There isn't a social program in this country that improves the financial well-being of Americans quite like Social Security. According to an analysis conducted by the Center on Budget and Policy Priorities using data from the U.S. Census Bureau, nearly 22.7 million people are lifted above the poverty line every year by the guaranteed payments Social Security provides. This includes 16.5 million seniors aged 65 and over.
But just because America's top retirement program provides the necessary income to help its beneficiaries cover their expenses, it doesn't mean Social Security is infallible.
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Social Security is facing a greater than $22 trillion long-term funding shortfall
For more than 80 years, the Social Security Board of Trustees has published an annual report that outlines the current financial health of the program. It also postulates what things might look like 10 years and 75 years (i.e., the "long-term") following the release of a report given a number of changes to fiscal and monetary policy, along with demographic shifts.
Since 1985, every Trustees Report has cautioned that Social Security was facing a shortfall in its long-term funding obligation. In other words, revenue collection wouldn't be sufficient to cover outlays -- primarily benefits paid, including cost-of-living adjustments, but also administrative expenses to operate the program -- over the coming 75 years.
The 2023 Social Security Board of Trustees Report estimated that the program's funding obligation shortfall had swelled to $22.4 trillion through 2097. This marked a $2 trillion increase from the estimate given in 2022 that outlined the program's long-term cash shortfall through 2096.
Arguably, even more worrisome is what could happen to retired-worker and survivor benefits in less than a decade.
The Trustees believe the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for doling out monthly checks to retired workers and survivor beneficiaries, could deplete its asset reserves by 2033. Should the OASI's asset reserves be exhausted, sweeping benefit cuts of up to 23% may be necessary to avoid any additional payout reductions through 2097. For the average retired worker, a 23% benefit reduction would reduce their annual take-home by an estimated $6,638 by 2033.
Image source: Getty Images.
Is America's top retirement program nothing more than a Ponzi scheme?
Social Security's worsening financial health has ignited the opinion on social media message boards that the program is nothing more than a gigantic Ponzi scheme.
A Ponzi scheme is an investment fraud that effectively pays out existing investors with the funds collected from newer investors. The architect(s) of these frauds may not invest the money they receive and typically pocket some of the funds for themselves. Bernie Madoff and Allen Stanford ran two of the most infamous Ponzi schemes on Wall Street.
But is Social Security truly nothing more than a Ponzi scheme? Dig beyond the social media message boards and you'll see that this opinion is completely lacking in evidence.
To begin with, Social Security isn't an investment vehicle, which is a requirement of a Ponzi scheme. The program is more of a social investment in the well-being of our nation's retired workers, survivors of deceased workers, and workers with long-term disabilities. Social Security was never designed to generate a profit or make its beneficiaries rich. It was signed into law to provide a financial foundation for those who could no longer do so for themselves.
Secondly, a Ponzi scheme specifically pays existing investors with the money collected from newer investors. Social Security fails this definition because not all of the money doled out in benefits comes from current workers.
In 2022, 90.6% of the $1.222 trillion Social Security collected derived from the 12.4% payroll tax on earned income (wages and salary, but not investment income) of working Americans. The remaining 9.4% ($115 billion) can be traced back to interest income earned on Social Security's asset reserves, as well as the taxation of benefits.
As noted, Ponzi schemes result in their architects stealing customers' funds. In other words, there's always money missing once the books are delved into. A third way Social Security confirms it's not a Ponzi scheme is by the transparency of its Trustees Reports. More specifically, every cent of the program's $2.8 trillion in combined OASI and Disability Insurance Trust Fund (DI) asset reserves is accounted for.
The Social Security program is required by law to invest any excess cash collected into ultra-safe, special-issue government bonds that generate interest income. The program's investment holdings are updated monthly, with an even more detailed breakdown of bonds held, along with maturities, in the annual Trustees Report.
Despite the extremely superficial correlation of today's workers providing a substantial percentage of the benefits existing beneficiaries are receiving, Social Security in no way meets the definition of a Ponzi scheme.
A depletion of the OASI's asset reserves could lead to sweeping benefit cuts for retired workers and survivor beneficiaries by 2033. US Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.
Here's what's really wrong with Social Security
In addition to the fallacy of Social Security being a Ponzi scheme, other outright lies have made the rounds on social media, including "Congress stole from Social Security" and that "undocumented workers are receiving benefits." None of these claims bear any bit of truth for why Social Security is contending with a $22.4 trillion long-term funding shortfall.
The bulk of Social Security's financial shortcomings can be traced back to demographic shifts.
Some of these shifts are well known. For instance, the steady retirement of baby boomers is lowering the worker-to-beneficiary ratio over time. Likewise, life expectancies have notably risen since the first retired-worker check was mailed in January 1940. Social Security was never meant to pay beneficiaries for multiple decades, as can happen now.
But it's the less-visible demographic shifts that are causing the most harm.
As an example, legal migration into the U.S. has declined for 25 consecutive years. Most legal immigrants arriving in the U.S. tend to be young, which means they'll spend decades in the labor force contributing to the program via the payroll tax before collecting a benefit of their own. Social Security relies on a healthy level of net migration into the U.S., and this figure has been precipitously declining.
Another problem for America's leading retirement program is a historic decline in U.S. birth rates. Although a lower number of births isn't a problem right now, it will become an issue a generation from now when the worker-to-beneficiary ratio falls even further.
Income inequality is an obstacle, as well. In 1985, 88.9% of all earned income was subject to the payroll tax. But as of 2021, only 81.4% of earned income was applicable to the payroll tax. More earned income is "escaping" taxation over time.
Lastly, Congress deserves its fair share of the blame. Lawmakers are well aware of the issues facing Social Security, but neither party has been willing to work with their opposition to find a common-ground solution. The longer lawmakers wait to act, the more painful an eventual solution is going to be for working Americans and Social Security beneficiaries.
