Security for their retirement income by incentivizing them to work and save less than they otherwise would have. Transitioning away from this unsustainable system will be costly and politically painful. We can begin by reducing the growth of future benefits, increasing the age at which new beneficiaries can claim Social Security, and discontinuing cost-of-living adjustments for wealthier Americans to reduce their benefits slowly over time. Bolder changes would transition the program away from an earnings-related benefit to a poverty-targeted, predictable benefit. Significant benefit changes are necessary to reduce payroll taxes and enable workers to save more in private accounts that they personally own.

It’s time to confront the painful but necessary truth that no matter what story politicians told, Social Security has always been an income transfer program, not a savings system. Today’s Social Security is increasingly burdening future generations with the threats of higher taxes and inflation. A more effective approach would design Social Security as a safety net to prevent senior poverty while empowering workers to have greater control over their retirement security.

....

Agreed.  Guaranteed I can take the earnings the government steals from me via FICA taxes and invest myself it for a higher rate of return than what I'll ever get from an social security check.

 

[Muda69]

Social Security Approaches Its Day of Reckoning

https://reason.com/2024/11/18/social-security-approaches-its-day-of-reckoning/

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Social Security is very popular with Americans. Large majorities of Democrats and Republican like the program and want it to continue with no cuts in benefits, no increase in costs to taxpayers, and no real reforms of any kind. Unfortunately, Social Security is and always has been a scam that is rapidly approaching collapse. Economists point out that something has to give if the program is to avoid catastrophe, and so do the trustees who run Social Security.

 

A Ponzi Scheme With Federal Backing

"Imagine a charismatic salesperson promising sky-high returns to early investors, only to use the money from new investors to pay them off," the Cato Institute's Romina Boccia writes in a new report. "This is the infamous story of Charles Ponzi, whose name became synonymous with fraud. Now, consider the US Social Security system. Current workers' payroll taxes fund the benefits of current retirees, much like how Ponzi's scheme used new money to pay off old promises."

Boccia reminds us that the famous Social Security "trust fund," which many Americans wrongly believe contains money paid into the program to be disbursed at a later date, doesn't really exist. "The trust fund essentially consists of IOUs or promissory notes that represent claims on future tax revenues."

Until 2010, Americans paid more in Social Security taxes than the program paid out in benefits. The extra money wasn't saved but passed on to be spent by the rest of the federal government in return for IOUs. That point passed as the ratio of workers to retirees dropped and seems unlikely to shift back given the country's declining birth rate and aging population. That means the difference between revenues and expenditures is now made up, as it is across the rest of the federal government, by borrowing. As Social Security cashes in those IOUs, the Treasury will borrow an estimated $4.1 trillion plus interest to fund the program between now and 2033. "It's like borrowing money to pay off credit cards," Boccia notes.

What's so special about 2033? That's the year the well of IOUs is expected to start running dry.

"The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report," the Social Security trustees revealed in the most recent annual report. "At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 79 percent of scheduled benefits."

Social Security's Disability Insurance fund is in better financial condition, but also much smaller. If rolled into old-age benefits, "the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2035." That is, it would buy a whole two years.

Americans Admit Reform Is Needed, but They Don't Want It

That said, there are ways to keep Social Security chugging along. Benefits could be lowered, taxes could be raised, the retirement age could be adjusted to reflect our life expectancy (which is longer now than when the program was implemented), or it could be converted to a means-tested welfare program. But good luck implementing any reforms. Americans have some understanding that the program is financially troubled: "Among U.S. nonretirees, 50% expect the Social Security system to pay them a benefit when they retire," according to Gallup. But most still don't want to change anything.

This month, Pew Research found "large majorities of Trump (77%) and Harris supporters (83%) opposed any reductions in the Social Security program." In February, a Redfield & Wilton Strategies survey revealed that 66 percent of Americans agree Social Security needs reforming, but "69 percent of respondents across all age groups opposed cutting benefits to those on Social Security, while 52 percent were against raising the retirement age and 44 percent opposed raising taxes on workers' income." What kind of reform they have in mind is anybody's guess.

FDR's Signature Program Is 'Straight Politics'

That public commitment to an unsustainable program was baked into Social Security from the beginning. According to the Social Security Administration Historian's Office, when then-President Franklin Delano Roosevelt was advised that basing Social Security on payroll taxes was unwise, he replied:

I guess you're right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics.

As a result, Americans feel a personal connection to their Social Security benefits even though they're just goodies funded by general federal revenues and, increasingly, debt. That's especially unfortunate given that most people are better off saving for their own retirements.

You're Better Off Saving for Yourself

"In all but four of the 400 cases" analyzed, "the annual income from saving outstrips the Social Security retirement benefit," according to a 2016 Tax Foundation analysis comparing private savings for old age to the government program. The exceptions were "very lowest income workers," suggesting Social Security would operate best as a form of relief for the poor.

Cato's Boccia proposes that "policymakers should focus on reducing the growing costs of benefits" if they hope to return Social Security to long-term solvency. "This leaves room for benefit reforms that uphold Social Security's original promise to keep seniors out of poverty."

Boccia considers other means of reducing benefits costs, too, including increasing eligibility ages and changing cost-of-living adjustments to more accurately reflect inflation. But it's difficult to escape the fact that most Americans would be better off in retirement if they saved for themselves than by relying on Social Security, even if we don't take into account the program's looming insolvency.

In terms of planning for the future, perhaps the most realistic Americans are those in the best position to do something about it. "Thirty-seven percent of nonretirees between the ages of 30 and 49 believe they will get Social Security benefits, while 61% do not," Gallup noted last year. People in that range are generally established and earn enough to sock some away for retirement. They have time to plan and build nest eggs. They would be in even better shape if freed from part or all of FDR's "straight politics" payroll taxes so they could save more.

"Reforms should prioritize reducing Social Security benefits and their burden on workers," Boccia concludes in her report.

Likewise, Americans should prioritize planning for their own futures rather than relying on a nonexistent "trust fund" made up of nothing but debt and empty promises.

Yep.  I don't plan on the SS Ponzi scheme for any significant percentage of my retirement income.  It's also why I'll probably be working full time until I'm at least 70.

 

[swordfish]

SF feels thankful for listening to my father and others who warned about the inevitability that SS was going to be gone by the time I aged into it (2028).  If there is anything left for me to receive, so be it, but I still plan on retiring and living comfortably at 65 in 2030 unless I think I need something to keep me out of the house and Mrs. SF happy..... 

[Muda69]

Social Security Is Deeply Unfair. The Social Security Fairness Act Won't Fix That.: https://reason.com/2024/12/17/social-security-is-deeply-unfair-the-social-security-fairness-act-wont-fix-that/?itm_source=parsely-api

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Since publishing an article yesterday about the Senate's upcoming vote on a bill to bestow better Social Security benefits on some retired public sector workers, I've received dozens of emails arguing that the current rules governing Social Security are deeply unfair.

I agree with the emailers, but not for the reasons they state.

Still, this seems like a good opportunity to highlight how Social Security works—and why it seems to make so many people angry. The big flaw at the center of the program is that no one has any property right to the money that flows through Social Security, though you would not know that from many of the responses I've received in the past 24 hours. A sampling:

"It is only FAIR we receive our Social Security benefits of which we contributed during our careers," wrote one reader named Rich, who said he was retired from law enforcement. "This is very simple, we are only asking to be treated Fairly."

"In my opinion, this is discriminatory as well as theft from the elderly," added another reader, a retired Federal Aviation Administration employee named Peter.

One former teacher named Vivian described the situation as "the government is outright STEALING from people."

"We are fighting for its repeal and to finally receive what is rightfully ours!" Vivian added.

Every one of those responses (and many others) is rooted in a common misunderstanding of how the Social Security program works on a fundamental level. The tax dollars that flow into Social Security do not belong to the workers who have those funds extracted from paychecks. They belong to the federal government—just like the dollars that fund the Pentagon or the Department of Health and Human Services or any other government program.

Therefore, what is paid out to beneficiaries is not a return on workers' investments, as many people seem to believe. It is a government expenditure, subject to the rules that govern those expenditures.

Since 1983, one of those rules—the Windfall Elimination Provision (WEP)—has curtailed Social Security payments to retirees who worked in the public sector and received a pension. That's true even if those workers also did some work in the private sector, in which case they might have earned some Social Security benefits. Those rules are the crux of the bill the Senate is currently considering.

Is that reduction in government expenditures to those people unfair? One can be sympathetic to the individuals who feel that way, but it's a little bit like saying that I should get a say in NASA's budget just because I paid taxes and some of those tax dollars might have gone to NASA.

Ultimately, these sentiments reveal more about the flaws of Social Security than they do about any notion of fairness.

Indeed, any conversation about the fairness of Social Security has to start by acknowledging how unfair the whole scheme is. Workers aren't given the choice to opt out. Younger, generally poorer workers are currently funding the retirements of older, generally wealthier beneficiaries. Most retirees receive significantly more in Social Security benefits than what they contributed during their careers. Is any of that fair?

The Social Security Fairness Act would increase payments to some retirees—and those retirees unsurprisingly see that as the fair outcome. However, it will cost the average couple $25,000 in lost benefits over the long term by accelerating the program's insolvency, according to an analysis by the Committee for a Responsible Federal Budget. Is that fair?

The big flaw at the center of all this is the simple fact that no one actually owns their Social Security benefits. That's a big part of the reason why people get so worked up about potential changes to the program. It's also why anyone who feels shortchanged in some way has to resort to making these silly arguments about fairness.

Allowing workers greater freedom to save for their own retirement would fix that. You can check your private retirement account anytime you'd like, see exactly how much you have, and not worry about federal policies that say you get more or less depending on what job you've had.

And if the company holding your account tells you one day that it going to return only half your money, you wouldn't argue with them about what was fair. No, you'd haul them into court for stealing from you. There would be an enforceable contract protecting your money.

Unfortunately, that's not how Social Security works. It never has and it never will. Understandably, this stresses people out.

It also creates opportunities for politically powerful special interests to influence the arbitrary rules governing who gets what. When retired public sector workers like Rich, Peter, and Vivian claim the WEP is unfairly reducing their benefits, this is what's really happening: They are looking at how the system worked before WEP was implemented in 1983, comparing that to how the system operates now, and complaining that they are now getting less than they would have under the old system.

That's true, but is it unfair? I don't think so. Like any government spending program, Social Security has arbitrary rules about who gets what and how much. You can dislike those rules and, of course, try to change them—which is exactly what these retired teachers and other public workers are trying to do.

But, then, they should be honest about what's happening. This isn't an attempt to make anything more or less fair. It's just a politically powerful special interest group trying to grab a bigger slice of the pie for its members.

At a recent family gathering one of my spouse's in-laws, who is a public sector employee in a neighboring state, was complaining about this WEP and how it needs to be repealed so he can get SS benefits along with a very generous state government pension.   In his state public sector employees don't contribute to social security,  yet he wants to receive benefits.  The greed is unreal. 

Edited December 18, 2024 by Muda69

[Bobref]

I just need it to last about 15 more years. 😂

[Impartial_Observer]

IO tends to be self sufficient and the last person I would ever want to depend on is the government….. that being said I’m pretty sure I’ve been hearing pretty much all of my working life.