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Social Security – It Is Bankrupt, It Is A Ponzi Scheme And It Will Collapse

*** The following is a guest post for The Debt by Joe the Economist of FixSSNow.org *** Google search yields 37,000,000 articles for the search phrase “Social Security will collapse”.  “Social Security Bankrupt” yields 6 million hits.  “Social Security Ponzi Scheme” yields 1.8 million hits.  Millions of hits, and yet none of it is very useful. I read a lot of blog work on Social Security and it is virtually impossible to go a day without reading that Social Security will collapse.  Whether Social Security collapses is not useful information without knowing how it collapses.  It is something like hearing it is going to rain without knowing when.  Social Security has a 17.9 trillion dollar shortfall – of course it is going to collapse.  The important thing is how and when.

The answer is that the crisis in Social Security will be sooner and larger than any of the experts are predicting.  The people who think that the crisis is 25 years away are stuck in the 1990s thinking that Social Security’s problem is demographic in nature.  Demographics may be a problem for Social Security, but the more immediate threat is economic.  The problem is jobs, wages, and the national debt.  These factors will bring SocialSecurity to its knees long before the number of retirees does.

Demographic will play a factor in the end of Social Security, but not in the sense that the experts foresee.  The fact is that the number of people who benefit from Social Security is dwindling.  In the latest Trustee’s report the Social Security Administration projects that the Trust Fund will be exhausted in 2036, or in 25 years.  That means that if you are 42 today, you are scheduled to retire the year that the Trust Fund hits zero.  That means that anyone who is 47 or younger can expect to live long enough to see their benefits radically cut.  These people were not supposed to get much from Social Security, and now they can expect to get much less.

2010 was the first year in which a majority of voting aged Americans could expect to get substantially less than what had been promised.  2012 was the first year in which a majority of registered voters will get substantially less than was promised.  Soon enough, a majority of registered and active voters will get substantially less than what has been promised.  Every year the size of that majority grows.

Politics isn’t about ideas – it is about percentages.  It should surprise no one that 2010 was the first year in the history of Social Security that payroll taxes were lowered.  In 2011, Congress is being pressured to extend those cuts.  In 2011, Rick Perry broke the rule that Social Security was the 3rd rail of politics.  He called it a ponzi-scheme.  This isn’t courage.  Rick Perry reflects the changing demographics of Social Security.  Get used to it.

To believe that Social Security will survive in its current form, one has to believe that a majority of Americans will vote against their own self interest.  Today, some Americans get as little back as $0.40 on the dollar, and that is before taxes.  And most young Americans doubt that they will ever get anything back.  Social Security is in the best interest of a dwindling minority.

The national debt will force a national discussion about Social Security and its economic returns.  The debt has grown, and grown.  So has the interest burden to support it.  Today that burden is relatively modest because the US government enjoys low borrowing costs.  As interest rates rise, the interest burden will grow.  And people will be forced to choose between supporting the deficit or supporting the retirees who created it.

One of the reasons that the US government enjoys low borrowing costs is because Social Security holds 2.5 trillion dollars of debt on favorable terms.  Social Security will in the near term become a net-seller of Treasuries as payroll taxes plus interest fails to cover the cost of the system.  Social Security owns more US government debt than anyone in the world.  It owns three times as much as China.  So the best customer of the US Treasury is about to become a direct competitor, forcing the US Treasury to switch from trapped capital in the Trust Fund to market rates in the public markets.

So Social Security will become a major part of rising interest rates, and will get to be center stage in the discussion about the national debt.  This debate will drive a considerable amount of inter-generational tension.  People below 50 will see payroll taxes as a way to paydown the national debt that was incurred by previous generations.  Those 50-65 will see Social Security as a fallback provided that its resources are well used.  Those 66 and older will continue to see the system as nothing more than payback for what was taken from them.

Social Security will get means tested.  But that is not enough.  It is already means tested by IRS tax code by income.  The next expansion will be to means test the system by wealth.  In the end many seniors will simply lose their check in its entirety.  This process will mean that more children will have to care for their parents.  So those who don’t like the system will start hating the system.

In the end, the system will be terminated.  Those in need will get support from standard welfare programs which will survive in more modest condition.  Payroll taxes will go away.  Income taxes will increase to help pay down the debt.  America will survive.  And our children will emerge from this mess with the exact same view of debt that our grandparents had as they emerged from the Great Depression.

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  • Bankrupt

    Very useful article. Thank you for sharing this story about social security in bankrupt ponzi scheme. We finding more interesting topic about this article.

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