HomeQualified/RetirementWould You Opt Out of The Social Security Ponzi Scheme?

Would You Opt Out of The Social Security Ponzi Scheme?

Maybe the title is a little unfair, but take a look at the definition of a Ponzi Scheme by the SEC and tell me Social Security as it exists today doesn’t fit?

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

So I am putting money in today…they are paying out those who are retired or disabled…and I get to hope that eventually I will see returns?  Let’s ignore that little argument for today, and focus on – if you could opt out of social security would you?

How Much am I putting into Social Security? What Can I expect to get Out?

Currently, FICA Taxes (Social Security Tax) tax 6.2% on the first $106,000.  That $106,000 number is expected to go up, if not made unlimited. So how much I am going to put in is a really difficult number to try and predict.  Will I start making my millions? will different streams of income be taxed differently in the future? But since we have to assume something in an effort to provide a calculation, I will use some excel skills combined with the SSA’s estimated Calculator.

I will assume my age, 28 and an assumption that I am making $150,000 W2 Employee (I am not making this amount, but I want it above the max rate for purposes of this example).  Why W2? Because I don’t want to get involved in Self Employment FICA Taxes.

  • Using the above variables I am expected to receive $2,556/month starting at age 67 in 2048(in today’s dollars).

If that is the case how much will I have put in from now until 67?  Even if we were to ignore a rise in FICA tax rates, and the increasing the cap I will have put in ~$259,000 (39 years * $6,572/yr).  But that ignores the growth I get on my first $6,572 for the next 39 years, and the second, etc..  Adding a 5% net compounding rate this number will increase to… ~$832,000.

Using that $832,000 number if we divide that by the $2,556/month number the SSA’s calculator gave me, gives me about 335 months or nearly 28 years worth of income (this number is purposefully low since the remaining $830,000 after the first month would still be growing).

So if given the choice I would opt right out of the social security system

Some Benefits of Social Security Not Found in the Math

There are some benefits that aren’t found in my simple calculations.

  • Social Security provides widow benefits
  • Social Security provides disability benefits
  • Social Security provides surviving children’s benefits

My 6.2% can purpose a whole hell of a lot of life insurance and some disability insurance.

What about you? Would Opt Out if given the choice?



  1. Evan, what about the 6.2 the employer has to kick in? That makes this a worse deal by a factor of 2. Worse still, if I die at 65, my adult child gets no inheritance from this. Yes, I’d rather keep my 12.4%, any day.

    • Woah…imagine if when opting out I got that 6.2% too?! I doubt I would bet the 6.2% and my 401(k) Match but what the hell since we are just dreaming here anyway lol

      • A privatized system would require that the employer deposit the money into your account. Would it impact matching 401? I doubt it. So the 800K above which is conservative to begin with, gets doubled. $1.6M. A 65 yr old male can get an immediate annuity for over 6%. This is $100K/yr. 100% replacement of income. And a portion of it is tax free as it’s considered return of principal.

        The first step is to offer a drop out. i.e. say, at 35 or older, you are permitted to quit the system, no benefit, no more deposits. Younger folk who drop out still have a small tax, maybe 2% of that 12, to pay off the rest of the retirees. I can go on, but you get the idea.

    • It would kill a ton of hard working Americans! PLUS, what about those hard working Americans that make A LOT OF MONEY? There Social Security isn’t going to go up (I used max numbers) so it just makes it an even worse situationf for them.

      • I’m not sure an extra 6.2% on income over $106k is going to kill anyone. It would suck, but I doubt it would really affect their day-to-day lives.

        • It is clearly a regressive tax, but without holding back words doesn’t it just suck!? So someone making 212K is going to put in an EXTRA 6,000/yr and not receive a single dime of increased benefit?

          Take that to an extreme….someone making a $1,000,000/yr like our boy Sam (jk…maybe!) will be putting in $60,000/yr?! And still receive that same $2,500/mo?

          • Well that’s pretty standard isn’t it? Most taxes are designed to take money from the rich to give to the poor. Which ok, is a nice idea, but I can’t help but think it is unfair on those people who work really hard to make their fortunes. I shouldn’t really complain, since I am certainly not in that bracket of being “rich”, but just a thought.

    • “micro second” and that is why you run the Wisdom Journal! Now we have to figure out a way to get the F’ out lol

  2. LOL…I never heard social security called a ponzi scheme before, but you’re right. It sounds right on.

    I would love to take that 6.2% and invest it myself so yea I’d opt out. If you’re self-employed it’s an even better deal because it would actually be 12.4% instead!

    The problem is we’d probably get taxed by a new program designed to support all the people who opted out and then blew it all without saving for their future.

    • The Wife is self employed (independent contractor) and we get worked in taxes…it sucks. I am thinking I have to set her up with an S-Corp and rock out the system.

      “The problem is we’d probably get taxed by a new program designed to support all the people who opted out and then blew it all without saving for their future.”
      – You might be right!

  3. I’d absolutely opt out and self-fund my own retirement.

    Too bad it will never happen since we’ll have to pay for all the baby boomers who consumed their way to retirement and now don’t have anything saved. So we’re probably going to end up paying more than they did AND get less when we retire.

    My solution – take SS back to what it was originally – an insurance plan for those who outlived their pension or who’s spouse/parents died or became disabled. Bump the retirement age up to something like 75 before you can get any payments.

  4. lol, I’m with Ron. “in a micro second”.

    I’m honestly not even anticipating a social security check by the time I retire. Honestly, all joking aside. I’m planning my finance on NOT receiving one. Hopefully I’ll be able to sue the Federal Gov for doing what Burnie did…

    • ” Hopefully I’ll be able to sue the Federal Gov for doing what Burnie did…”

      Not a snow balls chance in hell (I have always wanted to use that saying….thank you)

  5. I’m not really counting too much on OAS (old age security) or CPP (Canada pension plan), because I also don’t know if it will be around in 30, 40 years – if I could opt out, I also would. These programs are third-rail, though!

      • We have OAS, which is Canada’s welfare program for the aged and funded from general tax revenues and is available to everyone > 65. The payment is based on the number of years lived in Canada, and you receive about $6000 a year. This amount reduces once your income rises above $64,000 or so, and gets completely cut off at about $100,000 in income.

        We then have the CPP, which is Canada’s pension plan. The contribution is about 10% of income (5% employer, 5% employee). Premiums are paid up to about $47,000 of income. Funding is about 15% reserve funds and 85% pay as you go, so still quite the ponzi scheme. They are targeting 20% funded by 2014 and 30% funded by 2075.

      • The CPP benefits themselves are “calculated as 25% of the average contributory maximum over the entire working life of a contributor”, dropping the worst years where you were disabled, raising a kid, or doing something else where you couldn’t work. These benefits are taxable as ordinary income.

  6. I’d opt out but unfortunately the government would never allow that. I often chide people for improper use of the phrase Ponzi scheme, but SS is actually a Ponzi scheme. It’s a system that keeps taking money in from new suckers and paying out exiting clients to keep the scheme going – until it all comes crashing down when it can no longer be funded by enough new clients. Well, given our demographics, it is a mathematical certainty that there will be a declining worker/recipient ratio for decades until the point at which benefits can no longer be provided anywhere near to break-even for what lifetime contributions you and I forked over. Government at its best.

  7. Yes, SS is indeed a Ponzi scheme. But it is such a political hot potato that it is hard for me to imagine Congress ever giving a choice of opting out. When the Bush administration suggested it they were slammed by AARP and other self serving organizations. On a personal note, I am drawing SS now, but I am not one of those “baby boomers who consumed their way to retirement and now don’t have anything saved” that Kevin M referred to. I appreciate getting that monthly check, but I could get along without it. And I would support legislation enabling all you younger ones to opt out.

  8. No, I wouldn’t opt out just because I feel that it’s better to be in this SS game. However, by the time that I need it I honestly don’t even think there will be any left. @Joe, you make a great point. Those baby boomers used our SS!

    • wait a min? So you think it is better to be in the “SS Game” but you don’t believe it will be there when you get older? Then why the hell would you want to be in it…you should be fighting to get out!

      and Joe is one of “those baby boomers” LOL

  9. Wait. I’m not sure you can assume that a person who’s now 28 will actually collect at age 67. As a survivor of the Pleistocene, my “full” retirement age is 66. It’s reasonable to expect they’ll raise the retirement age for younger cohorts. If that happens, it’ll change your calculations significantly.

    Honestly, I don’t know what I would do if it weren’t for Social Security. I was laid off at 64 into the the worst job market since the Great Depression, at an age when under the best of circumstances I’d have about a snowball’s chance of getting rehired. I’ve lived frugally most of my adult life, stayed out of debt, and dutifully invested so much of my income that Quicken’s financial planning software used to say I was trying to save “too much.”

    As I recently observed online, the value of a dollar invested in my portfolio 10 years ago is now about 85 cents; it exceeded 100 pennies for only a couple of years during the entire decade. The value of Social Security did not disappear into thin air. I can’t live on the Social Security checks, but trying to scrabble together an income on a variety of contract gigs does not work. Without Social Security, I would lose my paid-off home to taxes and — no exaggeration — I would be starving.

    So, no. I would not opt out.

    But surely all those who do think Social Security is a “Ponzi scheme” should opt out. Just as you’re not required to participate in the state-run numbers game that is the lottery, you’re not required to draw Social Security benefits. If one believes it’s that crooked, one could preserve one’s moral integrity by not taking the money. Consider leaving your money in the system a tithe for those of us who really do need the benefit.

    • If its not 67 what age will it be? Doesn’t that mean I’ll be paying even MORE into the system?

      I bet if you calculated what you (and the patner) put into the system vs what you got out I think you’d be upset. Its a lot worse than than the .85 cents on the dollar (that number also doesn’t take into account th 8% you got over 30 years before that).

      “But surely all those who do think Social Security is a “Ponzi scheme” should opt out”
      – Unlike choosing not to play lotto (side note: I LOVE scratch offs) I can’t choose to opt out.

  10. I would absolutely without a moment’s hesitation opt out. I already have my own Disability and Life Insurance. I can guarantee I could take my monthly SS contribution and do better with it over the long haul–heck even if I stuck it under a mattress it would be better. I’m 29 so I basically expect SS to be non-existent by the time I retire…it is unsustainable.

  11. You are forgetting that assuming you opt out, your employer is contributing 6.5% on your behalf. If you opted out, then your employer should / could pay this to you.

  12. Politicians now secretly realize that Social Security functions ‘effectively’ a Ponzi scheme, but most are too gutless to tell the American public.

  13. I think you missed another important component: continuing interest earned on the $832K even as you draw down on it by $2556/month… $30K per year is only 3.6% of the total amount. If you can structure a portfolio with appropriate near-term and long-term risk that returns 3.6% or more, you could draw $30K/year in perpetuity. Even more modest returns of 2-3% could stretch that nest egg out to 40-50 years (or allow you to draw down more per year).

  14. Oh heck yes! I’d opt out of Social Security in a heart beat. Even at my meager income level, the SS benefits just don’t add up by a long shot. If you instead saved 5% of your income and spent the other 1.2% on disability insurance, most people would come out far ahead of this mandatory (except for clergy members!) Ponzi scheme, assuming the program is even still intact by that point in my life. Also, the pathetic “cost-of-living” increases that SS recipients receive don’t even keep up with inflation.

    I’d also opt out of Medicare as soon as possible! Let’s see, 2.9% of my income gets paid in (1.45% employee + 1.45% employer or both for self-employed) to give me “health insurance” that has huge gaps in it, costs me MORE money after age 65 for all but part A after paying in all that for the duration of my working life, doesn’t cover my choices of healthcare much (if at all), and has co-pays higher than my covered alternative providers charge cash payers for most basic services!

    Also, as for the whole “supporting today’s elderly” line: Let me donate my own time and money to help an elderly person! We would both be much more appreciative and have a good friend in the process.


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