The first nationwide pension program arrived in the United States in 1935, when the Social Security Act came into effect. Full benefits started at age 65. The act was later amended to allow disabled Americans of any age to receive Social Security benefits.
Eight decades later, Social Security payments are the biggest cost in the federal budget. They are over one trillion dollars each year. At the end of 2021, the Old Age and Survivors Insurance and Federal Disability Insurance (OASDI) program was paying benefits to 66 million people.
In celebrating the passage of the Social Security Act, President Franklin D. Roosevelt declared that the taxes collected from workers’ paychecks represented a “savings account for the old age of the worker” and that they would be “held by the government solely for the benefit of the worker in his old age.”
The Ponzi Scheme Allegation
Some critics argue that Social Security operates similarly to a Ponzi scheme due to certain structural aspects.
To begin with, the money paid into the Social Security “trust fund” is immediately lent to the Treasury. This leaves Congress free to spend the money it’s supposedly saving on behalf of current and future recipients. The “trust fund” consists only of bonds issued by the federal government. And this sleight-of-hand is not counted in official statistics measuring the size of the government’s budget deficit.
Each year, the Social Security Administration (SSA) issues a report with the title, Annual Report of the Board of Trustees of the Federal Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds. You can view the 2022 report here.
Understanding Social Security’s Growing Deficit
In 2020, total income minus total benefits paid resulted in a deficit of $56.3 billion. That’s bad enough. But the deficit is projected to increase substantially in the years ahead due to continuing erosion in the dependency ratio: the proportion of people paying into the system versus those receiving benefits from it. According to the annual report, if Congress does not act to increase revenues or decrease benefits, scheduled benefits will need to be reduced by nearly 25% across the board beginning in 2035.
Unfortunately, even that projection is overoptimistic. By 2035, millions fewer workers will pay into the system than even the most pessimistic scenarios estimate.
Blame technology. In the next few years, restaurants will be staffed by robots or automated servers. Hotels will be equipped with automated check-in systems and robotic butlers. Imagine a future where driverless vehicles are the norm. This change will make more than four million American jobs obsolete. Indeed, researchers at Oxford University estimate that nearly half of US jobs could be eliminated by technology in the next two decades.
With millions fewer workers paying into the system, we doubt that Social Security will be able to pay out more than 50% of promised benefits to anyone retiring in my lifetime.
Legal Realities and Historical Precedents
Another lie is that you have a contractual right to Social Security benefits, as FDR promised. But the truth is that Congress can modify or even stop benefits from being paid to anyone, at any time – even those who have paid into the system for decades.
In 1960, the Supreme Court ruled that Social Security payments were not a contract from the government. They were just welfare payments. Congress could change the terms of those payments at any time.
The case, Flemming vs. Nestor, involved a man named Ephram Nestor, who immigrated to the United States from Bulgaria in 1913. Nestor worked in the United States for 40 years and became eligible for old-age benefits in 1955. But in 1956, he was deported to Bulgaria because he had briefly been a member of the Communist Party in the 1930s. This was despite the fact that it was not illegal to be a Communist Party member at the time. When Nestor was deported, his old-age benefits were terminated.
Nestor sued to get the benefits restored. A federal district court ruled that he was entitled to receive them and that his wife, who had remained in the country, was entitled to survivors’ benefits. But in a 5-4 ruling, the Supreme Court overruled that decision. It held that, as with any other type of social welfare payment, Congress has the authority to end Social Security benefits to any class of people it chooses, at any time.
The law denying Social Security benefits to ex-Communists was long ago repealed. But the principle that Congress has no contractual obligation to Social Security beneficiaries remains in place. For instance, Congress could pass a domestic terrorism law. It would outlaw belonging to extreme right-wing groups, like the Proud Boys. It would also ban left-wing groups, such as the Earth Liberation Front. It could then amend the Social Security Act to cut off Social Security benefits to current or past members of these groups.
Plus, you can lose your Social Security if you’re convicted of some crimes. These crimes include espionage, sabotage, treason, and sedition. Indeed, those convicted of seditious conspiracy in connection with the January 6, 2021, attack on the Capitol face possible loss of their Social Security benefits.
Alternative Solution: Exploring Privatization
Can anything be done to salvage the great American Social Security system?
Yes – privatize the program, as Chile did with great success in 1980. Returns have ranged from 4% to 8% per year. The range depends on whether employees choose to invest their pension in bonds and fixed-income funds or in equity-weighted funds.
It’s time to end the Social Security Ponzi scheme. Turn over the assets in the so-called “trust funds” into real taxpayer-controlled retirement accounts backed by real assets.
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