Yes, Social Security Is a Ponzi Scheme

When I write about Social Security, my main goal is to point out how Americans would be much richer if the United States had personal retirement accounts based on real savings (like workers in Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden).

But I also point out that America’s current pay-as-you-go government system is a big fiscal burden with record levels of unfunded liabilities.

We are going to take a different approach today. Let’s start with this screenshot from Wikipedia on the definition of a Ponzi Scheme.

Why are we looking at this definition?

Because Elon Musk had the audacity to point out that Social Security is a Ponzi Scheme.

And this has caused controversy, as illustrated by these excerpts from an article on the MSN site.

Musk created a furor by labelling social security in the United States ‘the biggest Ponzi scam of all time.’ He justified his remarks saying that over time, the obligations of social security will be “much worse,” as people are now “living longer than expected.” …Musk said. “People pay into Social Security, and the money goes out of Social Security immediately, but the obligation for Social Security is your entire retirement career. So if you look at the future obligations of Social Security, it far exceeds the tax revenue. …Basically, people are living way longer than expected, and there are fewer babies being born, so you have more people who are retired and that live for a long time and get retirement payments. So the future obligations, so however bad the financial situation is right now for the federal government, it will be much worse in the future.”

It is true that Musk’s remarks caused a “furor.”

But it’s also the case that what he said is true.

• Demographic change is an enormous problem for Social Security.
• The program won’t have enough money to pay promised benefits.

Some defenders of the program claim that there is no problem. They admit that current tax payments get used to pay current benefits, but they assert that Social Security has a trust fund to pay benefits to future retirees.

There are two problems with this argument.

The first problem, as noted by the Congressional Budget Office, is that the so-called trust fund is depleted within 10 years.

The second problem is that the Trust Fund is an accounting fiction. It’s nothing but money the government owes to itself.

You may find that hard to believe, but when Bill Clinton released his new budget in 1999, the Analytical Perspectives (on page 337, if you want to check) contained this important admission about the supposed Trust Fund.

To ensure that nobody wonders whether I’m quoting out of context, here’s a screenshot of the relevant paragraph.

In other words, Elon Musk was right. Social Security is a Ponzi Scheme.

But there is one important difference between a Bernie Madoff-style scheme and Social Security. Madoff had no ability to coerce people into his fraudulent fund.

By contrast, politicians can impose massive tax increases in hopes of propping up Social Security.

Heck, they could pass a law adding lots of zeroes to the existing IOUs in the Trust Fund.

But neither of those supposed solutions addresses the real problem, which is that Social Security is a bad deal for the American economy and a bad deal for American workers.

P.S. One final note for my left-leaning friends. If you actually care about blacks and other minorities, you should support personal retirement accounts.

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Image credit: 401kcalculator.org | CC BY-SA 2.0.