Is Social Security a Ponzi Scheme?

By Scott GardnerOver 40% of Americans under the age of 60 believe that Social Security is a Ponzi Scheme. That’s probably because the two systems sound very similar. When I substitute the word ‘retirees’ for ‘investors,’ can you guess which of the following definitions describes the Social Security system and which one describes a Ponzi scheme?A system where you pay profits to earlier investors with the funds from more recent investors.A pay-as-you-go system that pays early investors from current payments into the system.If you guessed that option 1 describes a Ponzi scheme and the latter option describes the Social Security system, you’d be right! So many people think that Social Security is a Ponzi scheme because both systems collapse without continual deposits.As of today, the Social Security Board of Trustees projects that trust fund reserves will be exhausted by 2037 ². This means that all retirees after the year 2037 will likely have their benefits reduced to the amount of Social Security taxes collected by the system. To prevent this from happening, the Board of Trustees recommends that congress increase the paycheck tax rate from 12.4% to 14.4%.Alternative SolutionsI’m not too fond of taxes, and I don’t think the government is very efficient at allocating resources. So, instead of a tax hike, here are several solutions that might fix the Social Security Trust Fund (in no particular order).Sovereign Fund. The Social Security Trust Fund is required by law to be invested in non-marketable securities issued and guaranteed by the “full faith and credit” of the federal government. In other words, we borrow from ourselves to pay ourselves back at rock-bottom rates! Instead of allowing the government to borrow excess funds paid into the Social Security Trust Fund, (1) make the government get their money elsewhere and (2) allow all excess funds to be invested in a diversified global sovereign fund managed by the top fifty money managers in the United States.Eliminate Exemptions. There are many exempted retirement programs for congress, teachers, unions, and other government agencies¹ that get much higher returns than the Social Security system. While it might not solve all the Social Security Trust Fund’s solvency problems, it would definitely help to merge these programs with Social Security and grant all Americans equal retirement benefits.Private Retirement. Americans are living longer and longer, which is putting a strain on the Social Security Trust Fund. If you allow Americans to direct 50% of their Social Security contributions into a privately managed IRA in exchange for not claiming on the Social Security System at a later date, then it will increase confidence in personal retirement and solve much of the cash shortfall in the trust fund.Increase Immigration & Broad Amnesty. Part of the insolvency problem is that you have more people drawing on the system than are contributing to it. One way to solve that problem is to grant amnesty to all immigrants currently in the United States and adopt an Ellis Island-style policy that allows mass, rapid immigration for any worker under the age of 30 (with no prior criminal record, of course).Reduce Benefits. This solution will get you thrown out of office if you’re a politician, but it is something that should be seriously considered. Politicians tend to apply short-term fixes to everything because a long-term solution doesn’t get you reelected. The Social Security Trust Fund shortfall is one of them.Shut Down the Entire System. While this is an unpopular nuclear option, it is still an option. This will take many years to wind down for the people who rely on their Social Security income to live. Conceptually, if the Social Security fund were shut down and the government kept collecting 12.4% of every paycheck, the United States could apply that windfall to programs that benefit all its citizens—green initiatives, free higher education, cancer research, space exploration, infrastructure programs (high-speed rail systems), etc. That amount of money carefully directed could usher in a new era of prosperity and peace.Don’t Bet on Social Security. Personally, I am not expecting to get anything from Social Security. If I’m wrong, it’ll be nice to get an unexpected income. However, if I’m right, then I will still be able to retire in a manner of my choosing. So, if you don’t want to leave the comfort of your golden years in the hands of the government, I suggest you save aggressively and invest wisely to maximize the power of compounding.I am not advocating for one solution or another, but I am calling for congress to stop kicking the can down the road and do something proactive to prevent future tax hikes and insolvency. Anyone can react with a Band-Aid solution; it takes wisdom and cooperation to craft something that will truly benefit the masses.If you’re freaking out about retirement, my office (Sterling Wealth Management) is here to assist you with your retirement needs. If you want to schedule a free, no-obligation meeting to speak with me, please call me at 702-228-0500.¹ https://www.ssa.gov/slge/faqs.htm² https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html