“Social Security is the biggest Ponzi Scheme of all time.”

By Nick Hengl, CFP®, EA

Part 2 of the tariff post is in the works. In the meantime, however, I’m feelin inspired to cover a topic many find confusing and disconcerting. My source of inspiration…

A clip has been making the rounds of richest-man-in-the world and head of (advisor to?) the Department of Government Efficiency (DOGE), Elon Musk, telling Joe Rogan that “Social Security is the biggest Ponzi Scheme of all time”. Mr. Rogan—a podcaster, MMA commentator, and notorious conspiracy enthusiast—with a smug look of knowingness—says to Mr. Musk, “Right. Explain that”. Mr. Musk stumbles through an awkward answer that is—at best—incomplete.

If my tone comes across as cynical or dismissive, it should not be mistaken as an expression of political tilt. It’s the perspective of a professional who helps families plot out their financial course. It’s the perspective of someone who’s seen the dread in people’s eyes as they ask whether Social Security is going to exist when they reach retirement. And Mr. Musk’s flippant comment is perpetuating this fear. Here is the quote:

“Social Security is the biggest Ponzi Scheme of all time […] People pay into Social Security and the money goes out of Social Security immediately but the obligation for Social Security is your entire retirement career. So, you’re paying with—you’re […] Like if you look at the future obligations of Social Security, it far exceeds the tax revenue. Have you ever looked at the debt clock? There’s our present day debt but then there’s our future obligations. So, when you look at the future obligations of Social Security, the actual national debt is like double what people think it is because of the future obligations. So, basically people are living way longer than expected and there are fewer babies being born so you have more people who are retired, who live for a long time, and get retirement payments […]”

Let’s start with a real simple recap of Social Security:

There are two Social Security Trust Funds: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). OASI—what most people hope to receive in retirement—is what we’ll focus on. The OASI Social Security Trust fund has approximately $2.7 trillion in its reserves. This reserve was built through a combination of surplus payroll tax revenue, interest on Treasury securities, and taxation of Social Security benefits for recipients whose total income exceeds certain thresholds. In an ideal world, we would not need to tap into this reserve: the aforementioned payroll tax could cover the country’s current Social Security obligation and maybe we’d have a little left over to squirrel away in that OASI Trust fund.

Enter the Baby Boomers. As the largest cohort in the US began retiring, the payroll tax alone could not cover the full cost of the Social Security benefits, so we started supplementing payments from the OASI Trust. Which is precisely what it was designed to do. But it’s also where the fear of Social Security’s demise comes from. Fear that baby boomers will live longer than anticipated and deplete the Trust; fear that the current workforce is paying the older generation to empty the pot of gold.

…and that’s the basis upon which Mr. Musk is calling Social Security a Ponzi scheme: the newer participants to the labor force put money into the system, and it goes directly to participants who’ve reach retirement age. So, how is it not a Ponzi scheme then? Social security is not a mysterious black-box investment involving deception or any realistic risk of the system folding. There is no situation in which a “run” on Social Security is going to cause the cards to come tumbling down. You pay into the system and those payments go directly to retired beneficiaries; one day YOU will be that beneficiary—reaping the rewards of your years in the workforce.

Regarding the depletion of the OASI Trust fund…

Believe it or not, there are—and have been for a long time—very smart people monitoring, analyzing, and making Social Security policy recommendations; this includes the Board of Trustees and a Chief Actuary. The board’s most recent annual report stated that, at the current rate, the OASI Trust Fund would be depleted by 2034. This does NOT mean that Social Security benefits would suddenly stop. (Remember the majority of Social Security Payments come from payroll tax on the workforce.) It means that Social Security payments would drop to 80% of the full benefit amount through 2098.

So, how will we make sure that a 20% drop in payments doesn’t happen in the next 10 years? Legislation. What kind of legislation would allow us to fix this? We can start with the hundreds of potential legislative solutions provided by the Office of the Chief Actuary to address the Trust Fund’s solvency issues: https://www.ssa.gov/oact/solvency/provisions/summary.html

Congress has addressed shortfalls numerous times in the past—and they will again. How do I know? You try telling 58 million Social Security recipients their benefit is dropping by 20% and see how it goes. Not getting re-elected might be the least of your problems.

In summary: the Social Security system is far more robust and “fixable” than a lot of folks realize. And, no, it is not a Ponzi scheme.

Source: https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

Source: https://www.youtube.com/watch?v=sSOxPJD-VNo&t=3814s

Important Disclaimer: The information provided in this blog post is for informational and educational purposes only and should not be considered financial, investment, or legal advice. Every individual's financial situation is unique, and you should consult with a qualified financial professional before making any financial decisions. The opinions expressed are those of the author and do not necessarily reflect the views of any affiliated organizations. Investments involve risk, and past performance is not indicative of future results.