Kyle Johnson
Most people already know that Social Security is a disaster in progress. But I’d bet not one in one thousand knows my first point.
You do not have accrued property rights with respect to the money you have paid in to Social Security.
That’s not my opinion. That’s what the Supreme Court held in Flemming v. Nestor, 363 U.S. 603 (1960):
To engraft upon the Social Security system a concept of “accrued property rights” would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands. … It was doubtless out of an awareness of the need for such flexibility that Congress included in the original act, and has since retained, a clause expressly reserving to it “[t]he right to alter, amend, or repeal any provision” of the Act. § 1104, 49 Stat. 648, 42 U.S.C. § 1304. That provision makes express what is implicit in the institutional needs of the program. ....
We must conclude that a person covered by the Act has not such a right in benefit payments as would make every defeasance of “accrued” interests violative of the Due Process Clause of the Fifth Amendment.
Some would argue that the government’s ability to alter benefits is not without limitation. The Court did state that Congress is not free to “modify the statutory scheme free of all constitutional restraint.”
But this is merely hubris from gowned lawyers. Economic laws always prevail over statutory ones in the long run.
Because you have no legal right to a specific amount of benefits based on the amount paid into the system, any amount you are “owed” necessarily depends on two things: politics and economics.
Politically, Social Security is very safe. Politicians are pilloried for merely suggesting that benefits may need to be curtailed.
Whenever Social Security makes headlines, politicians post on X to placate voters with lies and falsehoods.
Earlier this year, US Representative Mark Pocan (D-WI) went viral by posting, “Let’s be clear: Social Security is your f*cking [sic] money.”
A few months later, so too did US Representative Tammy Duckworth (D-IL): “Social Security is YOUR money. Hands off.”
The Supreme Court decision is clear: it was your money, but not anymore.
So here’s the question you need to ask yourself: Can you envision the curtailing of Social Security benefits becoming a winning political issue?
I suspect not.
But beware—the program’s continuation is not necessarily a good thing.
Before diving into the data, it must be understood that Social Security is a Ponzi scheme (a financial fraud achieved by using money from new investors to repay prior obligations).
The Social Security Administration (SSA) collects payments only to then spend—not invest—the money. There are no income-generating investments in the traditional sense.
The SSA does list projected tax revenues as an asset on its balance sheet. But this is akin to a fraudster listing “expected future investors” as an asset on his scheme’s balance sheet.
The SSA also lists government bonds as an asset. But this too is economically dubious.
Suppose you were to write yourself a check for $10 billion. Did you just become a billionaire? Of course not, because the check is simultaneously an asset and a liability, which offset one another.
But that’s not how government accounting works.
The government feigns solvency by listing bonds as an asset. It ignores the liability side of the bonds by placing that burden on taxpayers. This is merely accounting trickery.
Because the SSA does not make any real investments, there are no actual returns. Yes, interest payments and taxes constitute Social Security’s “income” or “revenue” on the balance sheet. But all new money funneled into the system is used to repay prior obligations, which is the hallmark of a Ponzi scheme.
This fact is best exemplified by Ida May Fuller, one of the first Americans to collect Social Security benefits. Between June 1937 and October 1939, Fuller made nine payments into the system totaling $24.75. Fuller began collecting beneficiary payments in January 1940 and died in January 1975. She collected $22,88.92 in beneficiary payments in the interim.
Fuller might as well have won the lottery.
From where did Social Security get the funds to pay Fuller? It wasn’t from a hot stock tip. The government simply collected payments from younger workers and transferred the funds to her.
Charles Ponzi would be proud (or jealous? ; - ).
Even SSA officials cannot deny the Ponzi scheme nature of Social Security. On his radio show, Peter Schiff elicited staggering comments from some of the SSA’s top brass.
When asked to differentiate Social Security from a Ponzi scheme, former SSA Trustee Charles Blahous stated, “The difference is largely one of intent. I mean obviously, in a Ponzi scheme you have something of an intent to defraud.”
But this says nothing about using new money to repay old debts. Schiff pressed for an explanation regarding how Social Security and Ponzi schemes are financed. Blahous conceded, “There are certainly strong similarities.” When asked for an actual difference, Blahous only managed to respond with nervous laughter.
Months later, Schiff raised the same issues with former SSA Principal Deputy Commissioner Andrew Biggs. After his own bout of nervous laughter, Biggs explained:
“The difference would be, a Ponzi scheme would promise a rate of return which is mathematically impossible to produce. Social Security can keep going, in essence, by cutting the rate of return you get. Social Security will be a much worse deal for people retiring 50 years from now than it was for people retiring 50 years ago. So in that sense, it’s sustainable in a way a Ponzi scheme isn’t. But it’s sustainable by virtue of paying people in the future a poorer deal or poorer rate of return.”
Again, this is unimpressive. A “mathematically impossible” rate of return is not the defining characteristic of a Ponzi scheme.
Biggs continued, “The issue with Social Security is that it was an incredibly good deal for early participants.”
Schiff noted this is also true of Ponzi schemes in the private sector. Biggs conceded that early participants “received something like $17 trillion more in benefits than they paid in taxes. So Social Security is a little bit like a seesaw. At one end … [because some people] got a very, very good deal which means … people in the future are going to pay $17 trillion more in taxes than they’ll receive in benefits.”
Schiff noted that many of Bernie Madoff’s early investors achieved net profits by cashing out before the scheme collapsed. Schiff questioned if it’s the same dynamic for Social Security, that “all the money that our grandparents made is going to equal all the losses that our grandchildren suffer?”
Biggs: “Oh sure. It all has to net out. The problem is there’s no way out of it.” After denying the viability of moving to a private system, Biggs finished by admitting that “the $17 trillion is gone. It’s money that you’re never going to get back. But that’s just how these programs work.”
Schiff reasoned that $17 trillion is bad enough and that continuing the program will only increase the losses. Biggs didn’t put up much of a fight.
Here’s my question: how much would your analysis of the situation change if the figure offered by Biggs were $17.06 trillion?
I suspect not by much, if at all.
Well, $0.06 trillion is $60 billion, which is the estimated size of Bernie Madoff’s Ponzi scheme. Yes, the biggest private-sector Ponzi scheme in history is trivial compared to a mere fraction of Social Security’s scam.
The very nature of government is what makes Social Security the most dangerous Ponzi scheme of them all. Private-sector Ponzi schemes eventually fail as investors smarten up and recognize the fraud. Private-sector schemes collapse when their perpetrators fail to attract new investors.
But Americans are not free to decline Social Security. Pay the tax or go to jail. This dynamic ensures maximum pain and damage.
In 2024, roughly 68 million Americans received nearly $1.47 trillion in benefits. Social Security’s “reserve” was $2.7 trillion at the end of last year.
But this “reserve” is being depleted—Social Security has been paying out more than it takes in since 2020.
Last year, the Social Security Board of Trustees estimated that the combined reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) would be exhausted by 2035. This year, the estimate was revised to 2034.
What might it be next year?
I understand the necessity of making multi-year (even multi-decade) projections. But government economists struggle to accurately tally things in real time—revisions to Q2 and Q3 24 wiped out 53.3% of initial job estimates, and the latest revision wiped out an additional 911,000 jobs. Mainstream economists refuse to demonstrate their ability to accurately forecast monthly and quarterly statistics on inflation, unemployment, GDP, etc.
You’re free to disagree, but I think the government’s long-term forecasts are to be taken with a large grain of salt.
There’s another problem that doesn’t get enough attention.
The Social Security Act was passed in 1935. The first disbursements were made in 1940. That year, there were 159.4 workers for every beneficiary. Just 10 years later, the ratio was 16.5 to 1. The most recent data states there are now 2.7 workers for every beneficiary, and is projected to fall to 2.1 by the year 2100.
I fear that might be too optimistic. Recently, NBC polled nearly 3,000 adults aged 18–29 about their priorities for building a life they believed to be “successful.” Having children was a priority for:
Circumstances and preferences change over time. But I don’t trust government economists to accurately predict how and when.
What if things change from bad to worse?
So what happens when a Social Security trust fund runs out of money?
The SSA calculates that benefits must be slashed by roughly 20% (depending on the fund). But voters fuss anytime someone suggests cutting benefits by a mere two or three percent.
You don’t need to be clairvoyant to predict what’s going to happen.
Absent the political will to default honestly, government Ponzi schemes continue via fiat money creation.
The history of fiat currencies shows that a government cannot guarantee or regulate the value of its own currency. You’ll receive a disbursement with the amount you’re owed, but that amount will buy far less than it can today.
With government Ponzi schemes, there’s a risk they continue until the underlying currency and/or the issuing government itself collapses. I’m not saying you should retreat to a doomsday bunker any time soon… but this is how such stories eventually end.
Using “intermediate assumptions,” the trustees calculate the present value of unfunded obligations to be $25.1 trillion through 2099. On the infinite horizon, the figure is $72.8 trillion (up from 2024’s estimate of $62.8 trillion).
But Social Security doesn’t exist in isolation. Medicare’s financial situation is no better.
In 2024, Janet Yellen signed a Department of the Treasury report stating that Medicare and Social Security are underfunded by an estimated $175 trillion. Boston University economics professor Laurence Kotlikoff estimates the figure to be around $200 trillion. Mind you, this is in addition to the recognized national debt of $37 trillion.
The figures are so big and the projections are so far into the future, it’s difficult to know what to make of them. I find value in Kotlikoff’s attempt to bring them into perspective. He explains (italics are in the original article):
“Measuring the lifetime net tax rates facing today’s and tomorrow’s newborns starts with another label-free measure called the Fiscal Gap. It calculates, as a constant share of current and future GDP, the amount of extra resources the government needs to extract through time, either in the form of lower outlays or higher receipts, to achieve fiscal balance also know [sic] as intertemporal government budget balance.
“Like generational accounting, the fiscal gap is label free because it doesn’t care which receipts and payments are called official and which are called unofficial — it includes them all.”
Using a long-term GDP growth rate of 1.56% and a real interest rate of 6%, Kotlikoff calculates the fiscal gap to be 7.8% of GDP. For reference, total tax revenue has mostly bounced between 15–20% of GDP since 1945.
Kotlikoff calculates that achieving fiscal balance (a fiscal gap of zero) requires an immediate and sustained 26% decrease in government spending plus a 29.4% increase in taxation.
Fat chance. There isn’t the political will for that kind of spending cut nor tax increase—never mind both simultaneously.
We’re often told that a wealth tax would solve America’s financial woes. The most aggressive plans are typically around 5%. So here’s another way to put the unfunded liability estimates into context.
By studying the Forbes Real Time Billionaire List, analysts at the Institute for Policy Studies estimate US billionaires to have a combined net worth of $6.22 trillion. A 5% wealth tax would generate $311 billion in revenue.
That’s a rounding error on the government’s net outlays.
All billionaires globally are estimated to have a combined net worth of $16.1 trillion. A 5% wealth tax on all billionaires would generate $805 billion in revenue.
But that’s not enough to cover the US government’s current debt servicing payments ($1.05 trillion in 2024).
Even if it were applied annually, a wealth tax on billionaires wouldn’t put much of a dent in the recognized debt of $37 trillion, let alone the unfunded liabilities.
What about a 5% tax on the world?
Global GDP is estimated to be around $100 trillion. So a 5% tax on global GDP would generate $5 trillion. Even if we were to assume impressive economic growth, it would take decades of taxing the global population (8.2 billion) to meet the promises made to American retirees (roughly 70 million).
Of course, that’s never going to happen.
Can you hear the money helicopters?
A default is coming one way or another. And defaulting on obligations to the elderly is a recipe for disaster.
Old age often coincides with rising medical expenses. For most retirees, returning to the workforce is difficult or impossible.
Nonetheless, someone will eventually get the short end of the stick.
Don’t let it be you.
The younger you are, the better it is to assume that you’ll never receive meaningful Social Security benefits. Regardless of your age, it seems wise to minimize your reliance on this doomed program.
If you haven’t already, consider revising your plans for savings and investments. Admittedly, I’m biased. But Social Security’s problems add up to more green lights for speculating in resource stocks. It’s less risky than many believe. With a modicum of discipline, it’s far less risky than depending on the government.
KJ
P.S. Gold has broken its CPI inflation-adjusted high. And the fundamentals behind gold’s bull run are only strengthening. Silver’s monetary and industrial uses helped it crack the important $40 threshold. See how Lobo is playing gold, silver, uranium, and other resources by subscribing to our free, no-hype, no-spam newsletter: the Speculator’s Digest.
