The Next Step in Social Security’s Ponzi Scheme

By Garry Galles

On January 30, Rep. John Larson and 200 Democratic co-sponsors introduced the Social Security 2100 Act. Portrayed as giving retirees long-overdue benefit increases, it would actually add another step to Social Security’s long-running Ponzi scheme.

Despite Democrats’ history of rejecting that term for Social Security, it has been the biggest series of Ponzi schemes in history, redistributing tens of trillions of dollars of wealth to earlier recipients from subsequent generations.

After Social Security’s creation, those in or near retirement got benefits far exceeding their costs (Ida Mae Fuller, the first recipient, got 462 times total contributions made on her behalf). Those excess benefits inherently required that future Americans would have to pick up the tab for the difference.

Social Security has also been expanded multiple times. Each expansion meant those already retired paid no added taxes, and those near retirement paid a bit more for only a few years. But both groups received increased benefits throughout retirement, increasing the unfunded benefits whose burdens had to be borne by later generations. Thus, each such expansion started another Ponzi cycle benefiting older Americans at others’ expense.

Social Security benefits doubled between 1950 and 1952. They were raised 15 percent in 1970, 10 percent in 1971, and 20 percent in 1972, in a competition to buy the elderly vote. Benefits were tied to a measure that effectively double-counted inflation and even now, benefits are over-indexed to inflation, raising real benefit levels over time.

Disability and dependents’ benefits were added by 1960. Medicare was added in 1966, and benefits have been expanded (e.g., Medicare Part B, only one-quarter funded by recipients, and Part D’s prescription drug benefit, only one-eighth funded by recipients).

The Social Security 2100 Act would be the next episode. It would increase all retirees’ benefits (including current retirees who would pay nothing toward the boost) and increase the inflation (over)adjustment for benefits, picking future high-income earners’ pockets to pay for the vast majority of it, by taxing wage income beyond the $132,900 ceiling now in place (eventually to all wage income).

With the multiple Ponzi giveaways to recipients creating Social Security’s 13-digit unfunded liability and Medicare’s far larger one, how can the proposed law be rationalized? Without the benefit of being in the startup generation of earlier Ponzi expansions, the present generation is being forced to begin bearing some of the costs.

This was illustrated by an Urban Institute study of lifetime payroll taxes and benefits. Especially with recent expansions, Medicare, recipients were getting a great deal. In 2012 dollars, an average-wage-earning male would get $180,000 in benefits, $119,000 more than their contributions. A similarly situated female did even better. In sum, it yielded “excess” benefits of $105 trillion, with net benefits increasing over time.

However, for Social Security, whose major Ponzi expansions came further in the past, an average-earning male retiring in 2010 would make $300,000 in contributions, for only $277,000 in lifetime benefits. For women, with smaller average lifetime contributions and longer life expectancies, it was about a wash. And things are worsening. By 2030, that such men will be “shorted” 16 cents (10 cents for women) of every tax dollar paid.

Social Security is now a “bad deal” for current and future recipients precisely because the costs of its Ponzi structure are starting to be felt. But rather than admit that their “greatest accomplishment” relied on massive theft from future Americans, they want to restart the scheme, keeping restive seniors in their camp, by dumping even-greater burdens on future generations than they already have (hidden behind a flimsy cover story that high-income earners, actually big net losers from the system, would finally be forced to pay their “fair share”).

Democrats think they can finesse older Americans out of their votes for still more elections with Ponzi Security. But if other Americans recognized the dishonest ploy aimed at their wallets, they might end up in the electoral wilderness instead.


Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read.

This article was sourced from Mises.org


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