The Truth About Social (In)Security



The definition of a Ponzi scheme is “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.” This is exactly what happens every month when money is taken out of Americans’ paychecks to fund Social Secu- rity. In 1935, when the Social Security Act was signed by President Roosevelt, the Social Security Administration pledged that after 1949 the combined (Social Se- curity and Medicare) payroll tax rate of 6 percent would apply only to a worker’s annual income up to $3,000 and “that is the most you will ever pay.”

Today’s rate of 15.3% can apply to as much as $106,800 of annual income, which is more than triple the inflation-adjusted equivalent of what $3,000 was worth in 1949. If such a thing happened in the private sector, the one responsible would be prosecuted, fined and/or jailed, and a civil action for restitution could be filed to recoup your assets. But you can’t sue the Social Security Administration, and you do not even own the assets it has taken from you over the years.

Many politicians have tried to blame Social Security’s many problems on the changing of America’s demo- graphics. It is true that birth rates, immigration rates, and mortality rates have declined in the United States since 1935. Our average lifespan is now 78 years, up from 64 years in 1935. Yet Social Security has always used age 65 for eligibility. Politicians should notice that private pension plans, annuity providers, or insurers haven’t gone bust. They’ve adjusted over time.

Social Security is far from secure. It is projected to be completely insolvent by 2033. According to its 2013 Trustees Report, the Social Security system is 32 percent underfunded. That translates into $23 trillion. Detroit, a city that went bankrupt, had pension plans that were only 16 percent underfunded. But here’s the important thing to remember, Detroit did not just go bankrupt, it has been bankrupt for years. Yet no one, particularly its accountants and actuaries who spent years cooking the books, was paid to admit it.

The federal government has the ability to keep virtually all of its future liabilities off the books. It is not worth writing down the most current debt, because by the time this article is published, it will be millions short. Let’s just say it is over $17 trillion (if you want to see real-time updates go to But if you want the true measure of our debt, the one suggested by economic theory, is the fiscal gap, it is closer to $222 trillion. The fiscal gap is the present value of all future expenditures, including servicing outstanding official federal debt, minus the present value of all future receipts. The federal government simply decided not to report the present value of the checks for Social Security benefits.

The accounting our politicians use would embarrass the executives of Enron or Bernie Madof. Our country is facing a grave long-term fiscal crisis, one that is being dumped on a generation that is already crippled with college debt. The truth needs to be brought to light, and Washington needs to be held responsible.