Social Security Approaches Its Day of Reckoning

Americans should plan for their futures rather than relying on a nonexistent Social Security “trust fund.”

Social Security is very popular with Americans. Large majorities of Democrats and Republican like the program and want it to continue with no cuts in benefits, no increase in costs to taxpayers, and no real reforms of any kind. Unfortunately, Social Security is and always has been a scam that is rapidly approaching collapse. Economists point out that something has to give if the program is to avoid catastrophe, and so do the trustees who run Social Security.

A Ponzi Scheme With Federal Backing

"Imagine a charismatic salesperson promising sky-high returns to early investors, only to use the money from new investors to pay them off," the Cato Institute's Romina Boccia writes in a new report. "This is the infamous story of Charles Ponzi, whose name became synonymous with fraud. Now, consider the US Social Security system. Current workers' payroll taxes fund the benefits of current retirees, much like how Ponzi's scheme used new money to pay off old promises."

Boccia reminds us that the famous Social Security "trust fund," which many Americans wrongly believe contains money paid into the program to be disbursed at a later date, doesn't really exist. "The trust fund essentially consists of IOUs or promissory notes that represent claims on future tax revenues."

Until 2010, Americans paid more in Social Security taxes than the program paid out in benefits. The extra money wasn't saved but passed on to be spent by the rest of the federal government in return for IOUs. That point passed as the ratio of workers to retirees dropped and seems unlikely to shift back given the country's declining birth rate and aging population. That means the difference between revenues and expenditures is now made up, as it is across the rest of the federal government, by borrowing. As Social Security cashes in those IOUs, the Treasury will borrow an estimated $4.1 trillion plus interest to fund the program between now and 2033. "It's like borrowing money to pay off credit cards," Boccia notes.

What's so special about 2033? That's the year the well of IOUs is expected to start running dry.

"The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report," the Social Security trustees revealed in the most recent annual report. "At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 79 percent of scheduled benefits."

Social Security's Disability Insurance fund is in better financial condition, but also much smaller. If rolled into old-age benefits, "the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2035." That is, it would buy a whole two years.

Americans Admit Reform Is Needed, but They Don't Want It

That said, there are ways to keep Social Security chugging along. Benefits could be lowered, taxes could be raised, the retirement age could be adjusted to reflect our life expectancy (which is longer now than when the program was implemented), or it could be converted to a means-tested welfare program. But good luck implementing any reforms. Americans have some understanding that the program is financially troubled: "Among U.S. nonretirees, 50% expect the Social Security system to pay them a benefit when they retire," according to Gallup. But most still don't want to change anything.

This month, Pew Research found "large majorities of Trump (77%) and Harris supporters (83%) opposed any reductions in the Social Security program." In February, a Redfield & Wilton Strategies survey revealed that 66 percent of Americans agree Social Security needs reforming, but "69 percent of respondents across all age groups opposed cutting benefits to those on Social Security, while 52 percent were against raising the retirement age and 44 percent opposed raising taxes on workers' income." What kind of reform they have in mind is anybody's guess.

FDR's Signature Program Is 'Straight Politics'

That public commitment to an unsustainable program was baked into Social Security from the beginning. According to the Social Security Administration Historian's Office, when then-President Franklin Delano Roosevelt was advised that basing Social Security on payroll taxes was unwise, he replied:

I guess you're right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics.

As a result, Americans feel a personal connection to their Social Security benefits even though they're just goodies funded by general federal revenues and, increasingly, debt. That's especially unfortunate given that most people are better off saving for their own retirements.

You're Better Off Saving for Yourself

"In all but four of the 400 cases" analyzed, "the annual income from saving outstrips the Social Security retirement benefit," according to a 2016 Tax Foundation analysis comparing private savings for old age to the government program. The exceptions were "very lowest income workers," suggesting Social Security would operate best as a form of relief for the poor.

Cato's Boccia proposes that "policymakers should focus on reducing the growing costs of benefits" if they hope to return Social Security to long-term solvency. "This leaves room for benefit reforms that uphold Social Security's original promise to keep seniors out of poverty."

Boccia considers other means of reducing benefits costs, too, including increasing eligibility ages and changing cost-of-living adjustments to more accurately reflect inflation. But it's difficult to escape the fact that most Americans would be better off in retirement if they saved for themselves than by relying on Social Security, even if we don't take into account the program's looming insolvency.

In terms of planning for the future, perhaps the most realistic Americans are those in the best position to do something about it. "Thirty-seven percent of nonretirees between the ages of 30 and 49 believe they will get Social Security benefits, while 61% do not," Gallup noted last year. People in that range are generally established and earn enough to sock some away for retirement. They have time to plan and build nest eggs. They would be in even better shape if freed from part or all of FDR's "straight politics" payroll taxes so they could save more.

"Reforms should prioritize reducing Social Security benefits and their burden on workers," Boccia concludes in her report.

Likewise, Americans should prioritize planning for their own futures rather than relying on a nonexistent "trust fund" made up of nothing but debt and empty promises.