Despite Donald Trump’s repeated claims that he would not touch Social Security, Medicare, or Medicaid, the reality is that all three of those crucial programs are now under attack from Trump’s team. Regarding Social Security, a news report earlier this week (“Long waits, waves of calls, website crashes: Social Security is breaking down”) describes how the nation’s indispensable public pension system is in danger of falling apart because of Trump administration cuts.
It is difficult to read such news without concluding that this is deliberate sabotage by the White House to kill an immensely popular program that Republicans have long wanted to destroy but have been unwilling to attack via aboveboard democratic means. After all, why take the political heat from voting to dismantle something that people love and on which their lives in many cases literally depend, especially when it is possible to destroy it from within—and then to claim that it was broken all along?
This is horrifying to contemplate, for four reasons: Social Security is the most successful social program in history; it serves an essential purpose; it is amazingly inexpensive to run; and it is a sustainable long-term financial arrangement. I will address the first three of those claims tomorrow, but in today’s Part One of this two-part column, I will focus on that last fact about Social Security: it is sustainable.
Why start there? Republicans have for decades tried to misrepresent the finances of Social Security by saying that it will inevitably fall apart. That has always been wrong, but Elon Musk apparently at some point came across the once-fringe claim that Social Security is a Ponzi scheme. When Musk gets a superficial claim in his head, he does not let it go. And Trump then follows.
But Social Security most assuredly is not a Ponzi scheme. In fact, if it were a Ponzi scheme, that would necessarily mean that every privatized system of retirement would also be a Ponzi scheme. Indeed, banking itself would be a Ponzi scheme.
That is all nonsense, but unfortunately, because Musk has now committed to the false Ponzi propaganda, Republicans might finally succeed in ending Social Security for both current and future generations. That would be a tragedy, a tragedy made even worse because it would be a completely unforced error that would ruin the lives of tens of millions of Americans.
Not a Ponzi Scheme—Not Even a Little Bit
As it happens, much of my writing over the years here on Verdict and in my academic work has focused on Social Security’s finances. Over the last two decades or so, I have found myself writing variations on what in some ways amounts to the same column nearly every Spring, which is when the Trustees of the Social Security and Medicare systems issue their annual reports. The release of those reports is followed like clockwork by panicky news articles claiming that Social Security will soon be “broke” or is facing “bankruptcy.”
All such characterizations are based on a fundamental misunderstanding of how the Social Security trust fund works, which means that my writings have largely focused on beating back that one specific false claim. As two among many examples, I wrote “Good News About Social Security” in 2018 and “Social Security’s Good News is Good News” in 2022. Yes, it did feel repetitive, because it was. No matter how many times that claim was debunked, opportunistic Republicans would repeat it ad nauseam, requiring yet another refutation.
By contrast, the false claim that Social Security is a Ponzi scheme was nowhere near the mainstream until now, and the only time that I felt the need to take any time to respond to that claim was in a Verdict column in 2015. Even there, however, the Ponzi accusation was only one of many myths that I was trying to bust, because no one in a position of responsibility had openly endorsed that lunatic assertion. Clearly, things have changed.
What is a Ponzi scheme? It is a variation on a classic pyramid scheme, which means that it is a promise of future wealth that can only be fulfilled by continuing to recruit new suckers who pour new money into the scheme. When there are no new suckers left to dupe, the scheme falls apart.
How could anyone claim that Social Security is at all like that classic fraud? It is a very simpleminded comparison: A Ponzi scheme involves bringing in new participants, and Social Security also involves bringing in new participants. Got it? So because some group financial arrangements that bring in new participants are unsustainably fraudulent, all such arrangements must be unsustainably fraudulent. Brilliant. (To be clear, there is no reason to believe that Musk actually knows what a Ponzi scheme is or even how Social Security could be dishonestly described as one. More likely, he is mindlessly repeating what he hears in the dark recesses of social media. Perhaps he heard that calling something a Ponzi scheme is “un-woke,” and maybe even “based.”)
The key, however, is that Social Security can be (and has been) designed to be sustainable, which means that it need never collapse—and will only do so if political ideologues destroy it. In my 2015 column, I used a simplified example to show why Social Security is sustainable:
Imagine that two people are working, one younger and one older, and there is also one child and one retiree in their little community. The workers have a combined income of $100,000. They agree that they will spend $25,000 on the child, $25,000 on the retiree, and consume $25,000 each while they are working. They also agree that this will continue forever. Later, when the child begins to work (and is replaced by another child), and the retiree has died (replaced by the older worker), there are still two workers and two non-workers, and everyone can still consume $25,000 each.
The point is that this system is sustainable. It does not require finding new people to join the system, and it makes no false claims about how the money is being used, or where the benefit payments are coming from. It is a pay-as-you-go system, and it is clearly not a Ponzi scheme.
In other words, the new participants who join Social Security each year by entering the U.S. labor force are not new suckers but are simply participants in a system that allows them to build up credits that the system will (unless Trump and Musk have their way) be honored in the future. The real-world computations become more complicated because of wage growth and changing demographics, but the fact is that even the most pessimistic forecasts of Social Security’s future have said that at worst the future payouts might not be as large as we hoped. That does not, however, in any way make the system a Ponzi scheme. It simply means that responsible financial managers know how to make adjustments along the way in response to changes in reality-based forecasts.
Is the Entire Banking System a Ponzi Scheme?
But Social Security’s detractors might now say: Aha! So you’ve admitted that Social Security benefits might not match what has been forecast. That means that people should be able to invest their own money to prepare for their own retirement—that is, we need privatization!
As an initial matter, note that this completely shifts the argument. Social Security is not a Ponzi scheme, so its detractors quickly change the subject by claiming that it is nonetheless supposedly bad in some other way, like possibly providing lower rates of return than some idealized type of privatization. Even setting aside the higher fees and much scarier market risk that would be involved in moving to a system with private retirement accounts, however, there is a fundamental contradiction at work in that argument.
How do private retirement savings accounts work? People take some of the money that their employers pay them during their working years, setting those dollars aside and putting them into a bank (or other financial institution) to be withdrawn later, with interest. But this involves exactly the same “new participants” requirement that those who falsely decry Social Security’s (nonexistent) Ponzi-like structure focus on, in two ways.
First, banks do not put our retirement savings into vaults and then open the vaults when we retire. Banks take nearly all of our deposits and immediately lend them to borrowers (who then buy houses, start businesses, and so on). Those borrowers, by the way, will pay higher interest rates than the banks promise to pay their depositors. Why do we know this? Because that is the business model of banking in a nutshell: take in money with the promise to pay interest to depositors, lend out money with the requirement to receive larger interest payments from borrowers, and pocket the difference. The banks have no choice but to lend out depositors’ money, because otherwise they will earn no profits.
That means that when new retirees arrive at the bank to withdraw money from their retirement savings for the first time, the bank does not “give them back their money,” because the bank loaned out that money long ago. The bank can only honor withdrawal requests by drawing from new funds that are arriving from borrowers who repay their loans. And if the borrowers do not repay (that is, if they default), the bank will be insolvent. Moreover, when the bank loses deposits as retirees start to draw down their balances, it tries to bring new workers into the bank to start their own new retirement accounts, starting the cycle all over again.
The second way that private retirement accounts necessarily rely on “new participants” goes to the very purpose of saving for retirement: people want to stop working but to continue consuming (housing, restaurant meals, medications, and so on), and someone must produce all of those goods that retirees want to consume. That can only happen if new workers are brought into the work force, which means that the entire economic system is only sustainable with constant turnover and new participants joining the system in perpetuity.
That is, if I retire and say that “I am supporting myself with my own savings,” that can only be true if the money that I am withdrawing from my retirement savings account can buy things. If there are no younger people producing what I need to buy, I can say “But I have money!” until I am blue in the face, but I cannot eat money.
In short, if the people who attack Social Security want to say that it is a Ponzi scheme because it only works if new participants are brought in on an ongoing basis, then that is true of any retirement system, no matter how it is financed. Indeed, it is true of the entire financial system, because the returns that we earn on any money that we put into our bank accounts can ultimately only be paid because of the production of real goods and services in the nonfinancial economy.
In Part Two of this column tomorrow, I will discuss how the Social Security system is an irreplaceable and surprisingly inexpensive way to support Americans in their retirements. For now, however, the big takeaway today is that the facile comparison between Ponzi schemes and Social Security completely misunderstands how both systems work—and how fundamentally different they are.
