Social Security isn’t ‘going broke’ — it’s already broke

The headlines following a newly released report from the Social Security trustees could lead you to believe that the Social Security Trust Fund is going broke faster than anticipated. But it’s already broke, and has been for years — because the federal government borrowed the money from the trust fund and spent it.

Here’s how the trust fund works.  The federal government imposes a Social Security payroll tax on workers: 12.4 percent, with employers and employees both paying half.

{mosads}That money is deposited in the trust fund and the government uses it to pay current Social Security benefits. (There’s actually two trust funds, one for retirees and one for the disabled, but the trustees often combine the two for reporting purposes.)

Historically, workers have paid in more than was needed to cover benefits, allowing the trust fund to grow to $2.9 trillion — at least on paper.  However, the federal government has borrowed the trust fund surplus to cover other government expenses, depositing interest-bearing IOUs in its place.

If Social Security must pay out more than it receives, which the trustees say will happen this year for the first time since 1982, the government cannot draw from other assets because it doesn’t have any.  Indeed, the federal government has to borrow hundreds of billions of dollars every year just to cover its current expenses.

Thus the government must borrow the money — or raise taxes — to redeem its IOUs so Social Security can pay benefits.

So does that trust fund represent real assets, or is it little more than a Ponzi scheme?

The Ponzi scheme is named after convicted money swindler Charles Ponzi, whose investment schemes in 1920 made him millions — until it all collapsed, costing others millions.

The federal government’s Security and Exchange Commission helpfully explains the scam: It’s investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

That’s pretty much how Social Security works. Of course, unlike Ponzi, Social Security doesn’t have to “solicit new investors”; federal law requires virtually all working Americans to be an “investor.”

But even that won’t save the system. Fewer workers are paying in as the baby boomers retire. The Social Security Administration says there were some 5.1 workers per beneficiary in 1960; there will only be about 2.6 by 2020.

The SEC says that in Ponzi schemes fraudsters take investors’ contributions “to use for personal expenses, instead of engaging in any legitimate investment activity.” Arguably, that’s what Congress does when it spends the surplus.

Defenders of the trust fund claim that Social Security deposits are guaranteed by the “full faith and credit of the federal government,” though currently it may be fair to say that there’s more faith than credit.

Complicating the defenders’ claim is the fact that the trustees also warn us that the trust fund will be officially depleted of the assets (it doesn’t have) by 2034. After that, Social Security will only be able to pay about 75 cents on the dollar—unless Congress comes up with an intervention.

But while I have highlighted the similarities between Social Security and a Ponzi scheme, there is one big difference. Ponzi went to jail for his scam, don’t expect members of Congress to suffer the same fate.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.