Brent D. Gardner, CLU, ChFC

Ponzi and pyramid schemes are defined as fraudulent investing scams that promise high returns with little risk to investors. In order for these types of schemes to work, an influx of new investors is needed for the funds to be available to pay the old investors.

When someone claims that their social security benefits are their money that they put in, they are technically wrong.

America’s Social Security program displays the same characteristics as these schemes because Social Security recipients are not paid with the money that the government deducted directly from them and their past employers. Instead that money was used to pay the benefits for past retirees, while current retired recipients are getting their money through Americans who are currently working and contributing to the system.

In other words, when someone claims that their social security benefits are their money that they put in, they are technically wrong because their money was used to pay someone else.

A Brief History

Social Security first began as a dream proposed by President Franklin Roosevelt in 1934 that was inspired by the Social Insurance programs of Europe. The idea was simple—everyone chips in so that the widowed, disabled, and elderly can have a monthly stipend to provide them with some economic security when their ability to work and earn is limited. The Social Security Act was passed by Congress in 1935. Deductions started to be taken out of wages in 1937 to build up the fund’s reserves. And in 1940 the first beneficiaries began to collect their monthly checks.

The Social Security Administration proudly boasts that Ida May Fuller was the first American to receive benefits from this program. Born in 1874 and retired in 1939, Ms. Fuller was vaguely aware that for the past couple of years she was having money deducted from her check for Social Security. The first recipients of the Social Security program took out far more than they put in. 

So she visited an office to see what it was about and filed for benefits. In January 1940 check number 00-000-001 was issued to Ms. Fuller for the amount of $22.54, which is equal to more than $400 in 2020 when adjusted for inflation.

During Ms. Fuller’s working lifetime, she contributed a total of $24.75 into the program. She would go on to live another 35 years and collected $22,888.92. That’s a return of more than 924 times. The overwhelming majority of Ms. Fuller’s social security benefits were not paid by her but instead came from the workers in the American workforce between 1940 and 1975.

Design Flaws

As the documentation and data show, the first recipients of the Social Security program took out far more than they put in with the difference being made up by the fact that active workers then greatly outnumbered beneficiaries. In 1940 this was not an issue as there were 159 workers supporting one beneficiary. As the population grew, so did the number of retired people utilizing this program. By 1960, 15 years after President Roosevelt’s death, that ratio was reduced to 5 workers for every beneficiary. In 1980, the ratio dropped to just above three and in 2010 it dropped below that. As of 2013, every social security beneficiary is being supported by 2.8 workers.

Social Security should be viewed as a mandatory insurance policy instead of a government guaranteed benefit. Private insurance funds need to collect more in premiums than they payout in claims in order to remain solvent. This is why insurance plans have caps and limits on what they will pay out. Social Security’s benefits don’t follow that model. They will adjust the amount of the monthly benefit relative to what the beneficiary put in, meaning a low-income wage earner will receive less per month than a high-income wage earner, but these benefits are paid out over a lifetime. Cutting Social Security benefits will be political suicide for any politician or party that proposes it.

Ms. Fuller collected 924 times more than she put in, in part because she lived to be 100 years old.

By our government’s own estimates, the reserves in the Social Security Fund will be depleted by 2034 as more Americans draw benefits. In order to maintain solvency, there are only three options: cut benefits, increase the amount workers and employers are required to put in, or a combination of these choices.

Cutting the benefits will be political suicide for any politician or party that proposes it. Many baby boomers have retired or will retire over the next decade. They have paid into the system for their entire working careers and have factored Social Security benefits into their retirement plans. Likewise, because they have paid into the program their entire lives, many also believe the fallacy that their benefits come directly from the money deducted from their salaries over the decades, which as we know from Ida May Fuller’s story, is not true.

Don’t Count on It for Our Retirement

While cutting benefits now for current recipients might not be politically likely, Americans and especially those under 40 need to recognize that Social Security is a severely flawed system. Like most welfare, it can only operate when the people contributing into the system outweighs those who are taking out of it. If the opposite becomes true, then the system will collapse.

Raising the amount every worker contributes is not a good solution either because it leaves the flaws of the system intact while kicking its consequences down the road for a future generation. America needs to focus on gradually winding down Social Security with the idea to eliminate it in the not too distant future.

Start saving and planning for retirement now and make a plan that does not count on a government-issued Social Security check.

While it might take years or decades or even generations for politicians to seriously tackle the problems with this program, there is one thing that Millennials and Generation Z can do to prepare themselves for that day. Start saving and planning for retirement now and make a plan that does not count on a government-issued Social Security check.

In the worse-case scenario that the program goes bust and disappears, you’ll be prepared to live well. And even in the unlikely best-case scenario where the program somehow survives, you’ll have unexpected extra income.

This article was originally published on FEE.org. Read the original article.