What Social Security isn’t
There has always been a lot of misinformation and frank dishonesty surrounding Social Security. Here are three things that Social Security isn’t:
1. A retirement investment. Social Security is insurance. It is not meant to be your sole source of income after retirement (although for many Americans, it basically is). Social Security is not a substitute for a pension or 401k, or for personal savings. But if some calamity befalls you and you lose your retirement savings, Social Security can keep you from having to starve under a bridge. Comparisons between Social Security and, e.g., index funds are specious.
2. Broke or bankrupt. Even if the Trust Fund runs out in ca. 2033, Social Security will still pay nearly 80% of projected benefits. As long as there are workers in America, SS cannot go broke/bankrupt.
3. A Ponzi scheme. Anyone who tells you that Social Security is a Ponzi scheme understands neither Social Security nor Ponzi schemes and can safely be ignored. Here’s why:
“To begin with, Social Security isn’t an investment vehicle, which is a requirement of a Ponzi scheme. The program is more of a social investment in the well-being of our nation’s retired workers, survivors of deceased workers, and workers with long-term disabilities. Social Security was never designed to generate a profit or make its beneficiaries rich . . .
“Secondly, a Ponzi scheme specifically pays existing investors with the money collected from newer investors. Social Security fails this definition because not all of the money doled out in benefits comes from current worker.
“In 2022, 90.6% of the $1.222 trillion Social Security collected derived from the 12.4% payroll tax on earned income . . . of working Americans. The remaining 9.4% ($115 billion) can be traced back to interest income earned on Social Security’s asset reserves, as well as the taxation of benefits.
“As noted, Ponzi schemes result in their architects stealing customers’ funds. In other words, there’s always money missing once the books are delved into. A third way Social Security confirms it’s not a Ponzi scheme is by the transparency of its Trustees Reports . . .
*snip*
“Despite the extremely superficial correlation of today’s workers providing a substantial percentage of the benefits existing beneficiaries are receiving, Social Security in no way meets the definition of a Ponzi Scheme.”
Social Security is not a Ponzi scheme
Joel
you are essentially right, But there are some important nuances people need to understand if they are not going to be fooled by the liars.
SS is “mostly” insurance. but it is also a savings account. This is because the probality of the insured event is so great that the insurance premium amounts, together with interest earned on the premium to 100% of the expected payout in case of the insured event. Here it is important to understand the point of this and not get lost in argument about the “meaning” of insurance or the meaning of savings or the meaning of interest, You pay your payroll tax, which is equivalent to putting your money into a bank account (equivalent here does not mean point by point “the same.” it is saying something more like “it fills the same roll as” in it’s different vehicle.
your savings in SS earns interest, not by the formal rules of interest contracts in the private sector, but by the “magic” [a word i borrow from Senator Moynihan when he talked about the “magic” of compound interest) ..the magic of pay as you go financing. The money that comes into Social Security the same day (month, year) as it comes out to you in the form of a benefit check, comes (in principle) from a tax which is the same percent of earings as it was when you put your money into SS in the form of the payroll tax…but it is on an income which is larger than the income you had when you paid the money in, it is larger in absolute dollars because of inflation. that means you have the number of dollars in your benefit check that equals the buying power of the number of dollars you paid in. but the income of the present payer is higher than just the amount due to inflation. this comes from the growth in the economy (average real wages). you can think of this as the result of your contribution to the growth of the economy by the honest and prductive work you did over your lifetime…which is exatly where the interest comes from in private sector loans and investments. Or you can think of the real interest representd by the amount your benefit excedes your payments as the result of the government managing the country and the economy in a way that makes growth possible…and actual. It amounts to the same thing. Note that this means that your pension is not being paid BY the guy paying his payroll tax the same day you cash your benefit. YOU paid for that benefit with the money (not the same as “cash” you paid in plus the interest you earned….by deferring some of your consumption until you retire. If you can understand that this is “exactly” analogous to what happens when you withdraw your savings, or sell your stock…the cash comes from the “young” (that is “next”) investor (or customer) but no one says that investor/customrer is “paying FOR” your profit. (except sometimes as an unserious figure of speech).
I hope this fills out your (Joel’s) description of why SS is not a ponzi scheme. It may be worth adding that there is no reason for SS to run out of future “investors” as long as people want a safer way to save at least enough for retirement…safer than ordinary banks or stock market plans, or even their own business enterprises.
There is no reason people cannot take their after tax income and invest in the various private plans if they hope to make a higher rate of return. WE have more than twice the after tax income than our parents had pre-tax. SS is insurance, but it is insurance on the savings you invest in it.
I think we should all be able to understand this is how Social Security works if we do not stumble on the words.
” and is according to the latest reports about $20 Trillion underfunded. “
it may be important to again point out that the 20 Trillion is not a debt but an “actuarial deficit.” no one has borrowed any money. no one is owed any money, no debt collector will call.
what the 20 trillion dollars is is the difference between what SS would like to “buy” [benefits] and what it will have to spend at its present income rate [payroll tax].
20 trillion dollars present value is about 3.1% of the present alue nof future income [payroll]. this means that all people have to do to pay for their future needed benefits is to raise their payroll tax 3.1%, or 1.55% if they have an employer who matches that.
This can best be done by raising the payroll tax one tenth of one percent per year starting in 2025. waiting until 2033 or so will require a sudden increase in the tax of 2% for the worker and for the employer, This will not be a crushing burden. But it will be portayed as such by the people who hate Social Security, because they hate the whole idea of workers having security.
The money will come from the increase in real wages, but it would not be a burden even if there was no increase in real wages, In fact it would be more necessary than ever.
If you are going to live longer you will need to save more for retirement…whether through SS or some other savings vehicle. SS is the safest way to do it. It is insurance, not only on the money you saved, but for the money you need to save.
well, while you are digesting that, go back up and see what joel said about Ponzi scheme. It’s important. Tell your friends.
It seems like S/S is like a savings account that is far more inflation-adjusting than an ordinary savings account, which – it is usually said – loses money the longer you keep funds in it. (That’s more of the time-value of money problem.)
It makes sense to invest additional funds that can be drawn from in retirement, but that’s also a risk. An essential one it seems to me.
FWIW, most of the proceeds from one our IRAs goes towards paying the extra US income taxes we have to pay from the proceeds of our other income. That’s the price we pay for a civilized society.
AARP: The IRS has an online tool you can use to calculate how much of your benefit income is taxable. The Social Security Administration estimates that about 56 percent of Social Security recipients owe income taxes on their benefits.
Dobbs
outside SS investments are a good idea, but not everyone can afford the risk. nor are they “essential.” I can live on my SS, not grandly, but i am not a grandly type of person.But there is another trick that worked for me. Not having the ability or willingness to make risky investments, but recognizing that SS would not be available to me before I lost my ability to work , I started saving every dime I possibly could before I had to quit. I managed to save enough to live on while waiting for SS. This “late inning saving” avoids most of the risk of inflation and last minute bad days on the stock market. Not recommending it to those who don’t have the taste for it, but it’s an option some might want to consider.
and yes, most of us have real incomes far greater than our recent ancestors had. we have plenty of money after taxes and SS contribution to invest as we please. what it looks like to me is that people have a foolish idea of what money is and what reality is and get into “someone else got a bigger piece of the burfday cake” psychology grabbing for every nickle on the table or that they imagine ought to be on the table.
Americans are leery of stocks — and that’s not a good thing
Motley Fool via Yahoo Finance
In a recent survey by Fidelity, 28% of respondents said they’d rather take their chances finding love on a reality TV show than take their chances in the stock market. But if you don’t put your money into the stock market, you run another risk: not growing your money at a strong enough pace to meet your long-term financial goals.
It’s true that investing in stocks carries risk. In fact, there’s pretty much no such thing as a totally risk-free investment.
But one thing you should realize is that over the past 50 years, the stock market has averaged an annual 10% return on investment. If you play it safe and don’t invest in stocks, the return you’re able to get on your money might pale in comparison. And that could leave you with a shortfall. …
@Fred,
Of course, the answer to fear of risk isn’t to put your money in a mattress or bury it in the ground–the answer is diversifying your portfolio. Some mix of equities and bonds/CDs that allows you to sleep at night. I learned that over 40 years ago. There’s a lot of daylight between investing and gambling. Cryptocurrency, NFTs, fear metals, day trading are gambling, not investing. Over the long run, index funds outperform 90% of actively managed funds, Berkshire Hathaway nonwithstanding.
Fred
Joel is right. no one said put all of your money into Social Security. just the money you can’t afford to lose. after than you should have plenty of money to play with howver you want. Just don’t expect to “meet your financial goals. Not only might you lose your money, you might lose your soul.
“soul” is not a reference to any religious entity. soul means your chances of discovering real happiness. Admittedly, as far as I know Christians are the only religon that has made that their prime focus…except maybe the Zen Buddhist if there are any, some real Budhists, Taoists…again, if there are any…, possibly the Navaho and others I don’t know about