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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.