This morning somebody pushed my button and before I could finish my morning surfing I had to stop and get this off my chest. Rather than allowing it to sink into Facebook Oblivion I'm reposting it here in case I need to use it again.
Yet again I have come across someone calling Social Security a Ponzi scheme. This is a widespread careless rhetorical assault crying out to be corrected. Unlike a Ponzi scheme in which specific amounts of money are remitted by specific individuals to other specific individuals, the Social Security system is a collective arrangement which does collect from specific individuals but the money is not earmarked for any specific person. The system can be compared with everything from office pools to insurance to even a lottery -- but "Ponzi scheme" is absolutely a misleading comparison.
That said, if it isn't a Ponzi scheme then what is it?
Simply stated, it is a social contract, put into place by taxpayers at work, administered by a government agency, the Social Security Administration, charged with the responsibility of awarding limited benefits to other qualified citizens who for a variety of reasons either cannot work or whose ability to work is limited.
It is not an investment plan.
It is not an insurance plan in any common meaning of that term.
It is not a savings plan.
It is a pay as you go plan.
==>The working population furnishes the revenue stream and those currently receiving benefits are the beneficiaries.
Many people use the phrase "I paid into the system..." indicating that they think of Social Security as some kind of savings or investment plan which it is not. They are, nevertheless, entitled (catch that word - ENTITLED) to benefits of the system, provided they or someone related to them paid 40 quarters into the system. The system is organized in a manner that spouses and dependents have limited protection from total financial ruin when the person dies whose payroll taxes once supported the system.
One of the best-kept secrets in America is that Social Security payroll taxes are not collected from all earned income. Only those who earn less than a certain amount in any given year are taxed. After that amount is passed, not one more dime is collected from that person's earnings until the following January.
In 2012 payroll taxes are collected on earned income up to $110,000. After that point nothing more will be collected from that point til the end of December. The amount of Social Security payroll tax increases annually but every year the same rule applies -- after that year's tax has been paid, there will be no more Social Security payroll taxes for the rest of that calendar year.
(Medicare taxes are not capped. And as everybody knows by now, income taxes are subject to so many deductions, credits, carve-outs, exemptions and other loopholes that accountants and lawyers are usually employed by high earners to help navigate the system. BUT SOCIAL SECURITY PAYROLL TAXES ARE STRAIGHTFORWARD AND EASY TO UNDERSTAND.)
As anyone can see, poor people are taxed for the purpose of funding the Social Security system beginning with the first dollar earned every year.
There are no exemptions (even those who are paid "tip wages" are expected to pay Social Security taxes on their reported income).
THERE ARE NO DEDUCTIONS FROM SOCIAL SECURITY TAXES.
The "standard deduction" or itemized deductions that working people claim when income taxes are paid are only for that -- INCOME. But their payroll taxes are collected all the same. Even if they fail to earn enough to pay income tax, their Social Security (and Medicare) taxes are still collected to become part of what is used, no mater how small that amount may be, to support those systems.
It's hard for most people to understand, but the fact is that the Social Security system was put in place to take care of poor people, not the rich. That was true when it began in 1937 and it remains true today. It should be clear by now, in light of the explanation above, that it is also mainly funded by the working poor from the first dollar they earn.
Hopefully it will not be the only source of income in retirement for anyone reading this post. By that time I sincerely hope you will have additional resources, as I do, in the form of assets or additional income from a pension or other retirement plan to supplement your Social Security income. But just know that for most Americans -- yes, MOST -- their Social Security check is all that protects them from being totally destitute. " Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income." Considering how modest the Social Security benefit is, an additional ten percent is a very small amount, indeed.
So please. Never refer to the Social Security system as a Ponzi scheme. In my experience it is one of the most important features of our society. And for what it's worth, my experience with the system is that it is an extraordinary model of efficiency and performance, keeping separate accounts of every person in the system. Anyone at any time can receive a copy of their Social Security earnings (which is a good practice, by the way, to make sure your employers have been remitting your taxes properly.) It is very impressive to look at that statement with your name and account number, listing your lifetime earnings, even that summer job you may have had years ago that you forgot about. But the Social Security system didn't forget. And the day will come when you will be damn appreciative that they didn't.