It is often said that America’s Social Security system is a Ponzi scheme. Nothing could be further from the truth.
A Ponzi scheme involves investors, who are induced to invest in a particular product on the promise of a large return on their investment, say, 25% after one year. At the end of the year, when that 25% return is due to be paid, there is insufficient money to pay off the investors because the organizers of the scheme have spent the money on themselves. So, they use the money from new investors to pay off the old investors. This process goes on and on until one day new investors cannot be found. That’s when old investors don’t get paid off because there is no money to pay them. That group of investors, who have clearly been defrauded, gets caught holding the bag and loses everything.
That’s not the way Social Security operates. There are no investments when it comes to Social Security. That is, no one invests his money in the Social Security system.
Moreover, contrary to popular belief, people do not “put their money” into the Social Security system or into a Social Security “fund.” That is, Social Security is not a retirement account, like an IRA, where people send their money each month or where an employer withdraws a certain percentage of a person’s income and puts it into a retirement fund.
Social Security is nothing more than a welfare program, one that is no different in principle than, say, food stamps. In the case of food stamps, the welfare ostensibly helps the poor to buy food. In the case of Social Security, the welfare helps seniors to buy food, housing, vacations, golf balls, or whatever else they wish to spend the money on. It’s essentially a retirement pension that the government is giving people.
Let’s assume that the American people went without Social Security for more than 100 years (which is actually the case). Suddenly, the government decides to enact a program by which the government is going to provide a retirement stipend to everyone who is 65 years or older.
How much should that stipend be? It can be whatever the government wants it to be. The government could, for example, decree that each senior will receive the same amount, say, $2,000 per month.
Where would the government get the money to do that? Well, the government is not a fountain of wealth. The only way it can get the money to fund that monthly stipend for seniors is with taxation. It would get the money by taxing everyone who is younger than 65. It could do it with income taxes, food taxes, tariffs, excise taxes, or any other tax.
If that were the case, everyone could easily see reality — that is, that Social Security is just another welfare program, just like food stamps, that is being paid with money collected by taxation.
But public officials were much more clever than that. What they did was create a special tax on people’s payroll income called the FICA tax or the Federal Insurance Contributions Act, which forcibly took out a certain portion of people’s payroll to fund the Social Security payments.
They then calculated the amount of money seniors would receive by how much FICA taxes each of them had paid over the course of their work lives.
That was clever because it induced people to feel like they were “putting their money into the system,” like with an IRA.
That’s not what was happening, however. The FICA tax was just another tax — like the income tax or a food tax. It was just another way of collecting money through force from the citizenry.
Moreover, the calculation of how much money would be paid to each senior was entirely arbitrary. One way was to base it on the amount of FICA taxes paid, which was what they did. But they could have based it, if they had wanted, on how much income taxes people had paid, or they could have simply sent everyone the same amount — say, $2,000 per month.
The point of all this is that no one invests or puts his money into a welfare program, whether it be Social Security, food stamps, education grants, farm subsidies, or any other program where the government hands out a dole to people. A welfare program is simply a program in which the government gives out a set amount of money to people. The government determines how much that payment will be.
To get the money to pay welfare programs, the government taxes people. The taxes can be income taxes, payroll taxes, food taxes, sales taxes, tariffs, or some other tax. The amount people pay in taxes has nothing to do with how much welfare is paid out, unless the government decides to base the amount of welfare on how much taxes people have paid, as it has with Social Security.
Unlike a Ponzi scheme, which obviously is based on fraud, there is no fraud in Social Security, as some people often claim. While some politicians over the years have claimed that Social Security is a retirement program, what counts is the law, not some false political pronouncements designed to get votes. The law has been clear from the beginning — Social Security is just a welfare program, one funded by taxes, just like every other welfare program.