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HAVE YOU HEARD THIS nonsense about Social Security? It’s nothing but a Ponzi scheme. The trust fund is just IOUs. My favorite: I’d rather invest the money I pay in Social Security taxes because I’d get better investment returns.
All three claims reflect a fundamental misunderstanding of Social Security and how it works. Social Security is insurance—a form of annuity, a type of pension, a social safety net. It isn’t an investment and shouldn’t be viewed that way.
If, by Ponzi scheme, we mean that this year’s taxes are used to pay current beneficiaries, I guess it is. The same can be said of most government programs. That’s the way government works—or should, except we also pay for government programs by running deficits.
The trust is nothing but IOUs, or so it’s said. If you mean the trust purchased special interest-paying Treasury bonds as an investment, with the government promising to redeem those bonds, then—yes—the trust fund holds IOUs. But that’s virtually the same promise made to American investors and foreign governments when they buy U.S. government bonds.
Now we have my favorite: Give me the taxes I pay and let me invest them, and I’ll get better returns and accumulate significant assets. This is simplistic. Can you imagine that strategy working out for the vast majority of Americans, with their low level of financial literacy, poor savings record and scant stock market experience?
This approach also ignores a key fact: Social Security is much more than an inflation-adjusted retirement-income program. Benefits are also available to disabled individuals, to surviving spouses and children, to ex-spouses—even multiple ex-spouses. Some of these folks never paid a penny in payroll taxes. Want to take a chance at investing your Social Security taxes? You better hope your life goes exactly according to plan.
It seems to me Social Security is a very good investment—too good, actually, as evidenced by its chronic underfunding. During my working life, beginning in 1959 while still in high school, I paid $132,743 in Social Security payroll taxes and my employers paid an additional $133,423. In return, I received in benefits all I contributed within four years of starting Social Security—and that doesn’t include my wife’s benefits based on my earnings record. Since that breakeven, I’ve collected 11 additional years of benefits.
I don’t know about rates of return, present value and such. But I see this as a good deal, and it can be an even better deal for lower-income beneficiaries.
But there’s one deal that’s better still: Medicare. In total, I paid $98,063 in Medicare payroll taxes. That sum was easily exceeded by the cost of one short hospital stay and the accompanying medical care. My wife paid no Medicare taxes, but received several hundred thousand dollars in benefits for her eye injury.
I hope to add to my Social Security “return.” But I’m happy to let others come out ahead on Medicare spending.
You state: “… The trust is nothing but IOUs, or so it’s said. If you mean the trust purchased special interest-paying Treasury bonds as an investment, with the government promising to redeem those bonds, then—yes—the trust fund holds IOUs. But that’s virtually the same promise made to American investors and foreign governments when they buy U.S. government bonds. …”
Absolutely agree.
However, we added $23+ Trillion to the national debt over the past 15 years (Presidents Obama, Trump and Biden), we continue to add $1.5 – $2+ Trillion a year, and, the CBO recently predicted that, without change, our national debt will be $146 Trillion in 2054 (30 years) – 172% of GDP – where interest on the debt is the largest expense in the federal budget. So, redeeming those bonds adds to the national debt (part of our annual deficit). Paying interest (let alone raising taxes to cover interest, and run a surplus to reduce debt) will either crowd out American’s ability to properly fund Social Security and Medicare (national defense, etc.) or reduce worker and retiree standard of living.
A unique scheme … expect less in the future.
Thank you for another interesting article. I appreciate the thinking, but notice whenever you comment about SS as a good deal, you always ignore 1099 contractors (freelancers, gig workers, contractors) who comprise a sizable percentage of workers the past few decades.
Unlike many people who haven’t paid a cent or W-2 workers who only paid half, yet reap 100% of the SS benefit, people like me pay DOUBLE – with zero added benefit.
Should they cut my future SS due to means testing or other parameters in 2034, I wonder if they’ll remember that I paid 100% more than most everyone else? Doubtful.
So for me and millions like me, this annuity/insurance/whatever we want to call it will likely end up a very poor deal.
You have a point about paying as employer and employee, but SS won’t end up a poor deal in the end. Don’t forget you can deduct self-employment tax as a business expense. It’s actually one of the most common self-employment tax deductions.
I think the best solution (but most difficult to get politicians to approve) is to eliminate the cap on income for contributions by workers. The wealthiest will lobby their congressmen to not allow it of course. The more money the filthy rich have, the more they want. It’s like a drug to them.
Paying on all payroll earnings is fine as long as a proportional increased benefit goes with it otherwise it becomes a form of welfare. Keep in mind that the wealthiest don’t earn their money from payroll income. Warren Buffets reported salary pay is $100,000. Taxing all wages means higher taxes on upper middle class. We are looking in the wrong place, look to the employer portion of the payroll tax.
no – do NOT look to employers. Because millions of 1099 workers (who have to pay employer’s share) will be penalized even more. It’s a ridiculous, unfair system.
Super article. My father, born in 1919, served the entirety of WWII in the Navy, never made a great deal of money but was a super Dad and person, devoted husband, and had the best 30 years of retirement before he died at 95 I’ve ever seen. He had a modest pension of about $720 and it was SS and Medicare/VA that made his retirement possible. He played golf 5 days a week for much of the year, traveled extensively, and was very content with what he had.
Nice article Richard,
I feel too often, as you mentioned and at times I am guilty of, people voice opinions about topics without first understanding it. I have been reading the recent 29th edition of Nolo’s book called, “Social Security, Medicare & Government Pensions” by Attorney Joseph Matthews. In chapter 1 (Social Security: The Basics), he has a section starting on page 11 called “Saving Social Security” and lists 4 simple ways to fix the social security system. Here they are: 1) remove cap on earnings subject to social security (FICA) tax, 2) reduction against early benefits for nonearned income, 3)delay full retirement age, 4) slight reduction in benefits for high-income recipients. He states that ….”any of the adjustments discussed above would make a significant contribution to the long-term stability of social security.” After reading this and other books/websites about the simple/easy ways the government can fix social security, I now feel more educated about the topic and am less prone to listen to those who say, “Don’t plan for social security to be there when you retire.” Oftentimes, I ask the person who says this blanket statement, “Can you tell me how social security works, so I can better understand why you feel this way?” Of course, their answer is always, “I don’t know how it works, I just know that it won’t be there for future generations.” It makes me laugh, because I think to truly know if social security is going to be there, you probably should first understand how it works and what possible “fixes”, as mentioned by Nolo, that could be made to really decide if one thinks social security will be there for future generations. I used to be uneducated on this topic (social security) and would think like many “That social security won’t be there for future generations” until I did some reading on the topic and thus now feel it will be there. As someone above pointed out, the main voters are the older generation, and thus I don’t feel they are going to vote for someone who isn’t going to fix social security, as many people rely on it. Anyways, just my 2 cents worth 🙂 THanks for posting!
“ 4) slight reduction in benefits for high-income recipients.”
This is the camels nose under the tent… like non inflation adjusted tax on SS income, it will eventually be used to screw us all, and should be categorically rejected.
Good comments Fred. The SS was always intended to be a “pay as you go system” that was able to create reserves over years as more people were paying into the system than were receiving benefits. Of course, several things have happened over time that have made the “pay/go” formula less successful: 1) increased longevity, 2) huge Boomer generation currently retiring, 3) adding COLA and other benefits over time, and, of course 4) dithering on the part of Congress. Increasing the retirment age will help, but not on a current basis. Raising the wage cap or increasing the contribution rate would help more. And, reducing/eliminating the COLA would help maintain the solvency of the fund. The problem is, of course, that almost any change will require Congress to take action that will benefit some and hurt others, which in political terms, is a “no-win” situation. I am hopeful that needed change will be made, but strong is the temptation to kick the can down the road!
I don’t think they should eliminate COLAs. Many if not most retirees rely on SS as their main source of income. Without COLA they would be in a world of hurt with inflation each year.
Thank you for your comment. Yes, fixing SS – permanently- is not hard and can be done with relatively modest changes in various combination. It should also be changed so in the future adjustments are made automatically as demographics change. Here is one example of possible changes from my blog.
https://quinnscommentary.net/2024/01/14/yes-fixing-social-security-is-quite-easy/
I would only offer that the fix is “simple”, but not “easy”. Simple in the fact that the steps are all fairly straightforward, and most have actually been done before.
not easy in that nothing the federal government does is easy these days with a hyper-partisan and closely divided congress.
You are certainly right about that plus there is so much misinformation and misunderstanding about SS, the facts are even harder to sell.
I am fifty now and remember when I was a little boy listening my father tell my grandfather social security won’t be around when my father hits 62. Well, he has been collecting for 15 years now. Furthermore, I remember my father in-law telling me he remembers adults in his family saying social security won’t be around when his parents generation retire. He too is 77 and that generation came and went yet social security remains as strong as ever. I also did the math on an investment calculator. Matching up the returns and taking a 4% withdraw when I reach any age of retirement beats an average investor return. I think social security is a great program to look forward to. No need for me to waste money on the lottery. Great article!
Nice article. We can all hope our country has the backbone to make the necessary changes in the near future to this valuable program so that future generations can also participate. As we all know, it does not take rocket science to make the changes, so the program is sustainable well into the future. But it does take a “do what’s right” approach and set all the other agendas aside. Let’s only hope that clear minds will prevail for this extremely important social program for our nation.
Another thoughtful article. Thanks you.
While I completely agree that as individuals we would not do as well to invest the SS taxes we pay, I do think a portion of the SS trust fund could be invested in low cost broad based equity funds.
Certainly the best time to plant that tree was 20 years ago and the next best time is today. Same with SS & MC.
It will take some give and take from all current and future groups to make this work. That will likely include raising the tax rate, delaying the age to allow benefit claiming, increasing the wage base that are subject to tax, and subjecting income to the SS & Medicare to a broader taxable base. A change to a need base system would is a problem in my thinking. The major change provisions of the program were last modified at the last minute in 1983 and I expect the same in 2033 or 2034.
I thought that too and as you point out the time to do that was yesteryear.
However, I used a SS change modeling tool and tried diversifying investments and got this result.
“Social Security remains insolvent. The trust funds will run out in 2034 at which point all beneficiaries will face a sudden 19% benefit cut.”
there will be no “19% benefit cut” in 2034 to current s s recipients.
why?
1. Grandma votes
2 the government owns a money printing press
The number of Grandma’s voting is rapidly decreasing and boomers are dying at an ever increasing rate. Younger people aren’t thrilled about paying for boomers to live a “life of luxury” while they struggle because of the same boomers financial policies over the last 30 years. I rate the chances at 50-50 as to whether the reduction happens.
Your first point is right on, but legally general revenue can’t be used to fund the trust or pay benefits and it needs to stay that way.
Where is the interest that the government is paying on those special bonds coming from if not from general revenue? That paid interest is used to pay SS benefits.
I retired at age 61 and started taking my SS at age 62.
My – probably too simple – reasoning was that my children will inherit my savings and investments. They will NOT inherit my SS or Medicare.
re: “I don’t know about rates of return, present value and such…”
Obviously!
Meaning what, you want to invest the taxes so you can do better?
FICA payments are not taxes, they are insurance premiums. Modeled after the Mafia’s “insurance” programs.
Dick, thanks for a thought provoking article.
About 20 years ago I attended a lecture by Jeremy Siegel of the Wharton School. His research shows that the demographics of the US were insufficient to handle the coming baby boomer retirement. He looked at nt just SS and Medicare, but the transfer of retirement assets to the next generation. the same 2 workers that support SS and Medicare would also need to purchase the assets that retirees would sell to fund their lifestyle. His conclusion was that immigration, and worldwide investment were sufficient to handle the problem. My 19 year old son was with us at the lecture and I recall his conclusion was that his generation was in trouble.
Immigration seems to be a dirty word these days, but the reality is that recent estimates by The House Judiciary Committee suggest even illegal immigrants contribute about $16 billion a year to the SS Trust.
Just one example of $$$ being sucked up by immigrants CA K-12 costs $158B this year. About 1/3 of the school age children are immigrants. That’s about 3 times the $16B added to SS. In addition, the immigrants actually cost more than the natives, given allowances for language difficulties. This doesn’t even take into account medical care, prison, EBT, legal help, rental assistance, etc, etc, etc, etc ad naseum.
Correct, and their contribution to the nation’s GDP is likewise massive.
And how much is it costing to feed, house, school, imprison, etc… Illegals are getting more government benefits than citizens at this point.
A good dose of sanity. Thank you, Richard!
The ~most~ conservative view that still clings to rationality would be that your future SSI benefits will only be 80% of what they are today. Anything more doomsday than that is flawed.
Why?
The SSA’s actuaries state that the OASI Trust Fund is on trajectory to be depleted by 2034.
Oh no!
Well…it’s not quite the end of days.
Because as you pointed out, Richard, most annual SSI outflows are funded by same-year tax inflows. Right now, approx. 90-95% of outflows fit that mold. The remaining outflow comes from the slowly depleting OASI Trust Fund. When the trust fund is depleted, we’ll still have annual taxes covering most of the outflows.
By 2034, the actuaries estimate ~80% of outflows will be covered by inflows.
Meaning the ~most~ conservative planning viewpoint that still clings to rationality would be to assume your future SSI benefits will only be 80% of what they are today.
By SSI, I assume you mean Social Security income, not Supplemental Security Income (SSI).
Something to ponder: When Social Security sells bonds held by the trust fund to pay benefits to retirees, the buyer of those bonds is the U.S. Treasury, which — in turn — gets its money from tax revenue or by selling bonds to individual and institutional investors. In other words, the federal government is already handling the full cost of Social Security benefits. The trust fund is just an accounting gimmick, one that obscures what’s going on. The real issue isn’t the depletion of the trust fund. Instead, it’s how big a deficit the federal government will run in the years ahead if it’s to continue paying benefits at current levels.
If the incoming taxes were always sufficient to pay ongoing benefits there would be no need for a trust. The question is if the Treasury didn’t sell the bonds to the trust would it need to sell to public
Social Security and Medicare are indeed amazing gifts to us collectively. Thanks, Richard, for so clearly stating this.
A little skepticism can be healthy. Upon entering the work world four decades ago, I did not count on ever receiving SS, a pension, or an inheritance. This made me a much more conscientious saver, which I am also grateful for.
The main problem with SS is that a large nation cannot save for the future.
Real wealth is goods and services, not money. You cannot put things like food and medical care in a vault, and take them out 20 years later and use them. So most of what is consumed every year is produced by workers that year. While an individual can save money, a medium of exchange, and spend it later, this does not work on a national basis.
So with SS, and for that matter invested capital, when you reach a point where there are only two workers for every retiree, you’re going to have a problem. The goods and services created by every two workers have to supply three people, so the worker’s standard of living will be much lower than it otherwise would be.
This is why SS is the way it is. Workers have to pay 15.3% of their income in tax. This would not be too bad for workers if that was it, but a lot of the income taxes they pay at both the Federal and state level also go to support retirees.
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $168,600 (in 2024), while the self-employed pay 12.4 percent.
Workers pay 7.65% * wages; employers add their part of wages* 7.65% and remit the total ss& medicare amounts via 941 tax deposits.
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $168,600 (in 2024), while the self-employed pay 12.4 percent.
Yes, I rolled in medicare as part of the 7.65%
Ormode, your understanding of the issues seems well-considered and nuanced. (Thank you for that.) Do you have suggestions for further reading?
Those of us age 65 and older consume the largest portion of federal spending and it will get larger as the population ages.
Unlike people in Europe, Americans can’t seem to grasp that all we want from government must be paid for sooner or later. We remain one of the lowest taxed countries in the world but keep creating more unfunded long-term liabilities.
Here is a recent example regarding SS.
It is not just government spending. The laws of compound interest dictate that the bulk of the capital will be owned by the oldest people. This means that retirees collectively will be entitled to bulk of the returns from capital, as opposed to labor. Currently, capital is 30% and labor is 70% of the GDP. If the bulk of this 30% goes to older people, and the younger people have to pay 15.3% FICA plus Federal taxes plus state taxes, they will have very little left for their own life.
Young people will pay 7.65% plus federal and state taxes. Their employer will pay 7.65%
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $168,600 (in 2024), while the self-employed pay 12.4 percent.
Yes, I know that. Note that a self-employed person gets a credit back on their 1040 for part of the “employer” taxes.
My comment was to correct Ormand’s 15.3% rate reference.
“If the bulk of this 30% goes to older people, and the younger people have to pay 15.3% FICA plus Federal taxes plus state taxes, they will have very little left for their own life.”
15.3% is the COMBINED employee and employer rate for social security and medicare. An individual has 7.65% withheld from his or her paycheck, up to the social security cap, then 1.45% beyond the cap for Medicare. Obviously federal and state taxes are also withheld, unless a large exemption number is claimed.
Somehow I don’t see that as reality. I paid all those taxes my working life and now I am benefiting from current workers doing the same. If your logic were absolute retirement income today would be only SS would it not?
I think the answer is as Rick pointed out.
Exactly right. And this is why the solution at a global level is for folks to stay in the workforce for longer — not a terrible outcome, given today’s life expectancy. Still, it would be great if governments around the world prepared their citizens for this reality. But unfortunately, a significant slice of the population is going to be forced to stay in the workforce longer than they expected by some combination of inflation, higher taxes, lower investment returns and inadequate savings.
In addition to extending our working years, it’s crucial for the United States, distinct from other advanced Western economies, to intensify efforts urging Congress to prioritize immigration reform.
This reform should re-establish legal channels for promising young talent to establish roots and contribute to the prosperity of this nation.
The stellar performance of our leading companies underscores the profound impact immigrants can have on shaping a brighter, if not extraordinary, future for us all.
Jonathan – has anyone estimated a figure for how much longer one should stay in the workforce? I kept working until I turned 67 because I had both professional and financial goals to complete, and I crossed my own, personal finish line. Because I planned, I waited until I was 70 to draw Social Security. Many folks seem to use age as the finish line without having any plan other than to “not work anymore”. Based on what I read, Europeans retire earlier than many of us in the US – but that may be a flawed view. How do those financial systems and governments manage their retiree sector?
This article — from two decades ago — suggested the typical retirement age needs to rise to 72. Given today’s demographic trends were already known at that point, I suspect that age hasn’t changed a whole lot.
Keep in mind that this is the typical retirement age. Those who do a good job of saving and investing could still retire earlier — but not everybody can.
Greater immigration would ease today’s demographic crunch. But that doesn’t seem like a political possibility right now.
The reality is many of the European systems struggle with the retiree sector, consider France a couple of years ago.
In my opinion retiring based on age or a certain date can be a big mistake. Assuming it’s voluntary, retirement should be based on feeling you are ready- and you will know.
Having one’s finances in order when that feeling hits is the key to a pleasant retirement IMO.
I find it interesting that people have the viewpoints that Richard pointed out, but don’t have the same viewpoint as the Medicare tax paid. Maybe because the amount taken out per paycheck isn’t as high or its not money that one directly receives later in life.
I view both Social Security and Medicare as a tax and didn’t plan my upcoming retirement as either having a factor. If/When I receive a benefit, it will be the cherry on top of the sundae.
Many people don’t seem to understand the nature of the tax or that what we pay in taxes to fund these programs has nothing to do with he benefits provided.
The other big misconceptions is: “The Govt. may not fund SS … It will run out of money.” This has never occurred yet. Not going to happen. The politicians will be happy to send everyone’s money and raise SS taxes.
Social security will continue. However I would not be surprised to see means testing enter the picture in the near future.
There already is mean’s testing in the sense we pay taxes on the SS benefits or pay higher Part B premiums if income is at certain levels.
Right you are. It’s a shame that many people are unnecessarily frightened they are going to lose their benefits.
Thanks to politicans