The Social Security Ponzi Scheme

Jeff Jocoby, at

    You don’t have to be a financial wizard to know that Social Security is a lousy investment.  Unlike the money you deposit in a bank or salt away in an IRA, you don’t own the money you pay into Social Security.  You have no legal right to get those dollars back, and when you die you can’t pass them on to your heirs.  Nor can you use your Social Security account before you retire — you can’t borrow against it and you can’t cash it in.  You aren’t allowed to put the money into a balanced portfolio.  You can’t even watch as the interest accumulates, since your Social Security nest egg doesn’t earn any interest.

    Your nest egg, in fact, doesn’t even exist.  Because Social Security is financed on a pay-as-you-go system, the dollars withheld from your paycheck today aren’t being saved in an account with your name. They are immediately paid out to retirees.  The benefits you receive when you retire will be funded by the payroll taxes then being collected.  But because the ratio of workers paying in to retirees taking out is steadily shrinking — it has plummeted from 16 to 1 in 1940 to 3 to 1 today — Social Security is headed for a crisis.

    Within 15 years, the system will be paying out more in benefits than it collects in taxes.  Its shortfalls will grow larger and larger.  Bankruptcy will loom.  To save Social Security, Congress will have no choice but to sharply raise payroll taxes, go even more deeply into debt, or slash the benefits paid to retirees.

    This of course is the background to President Bush’s campaign to create personal investment accounts, which for the first time would allow workers to own and invest — really own, really invest — part of the Social Security tax taken from their paychecks.  With personal accounts many of the features that make Social Security such a crummy deal for today’s workers would be transformed into a package most of them could support.  A social-welfare program created in the age of gramophones and the Model A would be updated for a world of iPods and superhighways.

    But to many Democrats, such talk is heresy.  Letting Americans own some of their Social Security would be too risky, they argue – another way of saying that Americans are too dumb to be entrusted with their own money.  Much better to continue entrusting it to Washington, which has managed Social Security so skillfully that workers younger than 50 know they will never get back in benefits what they are paying into the system now.  (Perhaps that explains why 58 percent of Americans under 50 support personal accounts, according to a new poll by Zogby International.)

    Social Security wasn’t always a sucker’s game.  As with all Ponzi schemes, players who got in early made out like bandits.  For many years, Social Security deductions were minuscule.  Until 1949, the combined employer/employee tax rate was only 2 percent, and it was imposed on just the first $3,000 of income, for a maximum payroll tax of just $60 a year.  The first Social Security recipient was Ida May Fuller of Ludlow, Vt., who retired in 1940 after having paid a grand total of $44 in payroll taxes.  By the time she died in 1975, she had collected $20,933.52 in benefits — a return on her "investment" of more than 47,000 percent.

    It wasn’t really an investment, of course.  It was a forced transfer of wealth from younger persons to an older one.  And as the number of Ida May Fullers grew, and the value of their benefits increased, the amount of wealth that had to be transferred kept climbing.  By the time I entered the workforce in 1975, the Social Security withholding rate was 9.9 percent, applied to wages of up to $14,100.  Maximum tax bite: $1,395 a year — more than 23 times the $60 of a generation earlier.

    And a generation later?  Today Social Security skims off 12.4 percent of the first $90,000 earned – one-eighth of every paycheck.  There are no exemptions, no deductions.  It kicks in from the very first dollar of income.  It is the biggest tax the average American household faces — 80 percent of us pay more in Social Security taxes than we do in income tax.

    One tiny notch at a time, payroll taxes have been ratcheted up to a level that would have been unthinkable in Franklin Delano Roosevelt’s day.  No wonder Social Security is so unpopular among the young.  It provides no security for their retirement, while it impoverishes them in the present.  In exchange for an eighth of their earnings today, it guarantees nothing but higher taxes tomorrow.  That there are politicians who defend so regressive an arrangement wouldn’t have surprised FDR.  But how shocked he would be that they call themselves Democrats.

(Martin McPhillips)

Richard Nikoley

I'm Richard Nikoley. Free The Animal began in 2003 and as of 2021, contains 5,000 posts. I blog what I wish...from health, diet, and food to travel and lifestyle; to politics, social antagonism, expat-living location and time independent—while you sleep—income. I celebrate the audacity and hubris to live by your own exclusive authority and take your own chances. Read More


  1. Whymrhymer on February 14, 2005 at 20:06

    Glad to see you're jumping on this issue. There are so many people criticizing Bush's SS proposal I was starting to think I was in a very small minority.

  2. LibbytheRed on February 15, 2005 at 17:10

    You know, I think it's mainly the billions and billions of dollars over the next decade or so it will cost to keep current and imminent retirees on the current system that them there wacky democrats (as well as a handful of Republicans and others) are so foolishly concerned about.
    I'm just thinking that maybe a time when we're not already trillions of dollars in debt might be better to implement a new fiscally radical socialist system.

  3. Richard Nikoley on February 15, 2005 at 17:31

    "I'm just thinking that maybe a time when we're not already trillions of dollars in debt might be better to implement a new fiscally radical socialist system."

    Is there ever a good time; and, as if we don't already have a "radical socialist system". At whose expense would such a scheme be implemented?

  4. Todd on February 16, 2005 at 06:57

    This post begins with the words which form my point:

    You don't have to be a financial wizard to know that Social Security is a lousy investment.

    Social Security is not an investment, it is a mandatory contribution to a government program. I'm not saying it's all bad, but for my money a self-directed investment is monumentally better. Social Security will just be gravy if I am lucky enough to receive it upon retirement. Plan ahead, take responsibility, save on your own. Don't rely upon the government to support you.

  5. John on February 17, 2005 at 19:43

    Social Security was never meant to be an investment, nor was it ever intended to be an individual sole source of income after retirement (read the law, 1934-1935 version). The first part of that sentence remains true, but the second part, sadly, has not. Many DO depend on it and rightly so for the government, OUR government, promised many times, in many elections, by politicians from all parties that they could. Broken promises do not make a happy electorate.

  6. A. K. on February 19, 2005 at 05:05

    I was beginning to think I was the only one who had any intelligence… for whom this was as plain as the nose on my face. Thanks for easily putting the pieces together.

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