Is Social Security a Ponzi Scheme?

Ahh… Social Security. Is it a reliable system that we can count on to cover our expenses in retirement, is it destined for failure, or somewhere in between?

Short answer: no, I don’t think Social Security is a Ponzi scheme. However, I do think something needs to change for it to be sustainable long-term, so it doesn’t become a Ponzi scheme.

Germany was the first recorded nation to adopt a social insurance program back in 1889, when the common cold was practically a death sentence and you were “lucky” to live to 80. Germany initially established the retirement age, marking the start of retirement benefits, at 70 years old. This benchmark dropped to 65 in 1916.

Social Security was introduced to the US in 1935, where age 65 was determined to be the “retirement age.” Actuarial studies showed that using 65 as the benchmark for receiving Social Security benefits produced a “manageable system that could easily be made self-sustaining with only modest levels of payroll taxation” (source). In other words, age 65 struck an appropriate balance between people paying into the system with reasonable tax rates and those receiving Social Security checks.

Alas, the traditional retirement age of 65 was established. Since then, the full retirement age of receiving Social Security benefits has been extended to 67 for those born after 1960, with reduced Social Security payments accessible as early as age 62.

Good to go, right? Some guys did the math back in the ‘30s and we’ve got the perfect system. Not so much.

A lot has changed since the ‘30s. Increased life expectancy, a lower ratio of people paying taxes vs. those receiving retirement benefits, and stagnant Social Security tax rates all stress the system and impact the future of Social Security

Increased life expectancy

In 1940, around the time when Social Security originated, the average life expectancy for a 65-year-old was almost 14 years (~79 years old). Today, it is over 20 years (~85 years old), a 6-year difference. As the average life expectancy increases, our elderly population grows in lockstep. This trend is likely to continue as modern medicine advances. More old people means more people receiving Social Security benefits.

Lower ratio of Social Security contributors vs. beneficiaries

Nowadays, Americans are having fewer kids and living longer than the generations before us. The number of Americans 65 and older is projected to increase from 58 million in 2022 to 75 million in 2035.  As the population density shifts more toward the elderly, fewer and fewer people will be contributing to Social Security taxes compared to the number receiving Social Security benefits. Not looking great, so far.

Stagnant Social Security taxes

Although Social Security tax rates gradually increased from its inception until 1990, they have remained stagnant since 1990. This tax rate has remained 6.2% for employees and employers each, and 12.4% for self-employed individuals, for over 30 years.

Mike, get to the point.

So what’s the takeaway from this random lecture on Social Security? As life expectancy increases and the eligibility age to receive Social Security benefits remains mostly constant, the number of people receiving Social Security checks increases. The greater the number of people receiving Social Security payments, the greater the burden on working individuals.

Something has to give, whether it comes in the form of increased Social Security taxes on working individuals (which hasn’t happened since 1990), decreased Social Security payouts for retired individuals, further extending the retirement age for Social Security eligibility, continually expanding the national debt, or any combination of the above.

If nothing changes with the current system, Social Security payments are projected to decrease by 22% starting in 2041 (the Social Security Administration says so themselves).

Do I think Social Security will be abolished? Nah, that’d be political suicide for whatever politician decides to propose that. Not to mention they’d never get the invitation to Bingo ever again.

But even if Social Security does continue without hindrance, the annual payout may not be enough to sustain your desired quality of living for the remainder of your life. The average monthly Social Security payout for retirees in 2023 is $1,707. I don’t know about you, but I spend more than $1,707 a month. Retiring with nothing to stand on but your Social Security check can leave you in a world of hurt if you don’t have additional income sources to rely on.

Hence, why budgeting and investing are important. Although our beloved government has proven time and time again to be wise and responsible with the money we graciously give them, I’d rather not put my entire financial future in their hands.

Call to Action

Do you spend more than $1,707 a month? Do you plan to retire before age 62? Do you have trust issues with the US government? If you answered yes to any of these questions, start investing toward retirement.

What We’re Reading/Listening To:

YouTube Channel: Graham Stephan. When I first started getting into personal finance, I spent a LOT of time learning from Graham Stephan on YouTube. Can he be super click-baity at times? Absolutely. But he is a wealth of knowledge on all things personal finance, investing, and the US economy/housing market.

Debrief on Deck

Next week, I’m coming back ‘atcha for another newsletter (Wilson is busy playing Army in the woods). We’ll talk about how to evaluate a rental property to determine if it’ll be a good investment before buying.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

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