There are millions of retirees today who rely on Social Security for income. And if you’re a member of the workforce, chances are, you’re banking on being able to collect Social Security once you’re ready to end your career.
But is Social Security as legit as the government would like people to believe? Jim Cramer and Elon Musk don’t think so. And both have been very vocal about the fact that Social Security is nothing more than a scam.
Is Social Security a Ponzi scheme?
Cramer and Musk have repeatedly called Social Security a Ponzi scheme. In fact, Musk has gone so far as to call Social Security ” the biggest Ponzi scheme of all time.”
But are they right about Social Security? Not at all.
Social Security is a legal, government-run program designed to pay benefits to older Americans, as well as people who fall into other categories. The process for funding Social Security is clear. Workers pay taxes on their wages, and paying enough into the system entitles you to benefits down the line.
A Ponzi scheme is very different. It’s an illegal, fraudulent investment tactic where early investors are paid with money from new investors rather than actual profits, creating the illusion of strong returns.
Social Security may be facing some financial challenges. But it’s not a scheme. It’s a program that has a clear system for generating revenue, and the program discloses financial information every year via a report filed by its Trustees. Calling it a Ponzi scheme is just plain off base.
You still need to be careful with Social Security
Although Social Security is a perfectly legitimate program, the reality is you do need to be careful not to rely on it too heavily for your retirement. The reason isn’t because the government is spending that money on something else or stealing it. Rather, it’s because those benefits may only go so far in helping you cover your retirement expenses.
Retirees are generally advised that they’ll need 70% to 80% of their former earnings to live comfortably. Social Security may only replace about 40% of the average wage-earner’s paycheck in retirement, though, creating a significant gap.
Furthermore, it’s possible that Social Security may have to cut benefits in less than a decade due to an impending financial shortfall. That shortfall isn’t a result of the misappropriation of funds. Rather, it’s a matter of a shrinking workforce.
Social Security gets most of its funding from payroll taxes. In the coming years, though, older workers will be exiting the labor force at a faster rate than those coming in.
That’s going to strain Social Security’s finances and potentially force the program into benefit cuts. For this reason, it’s more important than ever to have a backup plan and not rely solely on Social Security benefits to fund your retirement.
That backup plan can look like a lot of different things. It could be personal savings you accumulate in an IRA or 401(k). It can be an investment portfolio, an income property, or earnings from a part-time job or business you start.
The key, though, is to have other income at your disposal outside of Social Security – not because the program is a giant scam, but because it’s facing challenges and was never designed to be retirees’ sole source of income in the first place.
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