The Federal Trade Commission just announced it is investigating allegations that the vitamin and supplement company Herbalife operates as a pyramid scheme, which is illegal. I have no idea whether the allegations against the well-known and long-established company are true; but the Social Security program is clearly a pyramid scheme and the government vociferously defends it.
Here’s how the federal government’s Securities and Exchange Commission (SEC) describes a pyramid scheme. “[D]espite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors.”
That happens to be exactly how Social Security works.
Social Security is a pay-as-you-go system. Workers pay a 12.4 percent federal payroll tax (split between employer and employee), which is used to pay current retirees’ benefits. Money in, money out.
A hallmark of pyramid schemes is that those who jump in early make lots of money compared to what they paid in; those who join later often do not get their investment back—or any money at all.
The first person to receive a monthly Social Security check was Ida May Fuller, in January 1940. She paid in a total of $24.75; her first monthly check was $22.54. By the time she died she had received $22,888.92.
Millions of Americans have come after Ida May, and the vast majority of them have gotten back far more than they paid in. But that windfall is coming to an end. As the Social Security Administration explains, “In 1950, there were 16 workers per beneficiary; in 1960, there were 5 workers per beneficiary. Today, the ratio is 3:1—and by 2025, there will be just 2.3 workers ‘paying in’ per beneficiary.”
As a result, the Social Security trustees have warned that by 2033—19 years from now—the government will only be able to pay 77 cents on the dollar of promised Social Security benefits. In other words, the pyramid scheme is about to collapse.
Or as the SEC explains it, “[E]ventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.” In this case, the “promoter” is the federal government and all those “fraudsters” who keep promising the public that Social Security is sound and solvent.
None of this will be a surprise to most millennials; surveys indicate most of them don’t expect Social Security to be around when they retire. Since they are at the bottom of the pyramid, they lose.
If the federal government really wants to go after pyramid schemes it ought to start with Social Security. That’s the biggest pyramid of them all.