Social Security Sense and Nonsense

October 5, 2010 at 11:12 am

In a new paper and podcast I’ve tried to correct some of the misinformation that critics of Social Security have been spreading about the program.

Here are the facts.  Social Security is a well-run, fiscally responsible program.  People earn retirement, survivors, and disability benefits by making payroll tax contributions during their working years.  Those taxes and other revenues are deposited in the Social Security trust funds, and all benefits and administrative expenses are paid out of the trust funds.  The amount that Social Security can spend is limited by its payroll tax income plus the balance in the trust funds.

The Social Security trustees — the official body charged with evaluating the program’s long-term finances — project that Social Security can pay 100 percent of promised benefits through 2037 and about three-quarters of scheduled benefits after that, even if Congress makes no changes in the program.  Relatively modest changes would put the program on a sound financial footing for 75 years and beyond.

Nonetheless, some critics are attempting to undermine confidence in Social Security with wild and blatantly false accusations.  They allege that the trust funds have been “raided” or disparage the trust funds as “funny money” or mere “IOUs.”  Some even label Social Security a “Ponzi scheme” after the notorious 1920s swindler Charles Ponzi.  All of these claims are nonsense.

Every year since 1984, Social Security has collected more in payroll taxes and other income than it pays in benefits and other expenses.  (The authors of the 1983 Social Security reform law did this on purpose in order to help pre-fund some of the costs of the baby boomers’ retirement.)  These surpluses are invested in U.S. Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard these securities as among the world’s very safest investments.

Investing the trust funds in Treasury securities is perfectly appropriate.  The federal government borrows funds from Social Security to help finance its ongoing operations in the same way that consumers and businesses borrow money deposited in a bank to finance their spending.  In neither case does this represent a “raid” on the funds.  The bank depositor will get his or her money back when needed, and so will the Social Security trust funds.

As far back as 1938, independent advisors to Social Security firmly endorsed the investment of Social Security surpluses in Treasury securities, saying that it does “not involve any misuse of these moneys or endanger the safety of these funds.”

Moreover, Social Security is the “polar opposite of a Ponzi scheme,” says the man who quite literally wrote the book about Ponzi’s famous scam, Boston University professor Mitchell Zuckoff.  The Social Security Administration’s historian has a piece on this topic as well.

Unlike the frauds of Ponzi — and, more recently, Bernard Madoff — Social Security does not promise unrealistically large financial returns and does not require unsustainable increases in the number of participants to remain solvent.  Instead, for the past 75 years it has provided a foundation that workers can build on for retirement as well as social insurance protection to families whose breadwinner dies and workers who become disabled.

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More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

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17 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Barry #

    Very interesting and informative.
    Now, I wish you’d write blog post about how fraternities are really just a ponzi scheme.

  2. CKing #

    @ Mike Honeycutt
    1. The $ in the fund hasn’t been spent – it’s been invested. We’ve loaned the $ to the Federal Govt and they’ll pay back what they borrowed plus a little extra at a low, fixed rate. This is just like a 1-yr, 5-yr or 10-yr bond you can get from your bank. The $ will be paid back well before it’s needed.
    It’s very important to know the difference between money Invested (where we’ll get back interest) and money paid out (which isn’t going to come back, such as a utility bill).
    2. All the Federal Govt’s budget comes from taxpayers, so yes we’ll be paying the money back to SS.
    Keep in mind, though, that the Federal Budget is very complex. Every year it includes payments for programs, Govt employee pay, military spending, etc. AND REPAYMENT OF BORROWED FUNDS.
    When the Federal govt needs money – especially if it’s immediate, unbudgeted $, such as the money spent to shore up national defense after 9/11 or to provide relief after Hurricane Katrina – it often borrows.
    In addition, our Govt does pass budgets that spend more than is eventually collected from taxpayers. These deficits are covered by borrowing, whether from banks, foreign govts (e.g. China) or from programs such as T-bills (which how the Treasury loans SS funds).
    Taxpayers are NOT paying for the same item twice, they are paying for SEPARATE benefits:
    * initially for Social Security, and
    * then for whatever programs/services our elected officials have approved via the annual budget.

  3. Henry Bennett #

    The arguments about the trust fund being filled with U. S. bonds miss the point – these bonds were issued to cover the massive deficits engendered by the huge tax cuts for the richest Americans passed during the administration of George W. Bush – in other words, we “borrowed” the money from the Social Security Trust Fund to finance these tax cuts and replaced the money with U. S. Bonds. If the Bush tax cuts are extended, these deficts will become even more massive and completely unsustainable. Certainly the wars in Iraq and Afghanistan also contributed to these deficits, but the tax cuts are the single greatest driver of deficits by far. We need to repeal the Bush tax cuts immediately – any other attempts to control the deficits are just window-dressing with no real long-term effect. If we don’t, the United States will have to default on its bonds – debt to our retired and disabled citizens – not a very pretty picture!

  4. Shane #

    It says in the Board of Trustees 2010 report that the Disability Insurance portion will run out in 2018. I think it is unfair to report that Social Security will be self sufficient until 2037 without mentioning that the DI portion will run out of money in 8 years.

    • 5

      Yes, you make an excellent point. I should have mentioned that I was focusing on the combined trust funds and that the disability trust fund will be exhausted earlier. Imbalances between the two Social Security trust funds are easily resolved, however, through reallocating the payroll tax contribution rate (in this case, raising the DI rate and reducing the OASI rate by an equal amount), as Congress has done several times in the past. With an appropriate reallocation, both the OASI and DI trust funds would remain solvent through 2037.

      • CarmanK #

        And see this is a major part of the problem in pubic discussion. The fine points seem to rise to the top and confuse rather than enlighten. No body seems to address issues with certainty except those who intend to deceive. SS is secure long term. It has been renewed and updated to meet the demands of population variations. Remember those who want to “privatize” SS have been exploiting the false concept that the boomers would break the bank since Ronald Reagan. Mr. Van de Waters, we really need some catch phrases and facts to counter the zombie lies about SS in the public domain.

  5. Lee Elliott #

    Some people believe that it is a bad idea trade the Social Security’s present surplus (something over 2 trillion dollars) for US T bills. If you somehow convert it to $100 bills and stack it up you’d have something bigger than a football field twelve feet high.

  6. Mike Honeycutt #

    This is important – please listen:

    1. The money in the trust fund has been spent. It is gone and has been replaced by IOUs (treasury bonds).

    2. As the treasury bonds are redeemed, the money will come from the tax payers. We paid for Social Security once out our paychecks and will have to pay for it again in higher taxes to pay for the bonds plus interest.

    Please explain to me why I’m wrong.

    Mike Honeycutt

    • 9

      Because it doesn’t matter to the treasury bonds where the capital comes from. From an accounting point of view, I would imagine, the bonds could have been sold to private citizens, or other governments, rather than to the SSA trust fund. Then the government uses that money for public services. So, in your formulation, we “pay twice” every time a bond is sold to anyone. Do you think treasury bonds should be discontinued?

      It seems to me that SSA had slowly built up a very nice pool of capital in readiness for the boomers’ retirement age when the government made an imprudent choice, as it turns out, in issuing bonds to the trust fund in order to get hold of that capital. Your post isn’t an argument against SS, it’s a point to be discussed in a debate over how the government manages the budget.

    • CarmanK #

      Mr. Van de Water has clearly stated the SS funds are invested in US Treasury Bonds and are SAFE from WALL STREET pillaging. In addition, the US government is not going to renege on its financial obligations, not here and not around the world. We are still fiscally strong, even though the republicans are doing their best to destroy the middle class and replace capitalism with a new form of economic tyranny called “Corporatism”. The Supreme Court gave personhood to “corporations” with no responsibilities or accountability. As such humans hide behind the corporate shield to do unspeakable harm to the country. If not for the corporate shield, many of the Wall Street robber barons would be labeled traitors. SS is the national safety net, it is the moral equivalent of “taking care of the common good” and it is the right thing for america.

  7. 11

    I think one of the biggest lies that is being spread about Social Security, and that does not seem to be addressed in this column, is that it somehow contributes to the federal deficit and the national debt. Republicans ALWAYS claim that SocSec and Medicare must be cut back because of our “out of control” entitlement spending. That somehow, these two stand-alone, self-funded programs are going to bankrupt the country.

  8. kraushaar #

    Dear ” Donald Knuth #”, the “the ratio of retirees to workers” is NOT a problem. It is not. It is a zombie lie that, like the other ones (“IOUs,” “Ponzi scheme,” etc.) has been propagated and repropagated over and over. When Social Security was *established*, the issue of retiree-to-worker ratios was accounted for, and it was again reaccounted for during the 1983 Social Security Reform law.

    Just because George Bush repeated this zombie lie in 2005 does not make it the truth.

    Please stop repeating this zombie lie. The Social Security program from its beginnings took the demographic shifts into account, and claims that it hasn’t are groundless.

    • 13

      When people start making up terms like “zombie lie” then you know that it’s an issue that everyone is repeating and few are really looking at.

      I read your sources and none of them had decent counter-arguments. There were a lot of strawmen and ad hominem attacks in their rebuttals, but little to nothing about how we are going to overcome the fact that **at current rates** tax on workers will not be able to cover retiree benefits once we hit the magic breaking point.

      One article says productivity is going to rise? How does that help ease the burden unless SS taxes are raised? One article mentions that it didn’t break in the past when the ratio drastically changed– so what? It has never hit the “breaking point” so it was never a problem. There is no denying that there we will hit that point and things are going to have to change.

      • 14

        Read the original Greenspan report–especially the Appendices that project both the “retiree ratio” and the Life Expectancy for those living to 65.

        You’ll note that they are spot-on with current data. (In fact, they’re a touch optimistic on lifespan–which suggests that the SocSec Trust Fund is overfunded.)

      • 15

        There’s a report that SSA presented to the deficit commission in May that is very useful. I can’t find the link at the moment. But that report has a very useful chart about fertility rates that explains why your concern is irrelevant.

        The fertility rate varies wildly until the late sixties, when reliable family planning and safe, accessible abortion services entered the culture. Since the seventies, the fertility rate has *flatlined* at about 2 children per woman. The ratio of worker to recipient is now completely predictable forty years out.

        In other words, there will never again be another baby boom in this country. All we have to do is get through the boomers’ retirement, then SS will take care of itself in perpetuity.

  9. Dan Favero #

    As Paul N. Van de Water clearly said, the scare tactics being spewed about by politicians is just that – scare tactics. Anyone paying attention to reality rather then blindly believing whatever feeds their political bias knows this.
    Politicians like House minority leader Boehner say we have to “get to work”, yet he wants to increase the retirement age to 70, but only start that 20 years from now. So either fixing Social Security is not a pressing issue, or Boehmer just wants his “fix” put off until he’s not around for the backlash. He states other “considerations”, yet the quickest, most effective solution to any possible long-term problem he ignores.

    Currently Social Security tax is withheld on up to $106,800 in wages. So while the majority of wage earners pay 6.2% of their wages, someone with a million-dollar salary pays only 0.66% of their wages.

    If social security tax was instead withheld on all wages, any future monetary problem would be eliminated. In addition, if the withholding was unlimited as to the amount of wages, the percentage could be reduced thereby lowering taxes on the majority of workers. Since businesses match social security tax withheld, most businesses would also see a lowering of taxes.

    The problem is that even though the majority of wage earners and many businesses would see a decrease in tax, the Republicans would use their usual scare tactic of yelling over and over that it’s a Democratic tax increase (Of course Boehmer’s holding money from those who need it most couldn’t be called a tax increase, so he’s OK with that).

    Thanks Paul for telling it like it is.

  10. 17


    Social Security is a huge problem because of one key thing: the ratio of retirees to workers. People are living longer, the birth rate is decreasing, there is less immigration, and the baby boomers are reaching retirement age.

    It’s really simple math: if it currently takes something like 3 workers to pay 1 retiree’s benefits and the number of retirees are growing at a faster rate than workers, there is eventually going to be a point where there aren’t enough workers to pay the full benefits. We know that we are going to hit that point in the next 15-30 years and we have no current plan to fix it.

    Relatively modest changes? Is doubling SS tax a modest change? Is raising the retirement age 3 years? Decreasing benefits by 25%? Changes like those are the only way to get the ratio back to a healthy point– and the longer the politicians wait to make these changes, the more drastic the change is going to need to be.

    Other measures like raising the maximum taxable income are political cop-outs that only keep pushing the underlying problem out a couple years. And the talk about how the reserves are managed doesn’t matter that much in the grand scheme of things because the reserves are going to be depleted rapidly once the ratio goes bad.

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