While debating healthcare reform, other government run programs such as Social Security invariably get brought up. In a recent debate in an online forum it came up and someone wrote me directly, in exercised language I might add, that Social Security is nothing but a Ponzi scheme. When I succinctly replied with, no you don't seem to understand how Social Security is structured. This person replied that "SS is nothing but a government-sponsered PONSE (sic) scheme, that has now reached the same crisis point that poor Bernie Madhoff's did. More withdrawals than entries, that is."
This finally seemed a good moment to put down in pixels a debunking of this meme, which comes up form time to time, and underscores how it seems many people simply don't understand how Social Security is actually structured and how it works.
Social Security is a pretty straight forward concept really. As people become young adults and enter the workforce, part of their wages are taken out for Social Security (FICA). That goes into a large pool with everyone else's FICA withholdings. On the other end, we have older people at retirement age who withdraw from the FICA pooled money. The rate at which a person is paid out, is calculated based what they paid into the fund. Retirees withdraw more on a month to month basis than what was withheld on a month to month basis while they are working. But this is offset by the fact that there are more people still of working age paying into the system than retirees. This is because people spend 40+ years being of working age and working than the 10 or so years of retirement age. So if the population of working people and retiring people stays consistent, the system is in balance and on it goes.
But what happens when the is a sudden boom in the population and they enter the system?
When they get to retirement age, there will be more people withdrawing from the system than those putting into the system. That situation occurred not long after World War II, and the common term of course for that event is the "baby boomers". Their presence in the system is being used to perpetuate the long running myth that Social security is a Ponzi scheme, that it will go bankrupt, that nothing will be there for the generations that followed after them, etc. This is because there presence in the system throws out-of-balance the stable despot, withdrawal system we talked about above.
From its inception right up to today deposits have been greater than withdrawals into the system. This will continue until around 2037, but will change when the remaining balance of the baby boomers are drawing from the fund. That is when withdrawals will begin to outpace deposits by around 15%. This is the baby boomers working their way through the system and is sometimes crudely analogized and referred to as the Social Security "pig in a python". A big lump working its way through.
This however has been accounted for, and why in the early 1980s under Reagan, they adjusted the FICA withholding rates in order to build up a larger trust fund so those extra withdrawals (because of the number of baby boomers that would then be drawing out of the system) would be covered. This was the trust fund that you may recall Al Gore was mocked by some for promising to "keep it in a lockbox" (a metaphor of course) during the October 3, 2000 Presidential debate.
This is a saved up trust fund to cover when withdrawals begins to exceed deposits because more boomers will begin taking from the system because of sheer numbers. As the built up trust is used to pay for this increase in retirees withdrawing, it will level out as the boomers withdrawing decrease and it returns to the basic structure of working population paying in while retired population takes out at balanced rate.
This is no different than withholding a little more of your paycheck into a savings account for when you need to make more or bigger purchases down the road. While you are saving up, more deposits than withdrawals. When you begin spending that extra savings to cover some large expenses, you are withdrawing more than you are depositing.
This dynamic is what some politicians use to try and eliminate Social Security, by using the fact that the fund will begin paying out more than it takes in when the boomers retire, and argue "it is all Ponzi scheme", "it will go bankrupt", "we need to privatize it", etc. They do this by misinforming, and using scare tactics on people of good conscience in order to try and eliminate Social Security and... wait for it.. privatize it and hand the money over to Wall Street. We saw this push once again just a few years ago when George W. Bush pushed to privatize Social Security and have everyone put their money into Wall Street. Imagine what would have happened to our society if everyones Social Security was put into the masters of the universe geniuses on Wall Street's hands as the market imploded.
The same scare tactics about the program have been used when the program was first being set-up, and have been used for over 70 years. That is it s all a scam, that it is socialist, communist, anti-American, and nothing but a Ponzi scheme. They have latched onto the withdrawal rates vs. deposit rates as the latest toe-hold to scream it is all a fraud. But such gnashing of teeth is based on a toxic stew of misinformation, deception, and ignorance.
Don't swallow it.
Image is of "The Scream", the famous 1893 expressionist oil painting by Edvard Munch (1863-1944)