So the genius billionaire co-president believes that the Social Security Program is “the biggest Ponzi scheme of all time.” Actually, I take it back. While he may not be as smart as many believe he is, I don’t think he is as dumb as he pretends to be either. I am fairly confident that he understands the difference between a Ponzi scheme and an insurance policy, but rather he wants us to believe that Social Security is a Ponzi scheme. Why? Maybe because, unlike Pentagon, NASA, and FAA, that either have contracts with or are extending new contracts to Space X, the Social Security Administration does not have any contracts with or is not planning on extending any new contracts to his companies, and hence gutting the agency is not going to directly impact his bottom line? It will certainly affect millions of recipients of social security payments, but why would he care about those old or disabled people who depend on social security payments for their survival?

Back to the question, is the Social Security Program really a Ponzi scheme? My assumption is that he made this assertion based on the fact that, in the typical mode of operation of the Social Security Program (at least the part that handles the retirement payments), the payments to the retired people who are eligible for such payments now are made from the income that is received by a different group of people who are currently in the workforce, and are paying the social security taxes. So, in essence, Social Security takes money from one group of people and gives it to another group of people. Does that make it a Ponzi scheme? Can we (and the genius co-president) think of any other program that does a similar thing?

I am sure Mr. Musk has heard of insurance plans, be it for health, property, or any other purpose. And I am fairly confident that Mr. Musk understands that if someone’s house catches on fire, or when someone needs a very expensive surgical operation, the payment that is made by the respective insurance companies to them or to the providers on their behalf, are not from the actual monthly premiums that the same individual has paid to the insurance companies. That’s how an insurance company works. They collect mostly fixed regular payments from their subscribers, and in the even of an illness or disaster for someone, they pay (albeit with some contractual restrictions and limits) to cover the expenses, regardless of how much that individual has actually paid the insurance company in their monthly premiums. Here too, a payment to one person may be coming from another person. But that does not make it a Ponzi scheme. It’s just a plan that tries to soften the blow of a disaster one person might experience by spreading the total cost among a large number of people, each one making a relatively small payment compared to the total costs incurred by the disaster. The insurance company has to do their own due diligence by carefully considering the probabilities of various disasters they are providing the coverage for, and then calculating the annual or monthly premium that they need to collect from their subscribers, such that, with a reasonably high probability, the company remains solvent and profitable.

In my understanding, a Ponzi scheme is usually a fraudulent investment opportunity offered with false promises of large returns. The person or a group that runs a Ponzi scheme looks to profit from it by taking in large investments, and paying somewhat larger than normal returns (presumably as promised, and from the principals of the investments they have already received) to a small group of initial investors to encourage new investors. This continues until they hit a target level of investment, at which point they may try various approaches, from fleeing and disappearing, to bankruptcy, to outright intimidation, to finally pocket the entire investments they have received (minus the relatively small amount of payments they have made).

Except for that one aspect of one person’s payments being used to make payments to another person, there is no parallel between a Ponzi scheme and the Social Security Program. The Social Security Program is really a retirement insurance plan. It collects regular payments from people while they are in the workforce, based on their income level, and then makes regular payments to them when they retire, until they die. The random or probabilistic aspect here, is really the life span distribution among the subscribers, which is pretty much every working individual in the country. One major aspect of the Social Security program is that its contract with the workforce is not as tight as a typical insurance contract may be. The administration has the discretion to make adjustments to their payouts, which they usually do, on an annual basis. And the Congress has the ability to increase the income of the program by making adjustments to the social security tax rate, and/or to the cap amount.

Let’s do a simple math, with the current numbers. In 2025, social security tax rate is 6.2% of the income up to a cap of $176,100. Meaning that the maximum amount an employee will pay on social security taxes for the year will be $10,918.20. The employers also contribute at the same rate, so the total maximum payment as social security taxes by an individual or by their employer on their behalf, is $21,836.4. For simplicity of the calculations, let’s just consider an individual who is lucky enough to find a job, at age 27, that pays them $176,100 a year, and that they work until the full retirement age of 67. Let’s also assume there is no change to the social security tax rate throughout these 40 years. Then, by the time this person retires, they have paid $873,456 to the social security program. This is the principal of the payments, and with a reasonable investment by the social security administration, this amount could have grown to a substantially larger amount than this, but again for simplicity, let’s ignore that possibility, and assume that there are very large pillows at social security offices, and the program keeps the collected taxes under those pillows.

Now, it’s time for that individual to retire, and collect the retirement payments from social security. Since this individual has made the maximum contributions, they will be eligible to receive the larges amount of payout for retirement at full retirement age. That number for 2025 is $4,018 per month. Similar to the assumptions that we made regarding the tax rate and the cap being fixed during the entire working years of the individual, let’s also assume that the amount of this payout remains constant throughout the rest of their life. Now the question is, how long do we expect this person to live? The life expectancy in the United States is currently around 77.5, with a standard deviation of about 8 years. If, again for simplicity, we assume that the distribution is Gaussian, then with 50% probability, our individual will live to 77.5, with 15.8% probability, they will to 85.5, with 2.2% probability they will live to 93.5, and with 0.1% probability they will live to 101.5. There is also a downside of the individual living only up to 69.5 with a probability of %15.8, or passing away at or before the age 61.5, before reaching the retirement age at all, with a probability of %2.2. The total payouts for each of these sample scenarios can also be easily calculated to be as $506,268 (50%), $891,996 (15.8%), $1,277,724 (2.2%), $1,663,452 (0.1%), and finally $120,540 (34.2%). Note that these are not lump sum payments, and are paid over decades, so the actual amounts projected back to the beginning of the period taking into account a reasonable interest rate could be significantly smaller. But again, for simplicity, let’s assume no interest rate adjustment (please note that both assumptions of no investment by SSA and no interest adjustment at the payout time are in the favor of securing a larger than assumed social security fund). The above are just some sample points to give an idea about the total payouts and their corresponding probabilities. A rigorous calculation is possibly needed to compute the average payout, especially considering the case when the individual passes away before reaching the retirement age (and hence neither pays social security taxes after that point nor receives any social security payments). But for our simple calculation, that number of $506,268 that holds for around 50% of the time is a good indicator, and compared to the total social security taxes collected of $873,456, the program should be quite solvent.

The reason for potential concerns about Social Security not being solvent in the future is that previous collections (tax rates and caps), possibly computed based on the lower life expectancies at the time, are not sufficient for the longer times people currently live on average compared to the past. But this does not make the program a Ponzi scheme. It just means that there is a need for adjustments to the incomes, either the tax rate, or the cap amount as it has happened over the past years as well. In fact, one might question the whole concept of the cap amount. Why would someone who is making tens or hundreds of millions of dollars a year, pay to the social security program an amount that is equal to someone who is making only $176,100 (not dismissing the fact that the latter itself is a decent income, but there are millions who make much more than that, but are exempt from paying social security taxes on their excess income over that cap). Turning the table the other way around, one might even argue that the fact that there exists a cap, makes the effective social security tax rate for millionaires and billionaires much less than other lower income Americans. For example, someone with an annual income of $17.6M pays the same amount of $10,918.20 in social security taxes, making their effective social security tax rate 0.062%, a hundred times lower than lower income Americans who pay the full 6.2%. In a sense, this means that it’s the millionaires and billionaires that are receiving a handout by having lower effective tax rates, not the lower income individuals who pay their fair share of taxes, and receive a proportionate payout during retirement.

So, instead of trying to dismantle the entire Social Security Program by claiming it to be a Ponzi scheme, if his intention is really to fix the inefficiencies and deficiencies in the government organizations, Mr. Musk can start from himself, and suggest that the Congress removes the cap on social security taxes and requires everyone to pay towards social security funds at equal rate based on their income. That would more than compensate for any potential concern for the future insolvency of the Social Security Program, and works much more efficiently than trying to save peanuts (compared to the potential deficiencies) by firing some SSA employees or closing some field offices.