Although it shares a couple of rough similarities with infamous financial scams conducted by the likes of Bernie Madoff and Charles Ponzi, the Social Security program is definitely not a Ponzi Scheme as claimed by some. It makes for a great soundbite and garners instant attention, but it's a fundamental mischaracterization. A Ponzi Scheme is a form of financial fraud that lures investors with a promise of high returns, in many cases, extremely high and way above-market returns. Instead of earning those returns through legitimate investments, the scheme pays earlier investors using money collected from newer ones. Eventually, the model collapses when there aren't enough new participants (suckers) to keep it going, leaving most people with significant losses. Social Security, on the other hand, does not promise high returns, it promises a modest, inflation-adjusted monthly benefit to support retirees, people with disabilities, and surviving family members of deceased workers. The program is fully transparent and participants know exactly where the money is going and know what to expect when benefits are distributed. They also know that the program is funded by payroll taxes that total 12.4% - 6.2% taken out of each paycheck and 6.2% simultaneously contributed by the employer.
Like practically everything else in our polarized age, the future of the 90-year-old Social Security program is both cloudy and a source of contention among various political factions. Regardless of points of view - cold, cruel math indicates that Program reserves are projected to run dry by 2033. If Congress does nothing, benefits will be automatically cut by at least 22%. Long-term, the balance of the century, Social Security is facing an estimated $30 trillion funding shortfall. When the time comes when benefits that are due exceed the proceeds from payroll taxes, the difference will have to be financed by raising taxes, borrowing, creating money, or reducing other government spending. As detailed previously, that "time" is projected to arrive in less than a decade.
Social Security has received a surplus of attention and wild claims as it steams toward insolvency. Since it's the largest expense item in the federal budget at $1.5 trillion per year (22.4% of federal outlays), that is not surprising. Some crackpots have claimed undocumented workers are eligible to receive benefits, or that Congress has stolen funds from the Social Security system. Neither of those rash statements are remotely true. There have also been claims that millions of dead people are receiving benefit payments. False. While fraud at Social Security does exist, it's not rampant and widespread. Only a small percentage of payments are considered improper, and a significant portion of these are due to administration errors rather than intentional fraud. Improper payments represent less than 1% of total disbursements.
Next, we'll look at the actual culprits contributing to the approaching crisis in the funding of Social Security. Far and away the most glaring issue would be the changing demographics. 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. Besides a lower worker-to-beneficiary ratio over time, life expectancies have risen. Meanwhile, the U.S. birth rate has been in steady decline for years and even accelerated post-pandemic. The birth rate currently stands at 1.6 births per woman, well below the replacement level of 2.1. This trend has profound negative implications for the economy and Social Security. The system relies and will continue to rely on a healthy level of net legal immigration into the United States. The Trump Administration in conjunction with Congress would be wise to triple legal immigration on an annual basis. Still another factor has been more earned income escaping taxation due to increasing income inequality. In 1985, 88.9% of all earned income was subject to payroll taxes. But as of 2022, only 82% of earned income was applicable to the payroll tax.
Besides the huge challenges posed by changing demographics, the United States Congress, acting in the true fashion of politicians, has contributed greatly to the present problem. Congress has a long history of both expanding benefits for Social Security recipients and expanding the pools of people eligible to receive benefits. This has especially been the case come election time. A couple of the more popular, and expensive, expansions of the program involved adding spouses and survivors of workers. Early beneficiaries of Social Security made out like bandits starting in 1940. The first person to receive a monthly Social Security payment was Ida May Fuller, who received her first check on January 31, 1940 at age 65. Ida lived another 35 years, hitting the century mark. She also received 1,000 times what she had paid in payroll taxes. Seniors have historically claimed they "earned" their benefits. They have not. They only paid for part of what they have gotten. They have redistributed tens of trillions of wealth to themselves from those younger.
While not a Ponzi Scheme, in many respects, politicians, program administrators, and the media have misled the public about certain aspects of Social Security. We hear about the sacred Social Security "Trust Fund." Sorry, but whatever label is affixed to this pot of assets will not alleviate the fund from being drained. The link between the payroll tax and benefit payments is part of a disingenuous game to convince the American public that what the SSA calls a social insurance program is equivalent to private insurance. Claims are made that "the workers themselves contribute to their own future retirement benefits by making regular payments into a joint fund." Bullshit! Taxes paid by today's workers are used to pay today's retirees. The Social Security Administration avoids using the term "guarantee" for benefits, preferring the word "obligation." The term "obligation" implies that benefits are determined by current law. Social Security benefits are not a legally binding contract or property right, but rather a statutory entitlement. At any time, Congress can modify the program's provisions, potentially impacting benefit levels or eligibility.
As the Titanic (Social Security) approaches the iceberg (fiscal cliff), anybody with half a brain can see that entitlement reform is requisite, and not optional. The United States should emulate recent developments passed by the Danish Parliament. Currently, the state pension age in Denmark is 67. A new law will raise that age to 68 in 2030, to 69 in 2035, and subsequently to age 70 in 2040. The reasoning is sound - consistent increases in life expectancy. I also believe it makes sense to consider reducing survivor benefits to a worker's spouse and/or dependents. It seems ridiculous that even an ex-spouse could be eligible for benefits at the death of a retiree receiving Social Security benefits. Another suggestion would be to introduce a process that helps alleviate abuse of the system in terms of disability benefits. My next suggestion to help "save" Social Security will be controversial, but I believe absolutely essential to the long-term survival of Social Security. I opine that there needs to be a means test - a financial assessment to determine if an individual qualifies for benefits, and if he or she does, the level of the monthly benefit as determined by previous employment parameters. There should be a transition away from an earnings-related benefit to a poverty- targeted benefit. It is time to confront the painful but necessary truth that no matter what story politicians have told, Social Security has always been an income transfer program, not a savings system.
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