Social Security at 90: Ponzi Scheme or Pillar of Retirement?

As a managing partner at a private equity firm, podcast host, and educator, I've had countless conversations about financial planning, investment strategies, and securing a comfortable retirement. And let me tell you, one topic consistently sparks passionate debate: Social Security, with a focus on Passion for sure! This year, the Social Security Administration celebrates its 90th birthday – a significant milestone that often gets overshadowed by whispers, concerns, and even outright accusations. At that age, she's no "spring chicken," but the perception about social security and its nuances continues to evolve.

Let's address the elephant in the room right away: I've heard it, you've heard it, and some of you might even secretly agree – "Social Security is just a big Ponzi scheme!" 🤯

Whoa, hold your horses! Before you accuse me of being completely off my rocker, let's break down why that comparison sometimes surfaces. Think about it:

• You dump money in over time. Pay me now, pay me forever - well, at least until you want to retire! Every paycheck, a portion goes to Social Security. Like a scam, you always need more and more new money and new "investors".

• You wait a very long time to collect. Eligibility typically kicks in around age 62 or later, with full retirement age being determined by "The System."

• You can only take out a limited amount. Don't think because you've

  
  

  been paying into the program for a long time, so you'll have a say in how much you can collect. You won't! There are caps on benefits, regardless of how much you contributed.

• When you die, they keep any uncollected funds. Like the song goes, give me more, give me more, give me, give me... It wasn't enough that you paid throughout your lifetime. Now you die, and let the system keep the rest. Unlike a traditional inheritance, those "extra" funds generally don't go to your estate in the same way. That means "The Man" keeps your money, and it becomes part of the pot.

  
  

On the surface, it does bear some resemblance to the characteristics of a Ponzi scheme for sure. Oen where early investors are paid by later investors' contributions. Well, hello, those bullet points outline something that looks and smells a lot like a scam! Looks like a duck, quacks like a duck - you get the picture. Heck, if a client or friend mentioned the structure of an investment like that without telling me it was social security, I would tell them to run for the hills. It doesn't sorta sound like a scam, it screams the definition of one.

But let's not get hasty and jump to conclusions because we're all level-headed, right? While the comparison can be a powerful rhetorical device, it overlooks a multitude of fundamental differences and embedded benefits that make Social Security a cornerstone of our society, not a fraudulent scheme. There are a lot of benefits that might not be at the forefront, but they're there - trust me. I've helped many families facing tough times, and there are benefits in place to help out those who are unfortunate and face unforeseen circumstances.

More Than Just a Retirement Check: The Hidden Benefits

The "Ponzi scheme" argument often focuses solely on the retirement income aspect, ignoring the extensive safety nets woven into the fabric of Social Security. Those are the benefits most don't know about until they need them and get guidance from an advisor. These include:

• Survivor Benefits: If you pass away, your spouse, children, or even dependent parents may be eligible for benefits. No it won't bring a loved one back, but it'll held with the economic burden that was forced onto families.

• Spousal and Widow/Widower Benefits: Non-working or lower-earning spouses can often claim benefits based on their spouse's work record.

• Benefits for Minors: Children under 18 (or 19 if still in high school) can receive benefits if a parent is disabled or deceased. Talk about protection, there aren't many programs that can help your spouse and even your children.

• Disability Benefits: If you become unable to work due to a severe medical condition, Social Security provides crucial income replacement.

  
  

These are not features of a typical Ponzi scheme. Imagine for a minute your spouse reaching out to Bernie Madoff to tell him you passed away and asked for monthly checks for them and the kids. The lesser known benefits discussed are social insurance programs designed to protect millions of American families during life's most challenging moments. Yes, they do exist and function the way they are supposed to. I've helped several navigate the process and social security does pony up.

Social Security The Changing Landscape: Longevity and Retirement

Another crucial factor to consider is the dramatic shift in life expectancy. Good habits payoff, that is until you reach the current generation which is expected to live shorter lives than the generation before. Wow, sounds like a topic for another blog, but for now we'll remain focused on longevity and its impact on funding. When Social Security was first enacted in 1935, the average life expectancy was around 61 years. Life was different with couples marrying earlier, starting families sooner and single income households. Today, it's closer to 77 years. People are living significantly longer, which means they are collecting benefits for a much greater period than originally anticipated. Cha Ching - that means people are ringing the register for several more years than before. Here's a look at how life expectancy has changed:

Life Expectancy at Birth (Selected Years)

• 1935: ~61 years

• 1950: ~68 years

• 1970: ~71 years

• 1990: ~75 years

• 2020: ~77 years

  
  

This increased longevity puts a strain on the system, no doubt, but it also highlights the very real need for continued support throughout a longer retirement.

The Elephant in the Retirement Plan: Lack of Personal Savings

From my perspective as a financial planner, educator, and someone who guides individuals and businesses through complex financial landscapes, one of my biggest concerns is the inability of many Americans to adequately save for retirement on their own. People have all the tools at their disposal and many of them choose to kick the can down the road and destroy their future self.

Without Social Security, the retirement crisis in this country would be far more severe. Yes, it's very true based on what I've seen across the board from a planning standpoint. For most people, Social Security should be viewed as part of their overall retirement income strategy, ideally accounting for 20-25% of their total income in retirement.

However, in many scenarios I analyze for clients, Social Security ends up comprising a staggering 50-75% of their retirement income. For some it's even all they have for income when they retire. Pretty bleak if you ask me! This isn't ideal, but it underscores the vital role Social Security plays as a foundational safety net, preventing millions from falling into poverty in their later years.

Addressing the "Running Out of Money" Myth

You've probably heard the dire predictions: "Social Security is going to run out of money!" While it's true that the system faces financial challenges and future projections indicate it may only be able to pay a reduced percentage of promised benefits if no changes are made, it's not going to disappear entirely. That would mean pure chaos and a complete revolt from the entire nation. Basically, that will NOT happen.

According to the latest Trustees' Report, Social Security can pay 100% of promised benefits until the mid-2030s. At that point, it's projected to be able to pay about 80% of scheduled benefits if Congress does nothing. This means it can still pay out a significant portion, even without legislative intervention.

Possible solutions include:

• Increasing the full retirement age: This is a common proposal given increased longevity. I can see this change aligning with the longevity of our population.

• Adjusting the Social Security tax rate: A slight increase could significantly bolster the trust funds. I'm not so sure this is a plausible one because it's not as clear and lacks clear direction for those intending on collecting at some point.

• Raising the cap on earnings subject to Social Security tax: Currently, earnings above a certain amount are not taxed for Social Security. This could be true and I don't think there would be much pushback on it either.

• Modifying the cost-of-living adjustments (COLAs): Tweaking how benefits are adjusted for inflation. This is another option that's a bit foggy. Imagine being thrilled at a 10% COLA adjustment but realizing there are other parts of Medicare and tax that adjust to gobble all that up. I remind clients of this all time time. Not that I want to rain on anyone's parade or anything, but it's not as cut and dry as you might think.

  
  

These are complex issues requiring political will, but they are solvable. The program has been around almost a hundred years and the government won't allow it to fail. There is too much riding on it. The system is adaptable, and historically, Congress has made necessary adjustments to ensure its solvency. I believe it'll be a combination of tweaks that make the program more flush with funds.

Debunking the Myths and Gaining Clarity

So, let's debunk the "Ponzi scheme" myth once and for all. Social Security is a social insurance program, not an investment scheme designed to enrich a few at the expense of many. There will be haters about the program that whine every time they pay into the system, but I assure you EVERYONE will collect their fair share when they retire. It's a pay-as-you-go system where current workers' contributions fund current retirees' and beneficiaries' payments, with reserves built up to buffer against economic shifts.

It's a promise between generations, designed to provide a floor of financial security in retirement, disability, and for survivors. Is it perfect? Nope, not even close and no system is. Does it need adjustments? Absolutely, and that will come. The program is a lot of things, but it is far from a scam.

As we celebrate Social Security's belated 90th birthday, let's recognize its profound impact on millions of American lives. It's a testament to a society that believes in protecting its most vulnerable. While personal saving remains paramount, understanding Social Security's role as a vital component of your retirement plan is crucial. That's right, part of collecting benefits from it does involve some planning, timing and strategy and that's where we help. Don't let the sensational headlines overshadow the fundamental truth: Social Security is a foundational pillar of financial security for millions. Meet with our team and be sure you're collecting what you deserve throughout your retirement.

Happy Belated 90th Birthday, Social Security Administration! Here's to many more years of serving the American people.

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