'The thought of living to 100 terrifies me': Is Social Security a giant Ponzi scheme?

By Quentin Fottrell

There is already a demographic 'run' on Social Security

Social Security is not a Ponzi scheme. It was never intended to be a get-rich-quick scheme or a reward for outliving everyone else.

Fear can lead us to do unexpected things.

It can push us toward panic selling, drive us to make wild assumptions about the world, and even prompt us to take a hard look at our own finances. We are subject to these impulses when we are looking for something or someone to blame.

Experts often attribute an expected shortfall in Social Security to demographic factors - boomers and Generation Xers retiring, with some claiming benefits early out of fear that the funds will run out. But a new report released this week by AARP also points to taxable payroll.

Unless Congress acts, the combined trust funds will run out in 2034, with just 83% of benefits payable. "The share of gross domestic product subject to Social Security's payroll tax, the program's primary income source, has fallen steadily over the past four decades," the AARP report said.

"Drawing on official government statistics, we estimate that Social Security would have enough resources to pay full benefits until 2059," it added, "25 years longer than the Social Security trustees now project, if payroll tax revenue had not fallen relative to GDP."

A Moneyist reader also unpacked their fears: "The thought of living to 100 terrifies me more than dying. For me, the biggest fraud is telling people to wait until 70 to retire just to maximize their Social Security benefits - as if that's the only factor worth considering."

They continued: "I grew up in the 1980s, and the advice to never count on Social Security is sounding more and more like a warning than a prediction. The longer Congress waits to 'fix' the system, the harder it becomes to have any confidence that it will continue to exist."

They worry that people will rush to claim benefits at 62, the earliest age a person can do so, and be pushed out of the workforce by AI, leading to a "run on Social Security similar to the bank runs before the Great Depression," they added. "Long live the Ponzi!"

Social Security is not a Ponzi scheme. It was never intended to be a get-rich-quick scheme or a reward for outliving everyone else. It was designed to provide a meaningful measure of financial security when working is no longer an option.

But AARP has a point: The Social Security taxable maximum is $184,500 for 2026 and $192,300 for 2027, meaning earnings above those limits are not subject to Social Security payroll taxes. In other words, a growing share of national income is falling outside the program's revenue base.

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Answering the reader's questions

But that does not mean people won't retire early through no fault of their own or lose their jobs due to AI. Some forecasters predict that AI will lead to the loss of 100 million jobs over the next decade - but potentially create even more.

The reader is essentially asking five questions: (1) Will fear trigger a Social Security crisis? (2) Is Social Security a Ponzi scheme? (3) Why sacrifice your 60s to get a bigger check at 70? (4) Can you really count on Social Security? And (5) Is AI disrupting employment forever?

(1) To answer the questions in order: Do not get carried away with 1930s-era prophecies of doom and gloom. A run on a bank involves a large number of people withdrawing their money and, if the bank cannot meet those withdrawals, even an otherwise solvent institution can fail.

I grew up in the 1980s too, and here's a fun fact about Generation X: The American Institute of Stress says we are apparently more stressed out than other generations. The main reason for that, researchers theorize, is because we are worried about falling short on our retirement goals.

(2) Social Security is a social-insurance program funded by workers and employers to provide support in retirement, prevent vulnerable people from falling into poverty and provide economic stability during downturns. It is at risk of a shortfall in funding, not annihilation.

Do not get carried away with 1930s prophecies of doom.

(3) You can claim Social Security at 62, but doing so reduces your monthly benefit by 30% compared with waiting until your full retirement age (FRA) of 67. Waiting until 70 increases your benefit by 8% for each year you delay beyond 67.

If you are collecting Social Security and remain below FRA throughout 2026, you can earn up to $24,480 before requiring an earnings test. Above that limit, $1 is withheld from your benefits for every $2 you earn. At FRA, Social Security recalculates your benefit to account for withholdings.

Yes, some people do claim Social Security benefits early due to fears about the program's long-term viability. But the program values stability, security and peace of mind over recklessness, madcap investments and promises of riches.

(4) You can count on Social Security, which is not projected to disappear. Payroll taxes and other incoming revenue will keep funding benefits. Under current projections, though, that revenue would cover only 83% of scheduled benefits from the combined trust funds in 2034.

(5) AI is already changing the workplace. A July Gallup poll found that 52% of workers actually use it in their jobs. It will eliminate some tasks and create new opportunities, but the risk is that those workers whose jobs will disappear may not have the time, training or resources to adapt.

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Why we have Social Security

Social Security was created in 1935 in response to the Great Depression and was not intended to maximize investment returns. Today, it provides a social safety net against the financial hardships of retirement, disability and the loss of a family's breadwinner.

There are two separate funds: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. Their reserves are invested in special-issue U.S. Treasury securities, backed by the federal government.

So what about this imminent funding crisis? The Congressional Budget Office said earlier this year that the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivors benefits, is projected to run out of reserves in 2032.

The Bipartisan Policy Center, a Washington, D.C.-based think tank, said in a June report that, at that point, incoming revenue would cover just 78% of scheduled benefits. Without congressional action, those shortfalls would mean reductions in benefits.

"The program's long-run outlook worsened significantly this year," it said. "The Social Security Administration (SSA) revised its fertility and immigration projections downward." The 75-year shortfall has risen to approximately $30 trillion - up from $26 trillion last year.

There is already a demographic "run" on Social Security. "An aging population is a major contributor to the problem," the think tank added. The ratio of workers to beneficiaries has dropped from 5-to-1 in 1960 to 2.9-to-1 today and is projected to fall to 2.2-to-1 by the 2070s.

As the AARP report noted, some lawmakers propose lifting the payroll tax cap and taxing investment income for high earners to bring revenue as a share of GDP closer to historical levels, strengthening the program's finances without burdening lower- and middle-income workers.

The Social Security Disability Insurance Trust Fund is projected to remain solvent until 2100, the end of the Board of Trustees' 75-year projection period, but the Old-Age and Survivors Insurance Trust Fund, under current estimates, won't have enough to pay full benefits in 2032.

We are encouraged to delay our dream life, save more, work longer and maximize our retirement contributions. Still, the price of financial security should not be spending our 60s worrying about our 70s, 80s and 90s, and beyond. For millions of people, however, that worry is a daily reality.

Keep calm and carry on working, if you can, and invest in your retirement.

Related: Should wealthier Americans forgo their Social Security benefits as a charitable gesture?

Check out The Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, weigh in on the latest Moneyist columns or email The Moneyist at qfottrell@marketwatch.com.

More columns from Quentin Fottrell:

'My life could be cut short': I'm 55, married and have a brain tumor. Should I splash out on a $210,000 Porsche?

'It feels like he's quietly building a separate life': My husband inherited $500,000, but he refuses to spend it on our home

'It seems bizarre': We're in our 80s with $950,000 in traditional IRAs. Why is our adviser pushing Roth conversions?

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-Quentin Fottrell

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