{"id":3045,"date":"2026-11-14T05:00:32","date_gmt":"2026-11-14T09:00:32","guid":{"rendered":"https:\/\/www.saudercpa.com\/blog\/?p=3045"},"modified":"2026-11-05T09:18:13","modified_gmt":"2026-11-05T13:18:13","slug":"social-security-the-unraveling","status":"publish","type":"post","link":"https:\/\/www.saudercpa.com\/blog\/2026\/11\/14\/social-security-the-unraveling\/","title":{"rendered":"Social Security \u2013 The Unraveling"},"content":{"rendered":"<p><em>Preface: &#8220;It will be a great day when our schools have all the money they need, and our air force has to have a bake sale to buy a bomber.&#8221; <strong>\u2014 Robert Fulghum<\/strong><\/em><\/p>\n<p><strong>Social Security \u2013 The Unraveling<\/strong><\/p>\n<p style=\"font-weight: 400;\">The following is the seventh in a series of blog posts on the subject of Social Security. The first six installments, which can be found <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/05\/16\/social-security-an-introduction\/\">here<\/a>, <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/06\/13\/social-security-claiming-retirement-benefits\/\">here<\/a>, <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/07\/11\/social-security-claiming-family-member-and-survivor-benefits\/\">here<\/a>, <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/08\/08\/social-security-how-your-social-security-benefits-are-taxed\/\">here<\/a>, <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/10\/24\/social-security-how-earned-income-is-taxed-to-fund-social-security\/\">here<\/a>, and <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/10\/31\/3027\/\">here<\/a>:<\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Reviewed the history of the Social Security program<\/li>\n<li>Explained how to claim Social Security retirement benefits<\/li>\n<li>Explained how to claim Social Security survivor and family member benefits<\/li>\n<li>Explained how Social Security benefits are taxed<\/li>\n<li>Explained how earned income is taxed to fund Social Security<\/li>\n<li>Addressed the regressive nature of FICA<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">This seventh installment will discuss:<\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Residual structural problems with Social Security<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">Future posts in this series will address:<\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Estimating Social Security\u2019s returns on investment<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>The Contradictions Inherent in the System<\/strong><\/p>\n<p><a href=\"https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa.png\"><img decoding=\"async\" loading=\"lazy\" class=\"aligncenter wp-image-3054 size-large\" src=\"https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-1024x500.png\" alt=\"\" width=\"840\" height=\"410\" srcset=\"https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-1024x500.png 1024w, https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-300x147.png 300w, https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-768x375.png 768w, https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-1536x750.png 1536w, https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-2048x1000.png 2048w, https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/SCR-20261104-hmfa-1200x586.png 1200w\" sizes=\"(max-width: 709px) 85vw, (max-width: 909px) 67vw, (max-width: 1362px) 62vw, 840px\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\">Don\u2019t look at the above pie charts published in the instructions to IRS Form 1040 for tax year 2025 before you have answered the following two questions:<\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>What percentage of the federal budget of the United States do you think is spent on national defense, including veterans and foreign affairs?<\/li>\n<li>What percentage of the federal budget do you think is spent on Social Security Medicare, and other retirement?<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">Now, take a look at the \u201cOutlays\u201d chart on the right. Do the results surprise you? Consider also that the 37% spent on Social Security, Medicare, and other retirement doesn\u2019t even include the 20% spent on other social programs (like SNAP and other forms of temporary assistance). Nor does it include the 10% spent on \u201cPhysical, human and community development\u201d (like farm aid, environmental spending, and aid to college students). The total for those three categories is 67% of every federal dollar spent. That is almost four times the amount spent on national defense (including all veteran benefits and all foreign aid).<\/p>\n<p style=\"font-weight: 400;\">Now, look at the pie chart on the left, the one that says \u201cIncome\u201d. You will notice that the segment for Social Security, Medicare, and other retirement is only 25% of income, even though it is 37% of outlays. While the details are always more complicated than a simple breakdown like this, a discrepancy this large between income and outlays surely constitutes a long-term funding problem.<\/p>\n<p><strong>The Social Security Trust Funds<\/strong><\/p>\n<p style=\"font-weight: 400;\">While regular income tax goes into the General Treasury Account to be divided up by legislators and fought over by government agencies, FICA is deposited in two Social Security Trust Funds, one for Social Security benefits and one for Medicare. Looked at a certain way, this makes Social Security and Medicare \u201csafe\u201d in the sense that funds raised for these purposes cannot be spent on other things on a political whim.<\/p>\n<p style=\"font-weight: 400;\">But it does not guarantee that the funds will be there. Nor does it guarantee that the FICA you pay in is held for you so that it is there when you retire. The trust funds are held in trust for the programs, not in trust for the individual participant. The funds are pay-as-you-go. What is being deducted from your paycheck now is paying benefits to those claiming them now. The benefits you will claim when you retire will be paid out of the paychecks of those still in the workforce at that time. Looked at this way, Social Security resemble<em>s<\/em> a Ponzi scheme.<\/p>\n<p style=\"font-weight: 400;\">A Ponzi scheme is an investment that pays current investors with funds obtained from newer investors. As long as each cohort of new investors is larger than previous ones, new premiums are sufficient to provide a profit to the existing investors. When sufficiently large numbers of new investors can no longer be found, the scheme unravels and the later investors are left with nothing. The scheme is named after <strong>Charles Ponzi<\/strong> who perpetrated one of the largest known operations of this type in the 1920s. But it was eclipsed in size and scope by Social Security a decade later.<\/p>\n<p style=\"font-weight: 400;\">One lucky break Social Security had was that within a decade of its creation and before many people had filed to claim benefits, the largest generation in American history was born, the so-called \u201cboomer\u201d generation. This created optimal Ponzi conditions that masked the program\u2019s fatal flaws for the better part of a century. Another lucky break was that the U.S. economy was growing rapidly in the 1950s and 1960s. This meant that larger numbers of younger workers were paying in larger amounts a to fund a smaller cohort of retirees who had paid in smaller amounts back in the 1930s and 1940s.<\/p>\n<p style=\"font-weight: 400;\">Social Security had been very controversial when it was first signed into law in 1935. But after an entire generation had grown up with it, it began to seem normal. It appeared solvent and any misgivings anyone had voiced about it seemed misplaced. The elderly and disabled retired in dignity, widows and orphans were protected, and workers hardly noticed paying a few percent of their wages into it. This seemed like such a winning formula that it was used as a model for Medicare when that program was signed into law 30 years later.<\/p>\n<p style=\"font-weight: 400;\">The system began to unravel in the 1970s. Medicare put additional strain on FICA funding sources. Even worse, birth rates had been falling and the recession of the 1970s, the first major economic setback in America in 40 years, brought things to a head as jobs disappeared and pension plans became insolvent. Now a larger cohort entitled to larger benefits was beginning to retire and the new cohort of younger workers was too small and didn\u2019t earn enough to fund them. This is analogous to the part of Charles Ponzi\u2019s career where he goes to jail.<\/p>\n<p style=\"font-weight: 400;\"><a href=\"https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/Charles_Ponzi_mug_shot.jpg\"><img decoding=\"async\" loading=\"lazy\" class=\"aligncenter size-full wp-image-3060\" src=\"https:\/\/www.saudercpa.com\/blog\/wp-content\/uploads\/2026\/11\/Charles_Ponzi_mug_shot.jpg\" alt=\"\" width=\"250\" height=\"172\" \/><\/a>Inevitably, FICA rates and caps had to be raised and additional taxes had to be implemented to cover the shortfall. As discussed in an <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/10\/24\/social-security-how-earned-income-is-taxed-to-fund-social-security\/\">earlier post in this series<\/a>, Social Security retirement benefits were not themselves subject to taxation until 1983. Social Security has lurched from crisis to short-term fix ever since, with bankruptcy always just around the corner, millions of indigent Americans on the chopping block, and ensuing political hysteria. As the last of the boomer generation retires and birthrates continue to fall, we can expect these cycles to become more rapid and more severe.<\/p>\n<p><strong>Stop the Cap<\/strong><\/p>\n<p style=\"font-weight: 400;\">When FICA was first introduced in 1935, it applied at a rate of 2% to earned income up to $3,000. As the Social Security program is continually running out of money, both the FICA rate and the \u201ccap\u201d on income it applies to have been periodically increased. As of 2026, the rate is 15.3% and the cap is $184,500. And the program is still running out of money.<\/p>\n<p style=\"font-weight: 400;\">One key problem is that Social Security insists on paying benefits to high earners. Not only that, but <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/10\/31\/3027\/?preview_id=3027&amp;preview_nonce=548d75e8cf&amp;post_format=standard&amp;_thumbnail_id=-1&amp;preview=true\">it pays larger benefits to high earners than to low earners<\/a>. This is not what anyone wants or expects Social Security to do. There would be political hell to pay if Social Security benefits were ever cut for low earners, but changes to caps or benefits to high earners would be politically feasible. It would also save a ton of money.<\/p>\n<p style=\"font-weight: 400;\">The reason the large benefits are still paid to the high earners is to maintain the fiction that Social Security is insurance or some kind of investment program. This is a very expensive fiction.<\/p>\n<p style=\"font-weight: 400;\">Raising the cap is a particularly cynical and pernicious fix. In the short run, the higher cap raises more income to fund the benefits paid to current recipients. But those paying more now will later claim larger benefits based on those larger payments they made.<\/p>\n<p style=\"font-weight: 400;\">Two good changes did emerge from the insolvency turmoil of the 1970s. One was the Employee <a href=\"https:\/\/www.saudercpa.com\/blog\/2025\/07\/05\/history-of-the-retirement-plan-part-i\/\">Retirement Income Security Act of 1974 (ERISA)<\/a> that began shifting the burden of retirement funding from employers to employees. Fifty years later, we must acknowledge that ERISA has been the success that Social Security wasn\u2019t. IRAs and 401(k)s really do allow working people to retire in dignity. What\u2019s more, they do it without fomenting national crises every few years. In fact, ERISA has probably made Social Security redundant, at least for mid to high earners.<\/p>\n<p style=\"font-weight: 400;\">The other good thing was Supplemental Social Security (SSI) in 1972. This is Social Security for people who have not paid enough in FICA to be eligible for benefits under Social Security. These are really the people Social Security was designed for and the people we think of when we think of Social Security. But these are not the people who receive most of the benefits under the current system.<\/p>\n<p style=\"font-weight: 400;\">What SSI did is to decouple at least some Social Security payments from FICA. This took some of the pressure off FICA. But more importantly, it set the precedent that at least some Social Security benefits could be paid out of general U.S. Treasury funds. These are the same general funds that fund other government programs. There is no pretense that SSI is a form of insurance or that it pays for itself. And that\u2019s OK. The armed forces don\u2019t pay for themselves, either. In a way, SSI makes FICA redundant, we just won\u2019t admit it yet.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Preface: &#8220;It will be a great day when our schools have all the money they need, and our air force has to have a bake sale to buy a bomber.&#8221; \u2014 Robert Fulghum Social Security \u2013 The Unraveling The following is the seventh in a series of blog posts on the subject of Social Security. &hellip; <a href=\"https:\/\/www.saudercpa.com\/blog\/2026\/11\/14\/social-security-the-unraveling\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Social Security \u2013 The Unraveling&#8221;<\/span><\/a><\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts\/3045"}],"collection":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/comments?post=3045"}],"version-history":[{"count":10,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts\/3045\/revisions"}],"predecessor-version":[{"id":3058,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts\/3045\/revisions\/3058"}],"wp:attachment":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/media?parent=3045"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/categories?post=3045"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/tags?post=3045"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}