Home Ponzi Scheme How To Fix Social Security – Forbes Advisor

How To Fix Social Security – Forbes Advisor

Let’s start with a quick refresher on how the federal government funds Social Security. It’s a pay-as-you-go system: The payroll taxes you contribute now fund benefits for current retirees.

This oversimplifies things a bit, but this core truth belies the common narrative of “I paid for my own Social Security benefits!” In reality, Social Security isn’t like a 401(k)—you are paying for other people’s Social Security benefits, and a new generation of workers will be paying for yours. (This is also why Social Security’s detractors call it a Ponzi scheme.)

The system functions well when there are enough workers to pay current beneficiaries, and it has banked enough cash to pad distributions if there aren’t. The problem is that, relatively soon, there won’t be enough cash in the system to pay for everyone’s promised benefits.

Between 1983—when a big Social Security reform bill was enacted—and 2010, Social Security ran a surplus. The Social Security trust funds hold the extra funds and invest them in safe assets that earn interest income. Since 2010, the program has been drawing on the interest income from the trust funds, as benefit costs have outstripped payroll tax revenue.

In 2021, payroll taxes and interest income won’t be enough to cover current benefits. This year, Social Security will start drawing down the principal held in the trust funds. If nothing…

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