Is Social Security a Ponzi Scheme?

By Kevin D. Williamson

Friday, March 07, 2025

 

Elon Musk—who is, let us not forget, one of those “unelected bureaucrats” Donald Trump raged against on Tuesday night—has sent Democrats to the fainting couch by referring to Social Security as a “Ponzi scheme,” an ancient and bog-standard piece of libertarian rhetoric that, while not entirely accurate, captures the spirit of the thing. Social Security resembles a Ponzi scheme in that its economic structure requires a steady flow of new taxpayers into the system to fund benefits promised to those eligible to collect them; it is different from a Ponzi scheme in that there isn’t really any fraud involved in it beyond the loosey-goosey marketing language politicians have used to sell it over the years. Social Security is a perfectly ordinary social-insurance scheme (“scheme” here in the nonpejorative British sense) very similar to many other programs around the world that are—predictably—failing for the same reason.

 

The fraud involved in Social Security is political rather than financial. Franklin Roosevelt described Social Security as though it were an investment plan, a kind of federally secured savings account for retirement, and his epigones in both parties have continued that long and dishonest tradition. It is, of course, no such thing: Social Security is an ordinary welfare program in which the federal government takes money from taxpayers to provide benefits to a favored class of people, in this case oldsters and people with disabilities. There is a separate payroll tax producing revenue the federal government pretends to set aside for Social Security and Medicare, which is done to reinforce the myth that Social Security is a system that people “pay into” before receiving payments that are, in some sense, a return on investment.

 

Heeding the proverbial wisdom that “a program for the poor is a poor program,” Roosevelt insisted—against the advice of some economic advisers—to link the program to a payroll tax in order to diminish the “relief attitude,” meaning the identification of Social Security as a welfare program like food stamps and payments to the poor. “With those taxes in there, no damn politician can ever scrap my social security program,” Roosevelt told his advisers. “Those taxes aren’t a matter of economics, they’re straight politics.”

 

(Poetically, we owe the survival of that cynical quotation to Luther Gulick, who was kind of an Elon Musk before Elon Musk, an unelected official who advised the FDR administration on efficient administration in government, having served on the Brownlow Committee, which made recommendations about government efficiency, and later advising the president on ad hoc basis.)

 

Americans “pay into” Social Security in the same way they “pay into” the Pentagon budget—and taxes paid to support the Department of Defense do not entitle Americans to tanks and aircraft carriers for their personal use. You do not own your Social Security “contributions” (“contributions” that are collected, ultimately, at threat of gunpoint) any more than you own your contributions to the national defense or to agricultural subsidy payments that are made to the hardworking, salt-of-the-earth farmers of … Manhattan.

 

Social Security is not in a bad fiscal situation because the trust fund was “raided.” The “trust fund” is, in effect, a figure of speech. Tax money comes in the door and benefit money goes out the door, and the difference between what Americans have paid in payroll taxes and what the federal government has paid out in benefits is documented and talked about as though it were a trust fund. The “trust funds” are “invested” in Treasury securities, which means that the government is more or less moving money between different accounts while spending more than it takes in and pretending that this is a form of savings or investment. For some years, Americans paid more in payroll taxes than the government paid out in benefits, and this difference is the “trust fund,” which is being depleted—again, this is purely a paper exercise—as payments exceed revenues.

 

Payments exceed revenues because the ratio of active workers paying payroll taxes to retirees receiving benefits is out of whack. In 1940, in the program’s infancy, there were 159 taxpayers per beneficiary. That ratio was never going to last, of course—it was an effect of the program’s having just begun—and by 1955 it had fallen to 8.6 taxpayers per beneficiary. That’s not too bad a number, but the ratio kept declining: to 5.1 in 1960, 4.0 in 1965, 3 in 2009, and about 2.8 today. Projections have it at more like 2, possibly less, in a couple of decades.

 

As the ratio declined, the payroll-tax rate increased: Originally, it was 2 percent on the first $3,000 of income (which is about $66,000 in today’s dollars), and, today, it is 12.4 percent on the first $176,100. Contrary to Democratic claims, lifting the cap and applying the 12.4 percent tax on all income would not cover the program’s unfunded liabilities—even if we work from modest expectations about how a new 12.4 percent income tax would affect compensation practices (Americans are pretty good at minimizing their taxes, and rich Americans are particularly inventive), eliminating the cap probably wouldn’t even cover half of the shortfall. (Estimates vary.) The ideas put forward by many Democrats would cover even less, because they wouldn’t apply the payroll tax to all income above the tax but only to income in excess of some envy-inducing ceiling, $500,000 or $1 million or whatever.

 

In the spirit of Luther Gulick and Elon Musk, it probably would be better to eliminate the payroll tax entirely and quit pretending that we fund Social Security out of something other than ordinary government tax revenue. That would at least be an administrative improvement and simplify the tax system a little bit, which is to be welcomed. But it wouldn’t fix Social Security.

 

There are a few things lawmakers could do to improve the program’s finances. One would be to cut benefits, which are, per the wishes of the program’s designers, paid out irrespective of beneficiaries’ wealth or income: Elon Musk, the world’s wealthiest man, will be eligible for a check just like anybody else—a high price to pay for a marketing fiction.

 

Another measure would be to raise taxes—if you want benefits and other government spending, someone has to pay for them. Most of the European welfare states admired by American progressives have relatively high tax rates on middle-class earners and those of relatively modest means—they do not fund government by soaking billionaires because there aren’t very many billionaires and, weirdly enough, they often do not have the kind of incomes you’d expect them to. Billionaires are billionaires because of their assets—in the U.S. context, that’s often a large stake in a company they founded—not because of their income.

 

A third thing to do would be to expand the population: Musk, who has at least 14 children with at least four different women, is doing his part. But natalist policies probably aren’t going to do very much, and have largely fizzled in other countries where they have been tried. (The Williamsons had four children in less than two years—you’re welcome.) Immigration could expand the tax rolls greatly, but Musk, an immigrant, serves an administration that is generally hostile toward immigration when it isn’t planning to sell U.S. citizenship papers at $5 million a copy or when the boss is looking for a new wife or seasonal hotel staff.

 

Democrats believe that Musk’s loose talk about the “Ponzi scheme” gives them a political opening, and maybe it does, but: an opening for what? By and large, Democrats are no more interested in means-testing Social Security than Republicans are, and don’t hold your breath waiting for Democratic leaders to propose paying for the Scandinavian welfare state of their dreams with Scandinavian taxes on blue-collar workers and the middle class. The Democratic product may come from a different species of bull than the Republican product, but the output is similar in consistency and smell.

 

I don’t expect the Trump administration to come for Social Security benefits. Trump won in November on support from old people, who make up the largest share of the electorate, and Republicans have long been solicitous of the benefits of Social Security and Medicare recipients. Medicaid is another story: Trump may have changed the demographics of the Republican coalition, but most Republicans can get behind screwing the poor, if only to honor tradition. The wrinkly old guys doddering toward the 18^th hole down in Palm Beach are probably safe, for now—the Grim Reaper is going to catch up to them before fiscal reality does. But those 45-year-old men who got bigly on the Trump train had better be saving for their own retirements, because there are only a handful of things that can be done to straighten out Social Security and, so far, the Trump administration opposes all of them.