When Warren Buffett speaks, lots of smart people listen. Until recently, he helmed Berkshire Hathaway (BRKA 0.46%) (BRKB 0.34%), and over the 60 years when he was in charge, the S&P 500 index of 500 of America's biggest companies gained about 39,000% (10.4% annually, on average), while Berkshire Hathaway grew in value by 5,500,000% (nearly 20% annually).
Clearly, Buffett knows a thing or two about money and the economy. He has shared thoughts about Social Security, too -- particularly back in 2005, when asked about it at an annual shareholder meeting.
Image source: The Motley Fool.
Is Social Security a Ponzi scheme?
At the 2005 shareholder meeting, an audience member asked Buffett and his vice chairman, Charlie Munger: "Today, I'm asking for your opinion on Social Security. Shall we call it the government-sponsored Ponzi scheme for retirees?"
First, let's define terms. Here's how our government defines Ponzi schemes, at Investor.gov:
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
Social Security does rely on money coming in from one group of people to pay another group of people, but there's no fraud involved. The system is transparent about what's going on and aims to help older people survive financially.
People who criticize Social Security as an undeserved "entitlement" are wrong, too. Retirees who paid into the system via taxes on their earnings are entitled to what they were promised -- some income in their golden years.
Warren Buffett said...
You might expect Buffett, a billionaire, to be against a tax like this. If so, you don't know Buffett, who has long called for higher taxes on the wealthy. Here's how he answered the question:
[E]ssentially it's a transfer payment. I basically believe that anything that would take Social Security payments below their present guaranteed level is a mistake. I think that in this country -- extraordinarily rich country -- that the people in their productive years can take care of those outside in both areas, even though the ratio of productive to non-productive has changed and is changing. But we take care of our young. And a rich country takes care of its young, and it takes care of its old.
As usual, Buffett knows his stuff, referring to the ratio of contributing workers to beneficiaries, which has been shrinking over time.
Check out how the ratio of workers to Social Security beneficiaries has shrunk over time:
|
Year |
Ratio of Covered Workers to Beneficiaries |
|---|---|
|
1945 |
41.9 |
|
1955 |
8.6 |
|
1975 |
3.2 |
|
1985 |
3.3 |
|
1995 |
3.3 |
|
2005 |
3.3 |
|
2015 |
2.8 |
|
2020 |
2.7 |
|
2025 |
2.6 |
|
2035* |
2.3 |
Source: Social Security Administration. *Projected, in the 2025 Social Security Trustees report.
A problem -- and solutions
Those shrinking numbers are a problem, and Social Security is facing a shortfall. If nothing is done to strengthen it, Social Security's trust funds' surplus will run out within a few years, which will result in benefits shrinking to around 77% of the amount due to beneficiaries.
Fortunately, there are multiple ways to fix Social Security, and Buffett pointed to one in his answer, referring to the earnings cap. It gets updated annually, and for 2026, it's $184,500. So someone who earns $1,184,500 pays as much into Social Security as someone who earns $184,500. Social Security would benefit if all of everyone's earnings were taxed -- or at least if the cap was raised significantly.
Here's hoping that Congress acts in the years ahead to strengthen the Social Security program.
