Maybe the whole US is one big Ponzi scheme

Recently, Elon Musk described Social Security as the "biggest Ponzi scheme of all time". Is it? What even is that?

I've got some essays queued up focusing on the threats to our democracy that Trump represents - as I have mentioned before, the weaponization of the Justice Department and the personalization of power are my main concerns - but let's talk about something lighter(?) this week - Social Security.

Building on my defense of tariffs post from last week, I'm going to stay in an economics vein. Well, it's politics, too, I suppose, as we'll see. Let's go.

Elon Musk recently described Social Security as a Ponzi scheme - in fact as the "biggest Ponzi scheme of all time". He's not alone in this. People have been saying this kind of thing for the entire 90 years since the federal retirement income program was created.

Is he right?

First of all, what even is a Ponzi scheme?

A Ponzi scheme is when a fraudster promises so-called "investors" big payouts, but instead, never invests in anything real and only covers the promised payments using cash from more recent "investors". These schemes fall apart - and the fraudster goes to prison - when the fraudster fails to convince any more marks to sign up. A crook named Ponzi made this kind of financial fraud famous a hundred years ago.

In a sense, Social Security does work like this.

All workers in the US pay the Social Security tax on their income. It's 6.2% directly, but employers also pay 6.2%. In the end, though, the employee is really covering all of this. It's the full tax cost of employing someone. We see this with self-employed people, who are required to pay all 12.4% on their income.

(By the way, this shows up on your paycheck as an OASDI tax. That's Old-Age, Survivors, and Disability Insurance - the real name of Social Security.)

That collected payroll tax basically goes directly toward paying the retirees and disabled people currently getting Social Security. That is how it works.

Technically, there is an accounting method used by the federal government, in which a special kind of bond is created. Then the federal government has to pay off that bond to fund Social Security. Those bonds are perfectly valid - every bit as valid as any other kind of federal debt - but it really is the federal government moving money from one pocket to another.

In the end, it all comes down to current workers paying Social Security taxes, which is then passed on to current recipients. The collected cash isn't actually sitting in a vault anywhere at any point.

(By the way, if the amount of taxes collected exceeds the amount of required payouts, that money is often used to fund other federal government programs, as shady as that might seem. Regardless, the bonds - the promises to fund Social Security - are still there.)

Okay, so looking at Social Security most basically, the money from the most recent "investors" (current workers) goes to pay off the early "investors" (retired workers).

(By the way, it's not my focus right now, but about a third of Medicare is funded the same way, too.)

Put this way, it does all sounds a bit Ponzi-ish, doesn't it?

However, there are important differences.

First off, Social Security is linked to and guaranteed by the federal government. In other words, all of us, together - mutually - as tax-paying American citizens. It's not some one-off crook trying to fleece rubes and skip town. This means, unless something really goes wrong in the US or maybe some massive political revolution zeroes it out, Social Security will be there in some form.

Second, related to that, being a government program, it's as transparent as you're going to get in this crazy, mixed-up world. I know it's in vogue to question everything and hate "the government", but government programs also require a lot of disclosures and reports. And if you, as a tax-payer, don't feel like you're getting enough answers, you can have your elected representatives demand some. (Try that with any kind of private financial company.)

Finally, there will always be new people paying into the system. I guess if Americans stop having kids altogether - and we cut off all immigration - there could be a problem, but unless those happen, we will always have new taxpayers. There's no having to recruit new "investors".

Now look, Society Security does need tweaks. The Board of Trustees that manages the program has said for years, in legally mandated annual reports, that the program will be unable to fully pay promised payouts. The most current report said that, starting in 2035, the program will only be able to cover 83% of its promises.

This means that Social Security will either have to cut its promised benefits, taxes will have to increase, or funding will need to be pulled from other parts of the federal budget. Since this is a federal government program, Congress and the president will have to get involved as to how exactly those three choices will be balanced. Make your voice heard now.

There are other suggestions out there to solve the problem, by the way. They usually go by the description of "privatization". In other words, somehow the money that currently goes to Social Security would instead be routed into a private account with your name on it. Then, presumably, you'd get to decide what to do with it. Think of it as a 401k account, if you're lucky enough to have one of those.

That said, even though it's "your" account, let's not kid ourselves. By-and-large, this would involve handing your money over to Wall Street in some way. It's true - that money would be legally owned and operated by you. And you might get better returns than Social Security - which famously hasn't stacked up well against decades of dramatic private financial market growth. But then again, we saw during the financial crisis around 2008 what can happen to Wall Street firms. Bankruptcy is always an option. And there are no guarantees of solid returns from investments. As the financial experts like to say, "Past performance is no guarantee of future results."

(I should mention that so-called annuities promise regular payments, much like Social Security. Think of them like private pension payments. But the security of these depends on the health and longevity of the firm you take the annuity out with.)

To wrap up, yeah, Social Security can look like a Ponzi scheme. Current taxpayers fund the retirements of past taxpayers. But no one's hiding anything. No one's getting rich, leaving you with nothing. And most of it is guaranteed because it's connected to the existence of the United States.

You know, now that I think about it, if you want to push it, I guess you could think of the entire US as a giant Ponzi scheme. Aren't we all just living off of the sacrifices, money, investments, advancements, and so on from those who went before us? From a certain perspective, we're all grifters.

Or perhaps, we're all just citizens, joined in this shared project, working together to shield ourselves from the vagaries of life as best we can. Let's recall why Social Security was even created. It's an anti-poverty program, meant to give the elderly some security and dignity after they could no longer work. Previously, the elderly had to rely on - or impose upon, depending on how you look at it - family. If they didn't have willing or able family, they had to become charity cases.

We can figure out a way to make it work - barring the complete breakdown and destruction of the US, I suppose - which, if that happens, well, we all probably have bigger problems to deal with than retirement.