Simple Solutions for Social Security

But no really appealing ones.

Politicians and pundits have been wringing their hands for years about the Social Security "Crisis."  As people retire and live longer, there won't be enough workers paying into the system to cover the Social Security benefits paid out.  Depending on whom you believe, the "Social Security Trust Fund" will go broke sometime between 2020 and 2040.

Many people have lost confidence in the Social Security System.  As has often been pointed out, more young Americans believe in people being abducted by space aliens than believe they'll ever collect any money from Social Security.  This scepticism is based on a fundamental misunderstanding of what Social Security is.  People think Social Security is somehow separate from other government programs and that it can "go broke" just as any insurance company or business can go bankrupt.

Social Security is not like the insurance business; conventional reasoning doesn't apply.  There are problems with Social Security and there are simple solutions to the problems, but before we can discuss solutions, we have to clear away some of the lies politicians tell about Social Security.  If we don't understand the problem, we won't find the solution.  This SSA site has some legislative background and court decisions.

Lie # 1 - Social Security was set up to take care of old people

Social Security was sold to taxpayers as a way to keep old people from being poor, but that wasn't the real reason behind it.  If you dig up the papers and memos written by the men who designed the system before it was presented to the public, you'll find that their basic social engineering goal was to break the bonds between generations.

At the time, people had lots of children so that their children would support them when they got old.  The designers of social security believed that population was growing too fast.  They hoped that if people believed that the government would take care of them, they'd have fewer children.

Roosevelt's social manipulators didn't foresee birth control or abortion which let women choose to have no children at all.  Now that people don't think they'll need children to take care of them, they've having too few children for our society to continue.  Social manipulation is dangerous - there are always unintended consequences.

They also didn't foresee huge programs such as Medicare which benefit the elderly.  Instead of younger people talking care of their parents, we find parents helping their children.  How many "children" of working age live with their parents because taxes are so high that they can't afford to live elsewhere?  This is good?

Lie # 2 - You're paid back what you put in, it's your money

This deliberate lie was started by President Roosevelt.  When the program passed, he called in his accountants and told them to set up individual "accounts" for each worker and recipient.  "Why should we do that, sir?" they asked.  "That's a lot of extra, unnecessary work and it's not an insurance program at all, it's a welfare program."

"I know that," Roosevelt told them, "but if we convince people they've earned their pensions, the Republicans won't be able to kill the program."

Like many politicians, Roosevelt was convinced that he knew what was best for society.  Since we peasants couldn't see that his marvelous ideas were for our own good, he believed it was OK for him to lie to help pass his programs.  Does that remind you of any modern politicians?

Roosevelt used his "bully pulpit" to persuade taxpayers that Social Security was insurance.  You paid in, the government invested your money and used your profits to pay your pension.  That's an out and out lie.

There's no way Social Security could ever be self-sustaining because too many people who never paid in were allowed to collect.  The only way to pay everybody off was to keep forcing new people into the program and to keep raising Social Security taxes--, oops, "contributions."

Paying off earlier investors with money from new investors is called a "Ponzi Scheme" after its inventor, Charles Ponzi.  The scheme is simplicity itself:

A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from new investors in order to keep the scheme going. [emphasis added]

The first people who collected Social Security paid in nothing at all.  This represents an infinite return on their "investment."  The only way to keep such "abnormally high" returns going was to "entice new investors."  Social Security isn't an insurance system; the "returns" it offers are too low for anyone to "invest" voluntarily.

Government can't entice new investors, so it forces every worker into the program by law.  This worked as long as a) the population kept growing at a faster rate of increase and b) pensioners died in their late 60's or early 70's.

Disaster loomed in two forms.

First, the social engineering effort to persuade women to have fewer children worked better than anticipated.  The social bureaucrats wanted the population to increase less rapidly; they didn't want population to drop because a shrinking population dooms the program.

Second, people are living longer than expected.  Not only are they able to entice fewer new suckers--, oops, investors, into the program because there aren't enough new suckers being born, they're also paying the original investors greater returns than expected because they're living too long.

Ponzi schemes always collapse when people catch on; Ponzi went to jail when the music stopped.  The government can force every potential sucker to pay up because of its taxing authority, but not even Hillary can tax suckers who haven't been born.

Lie # 3 - Your money is put aside to pay your benefits

This is the biggest lie of all.  Almost every article about Social Security talks about the "surplus" in the "Social Security Trust Fund" as if money were being saved to pay your pension.  The government has collected more in Social Security taxes so far than it has paid out in benefits so far, but the money is gone.  The politicians spent it all.

When money started coming in, the government could have bought stocks on Wall Street, but the government would have ended up being a major stockholder in just about every corporation in the land.  You don't want to even think about the problems that would come up if the government had that kind of power over businesses.

Not being able to buy stock, the Social Security administration bought US Treasury Bonds.  The "Social Security Surplus" became part of the national debt.

For a while, the government kept track of the national debt separately from the Social Security "surplus," but that made the debt look too big.  Years ago, politicians made the debt look smaller by rolling the "surplus" into the debt.  Some of our tax dollars go to pay accountants who maintain the fiction that the Social Security Trust Fund actually exists, but it's all been spent, just like every dollar our politicians get their paws on.

Smaller government-run pension schemes such as CALPERS invest in stocks so they have actual assets with which to pay pensions, but Social Security has only government debt.  Paying the Social Security part of the debt has the same priority as paying any other part of the national debt.  The debt either gets rolled over or it's paid off out of taxes as they come in.

Social Security is in fact a welfare program paid for out of taxes, just as Roosevelt's accountants said.  Although your tax stub claims that part of your taxes are for Social Security and part are for other taxes, it all goes in the same leaky bucket.

It shouldn't surprise you that the politicians spent the money.  One reason our bridges are falling down is that politicians spent the gasoline taxes which are supposed to pay for repairs on more important things like Hillary's Woodstock museum.  One reason there are so many airline delays is that politicians spent the airline ticket taxes which are supposed to pay for airport improvements on more important projects like the "Bridge to Nowhere."

Lie # 4 - Social Security is an Insurance Plan; you pay premiums, not taxes

Some years ago, the courts ruled that Social Security is not insurance, it's welfare:

The OASI [Old-Age and Survivors Insurance] program is in no sense a federally-administered 'insurance program' under which each worker pays premiums over the years and acquires at retirement an indefeasible right to receive for life a fixed monthly benefit, irrespective of the conditions which Congress has chosen to impose from time to time.

While the Act uses the term 'insurance,' the true nature of the program is to be determined from its actual incidents.

As for the payroll tax, which Social Security pamphlets had described as "a sort of premium on what might be called an insurance policy," the brief said: "The 'contribution' . . . is a true tax. It is not comparable to a premium under a policy of insurance promising the payment of an annuity commencing at a designated age."

"The beneficiary or prospective beneficiary of the OASI program acquires no interest in the fund itself." Translation: you have no property right in the Trust Fund - an official admission that this "trust fund" is not a true trust.

Note the sentence "While the Act uses the term 'insurance,' the true nature of the program is to be determined from its actual incidents."  The law calls it insurance, but we know it's not by what it does.  Who says judges don't have a sense of humor?  The joke's on us, however.  Section 1104 of the Social Security Act says:

The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.

Social security is a welfare program like any other welfare program; the politicians can change your benefits any time they like, that's why the AARP schmoozes politicians.  Your payments are taxes like any other taxes, you don't own anything, and the money's been spent.

There is no Social Security Trust Fund, it's not an investment scheme, and the dollars you paid in have gone to pay pensions of the people who got in before you did, just like any Ponzi scheme.  If a real insurance company did that, there would be orange jump suits for everybody.


Now that some of the lies are out of the way, we can discuss the situation rationally.  Social Security is doomed, and our politicians will continue to lie about it all day long.   We have Presidential hopefuls that even claim it's the most successful program in US history.

Simple Solution # 1 - Do Nothing

It's true that if we do nothing, the "Social Security Trust Fund" will go into deficit at some point, but so what?  Nothing will change.  Social Security taxes will continue to disappear into the national debt like all our taxes and pensions will be paid out of the budget like all other expenses, just as they are today.

The only difference will be that the politicians may have to admit that the "Trust Fund" was fiction all along.  They wanted us to believe we were "investing" in Social Security instead of being ripped off and they won't like it when we realize that Social Security taxes are no more an investment than any other taxes we pay, but so what?  Politicians lie, we should be used to it by now.

What happens to pensions, then, depends on politics just as it does now.  If retired people win, they'll raise taxes on everybody who's still working.  If workers win, pensions will drop so that workers don't have to pay more tax.  Either way, there will be a battle between generations like nothing we've ever seen.

Based on past history, nothing is what's most likely to be done.  Get ready for a slanging match that will make the Iraqi war debate seem like a polite conversation between lovers.

Simple Solution # 2 - Adjust the Retirement Age

The "trust fund" will go into deficit because there won't be enough workers to cover all the retiree's pensions.  We can't get money from workers who weren't born in the 80's and 90's, but we can limit pension costs by not letting people retire.

The Social Security Administration should know how many people are collecting; the Labor Department should know how many are working.  Every quarter, they can tell us how many workers per retiree.  If there aren't enough workers, people who want to retire wait until either a) more young people join the work force or b) some retirees die off.  Either way, they wait.

Making people wait is how they control medical costs in government-run health insurance schemes - you don't spend money on people who die while waiting for surgery.  Making people wait to collect pensions is even better because they not only don't collect pensions, they keep paying into the system.  Each year the government makes one person wait is worth about $25,000 to the system if you combine avoided pension costs and that person's Social Security taxes.  Making a million people wait one year is worth $25,000,000,000.  That's 25 billion dollars, enough to run the government about 3 working days.

If we adjust the retirement age upward, someone who wants to retire would suggest that we legalize the 12 million illegal workers to get more suckers into the system.  That wouldn't work - illegals aren't paid much, so they wouldn't put in much.  What's worse, the system is gimmicked to pay out the same pensions to people who pay a little as to people who pay a lot, so long as they pay in for 10 years.  Illegals will never pay in enough to cover what they take out.

What's worse, illegals do manual labor.  They aren't desk potatoes, so they'll live longer and collect longer than average.  Legalizing illegals makes the problem worse.

If we're worried only about keeping the "trust fund" solvent, we should leave the illegals as they are - some of them pay into Social Security through fraudulent Social Security numbers, but they won't ever collect.  That's pure profit for the system until some idiot offers amnesty again.  If that happens, they'll all be eligible for social security whether they paid in or not.  Either way, illegals make a bad situation worse.

Simple Solution #3 - Don't Pay the Rich

A normal welfare program doesn't give money to rich people.  Due to Roosevelt's lies about Social Security, however, rich people think they should collect because they paid in.  We know that lots of them don't really think its insurance, of course, because they join the American Association of Retired Persons (AARP).  Although they advertise other services, the AARP's main job is lobbying for more money for retired people.

Nobody lobbies insurance companies like Aetna to raise benefits, we know they won't because it's a contract.  People must suspect that Social Security really is welfare or they wouldn't lobby to keep it going.

Regardless of what people believe, cutting rich people out of this welfare program would save a bundle.  Politicians would love this option because it means they can take another swipe at the wealthy.

Simple Solution #4 - Get Back to First Principles

When Fess Parker created the Davy Crockett TV show, he wasn't interested in presenting history accurately; very few know any truth about Davy Crockett.  Davy Crockett served in the US House of Representatives.  One of his first debates concerned whether to give a pension to a widow.  Mr. Crockett believed that the government had no business being in the general pension business so he voted against the measure.

There was a time when Americans believed that people should provide for themselves.  We've been just been reminded of this principle by Mr. Sarkozy, President of France, in his November 7 address to the US House and Senate:

To the millions of men and women who came from every country in the world and who, with their own hands, their intelligence, and their hearts, built the greatest nation in the world, America did not say, "Come, and everything will be given to you."  Rather, she said, "Come, and the only limits to what you will be able to achieve will be those of your own courage, your boldness, and your talent."

Here, in your country, on this soil, both the humblest and the most illustrious citizens alike know that nothing is owed to them and that everything has to be earned.  That is what constitutes the moral value of America. [emphasis added]

Mr. Sarkozy got it right.  Americans "know that nothing is owed to them and that everything has to be earned."

As a said note, this is why safety nets are fundamentally un-American regardless of how good they sound during campaign rallies.  Our desire to earn for ourselves directly relates to our collective moral value.  Safety nets erode personal desire.

Mr. Roosevelt lied to us.  He knew that Americans wouldn't support a charitable, unearned welfare system for the aged any more than Davy Crockett would support an unearned government pension.  He lied to us and told us that he was setting up a government-run insurance program where we'd earn pensions.

He lied to us so effectively that most of today's debate is concerned with whether the "trust fund" will run out instead of being honest and asking whether it makes sense for the government to run a special-purpose welfare system for old people who have far more assets than their children.

So long as the debate keeps framing questions as if Social Security were an insurance company through which we earn our pensions, we won't get the right answer.  Once we admit that it's a plain old welfare system and that our payments are taxes which are taken forever out of our pay just like all other taxes, once we admit that the money's been spent and that our only hope of getting anything out of Social Security is for future taxpayers to put enough in, then and only then can we get the right answers.

The Real Questions

These are the questions we should be asking:

  • Should rich people get Social Security payments?
  • Should old people who are poor be taken care of through the normal welfare system like all the other poor people?
  • Should we encourage people to keep working by exempting 65 year olds from Social Security taxes?  That would mean less money coming into the system, but at least they wouldn't collect.
  • Should we encourage people to keep working by exempting 70 year olds from all income taxes?
  • How does amnesty for illegal immigrants help or hurt the Social Security welfare program?
  • How many workers under the age of 30 would give up all their current Social Security contributions to be given future exemption from FICA withholdings?
  • Should the government be given the right to invest in Wall Street through privately-contracted, escrow management?
  • Should small businesses be exempted from matching FICA witholdings for their employees if they offer 401k's that all of their employees are eligible for?

These are political questions, of course, and they'll be answered through the political process, but until we ask the right questions, we won't get workable answers.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments

You asked "Should rich people get Social Security payments"?  YES.  I understand your point that we must see Social Security properly as a welfare program and thus rich people wouldn't apply.  But this "solution" would make the whole thing even worse.  The problem with the tax law (and the politicians on the Ways and Means Committee) right now is that they see a difference between poor and rich that is driving the wealthy to find more and more loopholes to utilize and ways to ship their wealth out of the system even further.

December 6, 2007 4:37 PM

In India, which doesn't have much in the way of government-funded old-age pensions, children who do not take care of their aged parents can go to jail.

December 9, 2007 1:53 PM

The New York Times reports that Social Security is making people wait for benefits to limit their costs.

"More people have lost their homes, gone bankrupt or even

died while awaiting an appeals hearing on their Social

Security disability claims, lawyers say."

This is just what single-payer government-run health insurance programs do - making people wait until enough of them die is the ONLY way to limit costs in a system which provides medical care for free.

December 10, 2007 11:14 AM

The first condition for your receipt of the first Social Security payment should be that you surrender your driver's license.  If you're too old to work, you're too old to drive.  The second condition should be that you forfeit your right to vote.  I don't want you to have the ability to vote yourselves more of my money.

The entry fee for welfare should be sufficiently high to discourage all but those who truly need it.

December 10, 2007 2:21 PM

that is a brilliant idea.  jason for president!  personally, i am all for limiting the vote for anyone who is taking any sort of welfare.  if you are getting handouts, then you are dependent on me.  you should not have the right to take more of my stuff because you can gather more friends than i can.

December 10, 2007 2:29 PM
Thank you for a well-written discussion of the Social Security system.

I particularly appreciate the historical perspective you gave. Here's hoping a great many people read "Simple Solutions..."

Some useful discussion - and action - might result.
December 31, 2007 8:39 PM
It turns out that fewer people are retiring than expected.

People are smarter than government thinks.
May 21, 2008 11:06 AM
This article

tells how Social Security payments were cut off for people who had outstanding arrest warrants. The major point of the article, which the author missed, is that Congress can change the benefit formula at any time, including some and excluding others at whim.
August 12, 2009 2:48 PM
Now the Times is proposing a temporary cut in workers' social security payments as a form of stimulus.

Make Social Security Pay, Today
Payroll tax holidays would help workers.
July 10, 2010 10:22 AM

The structure of Charles Ponzi's scheme must have impressed the policy makers coming of age in the 1930s, because they would use the same structure for the nation's new Social Security system.

Starting in 1937, employees and employers needed to fund the system and in 1940, retirees began to draw benefits. The financial amount of these benefits dwarfed what the first retirees put in during their working careers. This might seem unfair to most of us, but because there were far more people putting into the system than there were taking out, no one seemed to mind very much.

Medicare's Downward Spiral
Because of the post war baby boom, Social Security's scheme was able to work and remain financially solvent. While the public was skeptical of the program at its beginning, more and more people became won over by it as they contributed, saw others benefit, and then eventually benefitted themselves. It was so popular that the government decided to expand its role as a provider of social benefits by introducing the Medicare system in 1965.

There is no doubt that Medicare was an attempt at solving a real problem that most seniors faced in regard to private health insurance; it was very expensive. About three times the amount for a younger person. Today's Medicare system consists of four parts but for simplicity we will focus on Part A, which is funded through payroll taxes like Social Security. And like Social Security, it is not sustainable over the longer term because it is structured like a Ponzi Scheme where new money needs to flow in to pay the older folks that are cashing out.

Today there are more medical treatments available than there were sixty years ago. This helps people live longer than before which also means they are using more of the system than previous generations did. At the same time, there are fewer workers per beneficiary than before which means more money is flowing out while less money is flowing in. This is the stage of a Ponzi scheme where things are about to fall apart.

The flaws with these systems are not new revelations. In fact, the estimates of when the programs will run out of money comes from the programs themselves. Reform is needed but it's unpalatable for most politicians because the old investors are a large voting block, and they want their promised returns even if their own money is gone and someone else will be left being stiffed.

There are no simple solutions....

June 25, 2023 10:12 PM
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