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Ponzi Schmonzi

Will all my readers out there who think Rick Perry’s ruggedly handsome mug should be carved onto Mount Rushmore please stop sending me emails about Social Security as a Ponzi scheme? The astute governor from Texas, apparently one of the country’s leading experts on Social Security, has been running around comparing the federal retirement program to such a doomed investment plan.

I’ve addressed this issue many times before in this column. I don’t want to bore my regular readers with another long dissertation on this topic. But since Gov. Rushmore broached the subject, I’ll make three quick observations.

First: Social Security is not an investment scheme. It’s a social insurance program. (The word “social” in “Social Security” means something!)

In addition to providing workers with a basic and stable income in retirement, Social Security was established to achieve larger goals for our country as a whole. One of those goals was to raise the standard of living of lower-income workers in retirement. This is accomplished with a weighted benefit formula that gives those retirees a higher “replacement rate” — when comparing their average income with their Social Security retirement benefit — than their more well-to-do fellow taxpayers can expect.

Second: Many emailers wrote to tell me how Social Security started out with thousands of taxpayers for each Social Security beneficiary, how we now suddenly find ourselves at a three-to-one ratio, and how the entire scam will implode when we reach two to one. That’s a classic Ponzi-scheme scenario, they say.

Well, obviously, in the earliest days of the program (the early 1940s), workers far outnumbered Social Security beneficiaries — but the ratio was more like 40 to one, not “thousands” to one. But as more and more people quickly qualified for benefits, the taxpayer-to-beneficiary ratio rapidly dropped, and by about 1970, it had matured to the three-to-one ratio that has held strong for 40 years now.

As the baby boomers retire, we are indeed heading toward a two-to-one ratio. But with some modest adjustments to benefits and/or tax rates, the system can continue to operate quite well at such a worker-to-beneficiary ratio.

Finally, third: Ponzi schemes, by their very definition, have short life spans. Social Security has been around for 75 years now.

Q & A

Q: I paid maximum Social Security taxes from the time I started working in 1971. I plan to keep working until the end of 2011, when I will retire at age 66. How much will I pay in Social Security taxes? How long will it take for me to get that back?

A: I normally don’t like answering this kind of question, because I think it just lends credence to the Social-Security-as-an-investment-scheme scenario I just spent the first part of this column debunking.

On the other hand, I totally understand that people want to know if they’re getting their money’s worth out of the program. That’s just human nature. But before I answer your question, I have to make the following points.

First, in addition to what you get out of the program, you have to consider what the country gains from a national social insurance system. I alluded to one of the program’s social benefits above. In a future column, I will spell out more.

Second, these “payback” numbers can be presented in all sorts of ways. For example, some insist the employer’s share of Social Security taxes should be factored into the equation. This is the amount your employer kicked into Social Security to match your tax payments.

I disagree. After all, it’s not like your employer was sending your money to the government. The employer’s share is simply another tax a business pays. Think of it this way: If Social Security were abolished tomorrow (or when Gov. Perry is elected president), do you think your employer is going to increase your salary by the amount of that matching share of Social Security tax? Will he say, “Oh, here’s that money of yours we’ve been sending to the government for you! You can have it back now!” I don’t think so.

But if you disagree with my take on this, then simply double the number I give you when I present the amount of Social Security taxes you’ve paid.

I also must point out that I fully understand that I’m presenting the “payback times” for someone who works for wages. A self-employed person pays twice as much in Social Security taxes — although, over the years, that rate’s been reduced by various tax write-offs.

And finally, I must make it clear that in adding up the “taxes paid” column, I used the Social Security tax, which varied from 4.6 percent when you first started working in 1971 to 6.2 percent in 2010. (And in 2011, you paid only 4.2 percent, due to a provision in last year’s economic stimulus package.) When some people attempt to do these payback times, they mistakenly add in Medicare taxes paid. Medicare is a completely separate program and is entirely separately funded. It makes absolutely no sense to factor in Medicare taxes when trying to figure out Social Security payback times.

Having said that, here are the numbers. Assuming, as you said, that you paid Social Security taxes on maximum earnings from 1971 to 2011, you will have paid $132,740 in Social Security taxes during those 40 years. You should expect to get a monthly Social Security retirement benefit of about $2,400. That means you will recoup all the taxes you paid in about 55 months, or a little more than four and a half years.

If you have a Social Security question, Tom Margenau has the answer. Contact him at To find out more about Tom Margenau and to read past columns and see features from other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at



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