By contrast to Ponzi schemes, Social Security relies on a real asset: the taxing authority of the US government
Millions of dead people aren’t getting Social Security benefits
Trump and Musk say the Social Security Administration fraudulently pays people listed as 100 years or older who’ve been dead for years, but this claim isn’t true.
Scripps News
- Elon Musk has suggested making changes to Social Security, including implying it is a Ponzi scheme, which has sparked debate.
- Social Security is funded by payroll taxes and is designed as a “pay-as-you-go” system, unlike a Ponzi scheme.
- A surplus of Social Security funds was invested in bonds, which are now being used to finance a portion of retirement benefits.
Elon Musk has his chainsaw out and is coming for Social Security, which poses a particularly tough problem because it is the most popular federal program. In addition, there is no cash to divert, it is a pass-through system where revenue from worker payroll taxes is immediately paid out in scheduled benefits.
There is, however, a bond fund earmarked to supplement the payroll tax. Can that be raided? To further reduce public confidence in the system, Musk has tried to diminish service quality through staff reductions and office closures, and by claiming that Social Security is a Ponzi scheme bound to collapse.
What is a Ponzi scheme?
In 1920, Charles Ponzi’s “get-rich-quick” scheme started out small and legal. He promised investors a doubling of their investments in 90 days, and fulfilled that promise by buying International Postal Coupons, available at a low price in post-WWI Italy, and selling them in the US at a higher price.
Ponzi was quickly flooded with would-be investors; that’s when he realized he needn’t bother with postal coupons, or any real asset. Instead, he simply sequenced the investors, paying early investors their promised return from the money invested by later investors.
The inherent instability of such a scheme lies in the impossible requirement that each successive group of investors is sufficiently larger than the preceding group so that the promised returns can continue to be paid. Upon the inevitable collapse, unpaid investors sued, criminal law was applied, and Ponzi landed in prison.
Here’s why Social Security is not a Ponzi scheme
By contrast to Ponzi schemes, Social Security relies on a real asset, the taxing authority of the US government, which in turn relies on the productivity of the nation. Most workers pay a payroll tax, plus the employer match, to insure against poverty in their old age. Social Security is a “pay-as-you-go” system: current workers pay for current retirees in the expectation that when they retire, future workers will do the same for them.
This is a reciprocal responsibility with an economic basis: the young pay for the benefits of the old out of the productivity made possible by the old when they were young. Over the decades, each generation has added to and passed on the physical and knowledge capital of the nation. As a result, worker productivity per hour has been increasing at a rate of roughly 1.5% annually.
There is no similar asset-based reciprocity in a Ponzi scheme.
A warning to baby boomers: Those bonds are for you
The 77 million baby boomers born between 1946 and 1964 were followed by the baby bust, with only 47 million born during the following eighteen years. President Reagan intervened to prevent a huge increase in the payroll tax rate to be paid by the busters when the boomers retired.
Beginning in 1985, he forced the boomers to save by requiring them to pay more than enough to meet the scheduled retiree benefits. This extra cash, or “surplus,” was used to buy bonds from Treasury during their work years to be repaid with interest during retirement as the bonds were to be sold back to Treasury.
In principle, the Congress could have invested the cash in growth-enhancing assets like roads, bridges, broadband, and port facilities. The economic growth fostered by such productive public sector assets formed the economic basis for the reciprocal responsibility between workers and retirees.
In Reagan’s 1985 plan, the payroll tax rate was calibrated so that the bonds would run out around 2060, when the youngest Boomer would be 96 years old, and just a few hundred thousand would still be alive collecting benefits.
However, the blessing of longer average life-span combined with slower-than-projected economic growth will now exhaust the bond fund around 2034. Today, $2.7 trillion in bonds remain in the Trust Fund and, according to plan, they are being sold to Treasury to finance 22% of retirement benefits.
If Musk and President Trump were able to divert those bonds, retirement benefits would drop by 22%. Moreover, the national debt owed to the public would fall by that $2.7 trillion, increasing the difference between the debt ceiling and the debt owed to the public.
In turn, that increased gap would allow Congress to borrow more from the public to finance its tax cut, and that, after all, is the purpose of the Musk/Trump Scheme.
William L. Holahan, is an emeritus professor and former chair of economics at the University of Wisconsin-Milwaukee.
