Dealing With America’s Ponzi Scheme – Social Security

Last week in the July 2, 2025 edition of The Wall Street Journal, editorialist William Galston opined that The Social Security Crises Is Coming. I have been critical of Mr. Galston previously for easy acceptance of the political norm – the conventional wisdom – on a variety of issues. By that I mean Mr. Galston accepts the assertions of the Washington insiders as gospel and goes on from there with an opinion that has less basis in fact than the original accepted norm. Let me demonstrate by quoting from Mr. Galston’s opinion piece:

“Today’s political din makes it difficult for genuine warning calls to break through, but the Social Security system’s trustees in late June sent a signal so alarming that America can’t ignore it: Unless lawmakers do something, the system’s trust fund will be exhausted in the first quarter of 2033—sooner than earlier reports predicted. This crisis will trigger large cuts in benefits to current and new beneficiaries.”

In actuality Mr. Galston is part of the political din which if continued makes a real problem even harder to resolve. First, there is no Social Security Trust. It went out of existence when President Lyndon Johnson incorporated both the revenue from the Federal Insurance Contributions Act (FICA) and the obligations to pay benefits as part of the general fund. In essence, FICA is just another income tax, and social security benefits are just another general fund obligation.

Since there is no Social Security Trust Fund, there are no real Trustees. Real trustees have fiduciary duties to safeguard the res (body of the trust) and make payments consistent with the purpose of the trust to the beneficiaries. These trustees have no responsibility for protecting the res. If they did they would have invested the revenue from FICA over all these years to add to the res and provide additional revenue to contribute to the maintenance of the social security benefits. No such action was ever been undertaken after 1969 – basically the government used the excess revenue on an interest free basis. Which is why the social security trustees are, in reality the Secretary of the Treasury, Secretary of Labor, Secretary of Health and Human Services, Commissioner of Social Security and two toadies appointed by the President and confirmed by the Senate. If you think they are real trustees try suing them for breach of fiduciary duty. NOT!

In reality – and we like to deal in reality – Social Security benefits are not paid out of a trust but rather out of an annual appropriation from the general fund. In reality, there is really no distinction as to its source and methods than an appropriation for the military, or the food stamps, or any other general fund appropriation. In reality – and we still are dealing with reality here – the Social Security Fund is not really going to run out of money as suggested by Mr. Galston because there is no fund, rather for the first time payments of Social Security benefits from the general fund will exceed revenue from the FICA taxes to the general fund. Currently that is projected to begin in 2033.

When Elon Musk described the social security system as a gigantic Ponzi scheme he was dead right. However, he was not the first. Literally hundreds of people who have paid attention to the Social Security System, including me, have said the same thing with the same degree of accuracy. Even those who gathered with former President Franklin Delano Roosevelt (D) to create the Social Security System acknowledged that the whole system assumed that the population would grow faster than those eligible to receive benefits – that is precisely the definition of a Ponzi scheme. To double down on that they set age for eligibility for benefits at age 65 which was precisely the same age as the average mortality of men – the expectation being that only those few who lived beyond the life expectancy would actually collect benefits.

In historical terms it is the moral equivalent of the child noting that the Emperor was wearing no clothes. (For those of you forced to endure a teachers union led education in the Portland Public Schools, it is a story about. . . oh hell, buy a copy you cheap SOB and learn a little about life.) So when the mortality rate increased and the birth rate decreased the whole scheme was on its predictable path to calamity.

But it needn’t be. When we stop looking at the problem as if we need to preserve the myth of a trust fund and recognize that it is just one more appropriation for the general fund, it is a relatively easy problem to solve. Basically, you have three options: 1) increase the amount of the general fund appropriations, or 2) reduce expenditures. That’s it. You can waste your time trying to resurrect the current Ponzi scheme or you can deal with in the same way that the government deals with other revenue and expenses.

As a conservative and a skeptic about the efficiencies of government, my first choice is always to deal with the expenditures before ever asking taxpayers to pay even more. Here is a list of things that Congress and the Administration can do:

• Eliminate waste and fraud. That includes eliminating benefits to illegal immigrants, dead people and other scofflaws.

• Separate payments to those receiving disability payments from all other payment made by the Social Security System and place responsibility for those payments with other welfare agencies.

• Streamline the records and reduce costs incurred for permanent storage of hard copies.

• Adjust the eligibility status for those currently under forty years of age to reflect changes in mortality rates. This is a process that should recur on a regular basis but only apply to those under forty. There is nothing magic about forty rather it is just an arbitrary number that is distant enough from general retirement age that allows people to make intelligent choices.

• Allow permanent choices to those under forty to opt out of the Social Security System and invest the amounts that would have been paid to FICA (both employer and employee taxes) payment system. There is additional risk but history has shown that over time investment in the S&P 500 Index would return, on average, over eight percent (compounded) per annum which is significantly greater than the current return which is zero. Even investment in Treasury bond would over time, yield a return of three and one-half percent – again which is significantly greater that the current zero percent.

• And finally, comparable to the no tax on social security benefits, a tax free distribution from deferred compensation plans (pensions, IRA, etc.) for those annually waving social security benefits.

But don’t hold your breath, the Democrats in general, along with a handful of cowardly Republicans would rather campaign on the problem than solve the problem.

But since the threshold for payments exceeding FICA tax revues doesn’t occur until 2033 you can count on Congress to keep kicking a solution down the road until a known event (the cross-over point) again becomes a moment of crises.