Posted by: vicholdsforth | September 26, 2011

Is it Fair to Call Social Security a Ponzi Scheme or Entitlement?

Recently I’ve received emails and seen some facebook posts about Social Security.  They vary in their content, but all express the sentiment, “Entitlement my a$$!  I’ve been paying into that program for 30 years and that money is mine!”  And Rick Perry has been getting quite a bit of criticism for characterizing Social Security as a Ponzi scheme.

I think the reason phrases like “Ponzi scheme” and “entitlement” inflame passions  is the commonly held misconception that the money we’ve all been paying into Social Security was supposed to go into a savings account somewhere with each of our names on it, like some big government-managed 401K that politicians have raided.  Many people believe this, including my parents, but it is not accurate.

Every month, when the government garnishes your wages for Social Security taxes, it immediately turns around and writes checks for current retirees’ benefits.  The truth is, our grandparents were taxed to give a hand-out to their grandparents.   That was money that they themselves might have put aside to save for their own retirement,  but instead they started getting taxed out the wazoo.  They were also quickly lulled into the belief that they didn’t need to save for their own retirement, because they would receive Social Security benefits.  So when they retired, guess what?  They needed a hand-out.  As time went by, fewer and fewer people bothered to save anything at all for retirement…and now they are relying on a hand out from us and our kids.  Two-thirds of American retirees get their monthly income mostly or entirely from Social Security.

This is where the Ponzi scheme characterization comes from:  There is no legitimate investment generating profits; those who join early reap their huge financial windfall not from interest, dividends, and capital gains, as in a typical investment; but rather, it is merely skimmed from the contributions of those who join later.   Eventually there are not enough people to take money from, so those last to join are left holding the bag.  This is what Bernie Madoff did, and it is what our government is doing to us right now.  The difference is people could say “no” to Madoff.

An entitlement is not really charity; it is any payment the government is obligated by law to pay.  It usually feels like charity because when the government obligates itself to give something to someone, they must take the money from us working people to pay for it, and it usually goes to someone who is not working.  But when productive, working people are on the receiving end, it doesn’t feel like charity because we’ve been paying into it for our whole lives.  Still, it is accurate to say that Social Security is an entitlement because our government has obligated itself to pay; and our children will be taxed to pay our benefits, just as we have been taxed to pay our parents’ and grandparents’ benefits.

That trust fund you hear about that got looted was just for the months in which the government collected more from us than they had checks to write…not the savings account that many people think it is.  To draw an analogy from our household budgets, it would be like taking the savings we’re getting on our electric bill, now that the weather has cooled off and we’re not running the air conditioning, and putting it aside for winter when we know our gas bill is going to go up.  It’s just a fraction of the entire budget, and certainly doesn’t represent how things are done on a day-to-day basis.

So, if politicians looting the Social Security Trust Fund isn’t the main problem, what is?  In 1950, the United States had more than 16 working people supporting each retiree. And the average life expectancy was 65.   In other words, about half the population died before they ever collected a penny. Today, because of the Baby Boomers reaching retirement age, along with smaller families and the legalization of abortion, there are only 3 working people supporting each retiree; and the average life expectancy is now about 80.   By the time I’m ready to retire, there will only be 2 working people paying into the system to support me.   So now we are supporting twice as many people for 15 years longer with 1/5 the number of working people to do it.  And we haven’t even talked about Medicare.  The average retiree collects 3 times as much in Medicare benefits as he or she has paid in Medicare taxes.

So, I hope it’s becoming evident that the problems we are facing with Social Security are not because politicians raided the trust fund, but because the system is fundamentally flawed in its design.   If things continue on the same trajectory, some economists estimate that our kids will be paying about two-thirds of their income in taxes.  Glance at your next pay stub and think about whether or not you’d be able to live on only 1/3 your gross income.  I don’t want that for my kids.  I trust you don’t want that for yours, either.

The Republican candidates are not trying to rob us.  That was done 75 years ago, and the people who benefitted are dead now.  The question is, will we in turn rob our kids, or bite the bullet and fix this instead?  What the Republican candidates are proposing is transitioning Social Security to what most people already believe it to be:  a savings account with your name on it.



  1. nice way to put it. The truth has no agenda, and hurts a bit at times, people just have to look at as no free lunch time. Do we do our kids wrong, all for our own easy way’s? All the best!

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