Is Social Security a “Pay-as-you-go” System?

By Fred Claridge, Special for US Daily Review.

It was advance funded at its origin. It was again partly pre-funded during the Regan administration in 1983 by raising payroll taxes above immediate program costs in order to create a trust fund that would lend money to the U.S. government.

Social Security will not become a pure pay-as-you-go system until 2036, according to the latest government estimates.  At that time there will be a shortfall; yet, enough funding to provide approximately 70% of the then current benefit amount.

The structure and operation of Social Security is sometimes confused by its detractors as a Ponzi or Pyramid scheme.  While there may be some resemblance to Charles Ponzi’s scheme, due to the nature of future participants receiving funding from newer participants, Social Security does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants.

Similarly, just visualize a chain letter.  One person gets 10 suckers to send them, let’s say, $25 and each in turn has to enroll 10 additional people to participate, who then get 10 more ad infinitum. This scheme, when drawn on paper would look like a pyramid, hence its name; Pyramid Scheme. It would eventually require more than the world’s population to infinity!

Imagine at any given time there are 45 million people receiving Social Security payments. This will work to perfection if we were to have 45 million people paying Social Security taxes. With these numbers Social Security would last forever. It does not require a doubling of participants every time a payment is made to a current beneficiary, nor a geometric increase in the number of participants.

“If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement.

However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security).

During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems.”

Currently there are many self-funded retirement programs available for those who wish to either replace or supplement Social Security retirement benefits. These include IRAs, SEP IRAs, 401K plans, and various Defined Benefit Programs.

Social Security was instituted, for better or worse, as a safety net for the aging American population.  It was never intended to be a profit sharing or salary matching pension program. Many proponents of Social Security have rightly pointed out the devastation to over a generation of retirees who have lost the major part of their self directed private sector investments during the current recession

The fix to the Social Security ‘problem’ can be easily accomplished; but, it must be in advance by instituting higher payroll taxes, permanent infusions of general revenue, benefit reductions or a combination of these reforms. Along with these possible adjustments we, the American public, may demand the President and Congress establish a program similar to the highly successful California pension investment CALPERS program which actively manages pension funds via sound investments rather than ‘lending’ monies to the government!

*Much of the information provided in this article originated from Mr.Larry DeWitt, Social Security Historian’s Office, updated January 2009 including part of the paragraph in quotes.

Fred Claridge is Director of Certified Senior Guidance Association (CSGA) which certifies businesses and companies according to a strict code of ethics especially for Seniors citizens. Known as “The Voice of Senior’s Rights” since 1995. Former Director, President, and Chairman of CAN Associates, Inter-Agency Council on Child Abuse and Neglect in Los Angeles. Former President of two mortgage companies in Los Angeles, CA. Former Vice President Loan Officer for Union Bank, CA, Imperial Bank, and Lloyd’s Bank, CA.

Editor’s Note: We have recently had several articles critical of Social Security.  To see all of our articles on this topic, see here.  This article is offered to provide balance.


All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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