You may think that because you’ve paid into the Social Security systems over the years, you’ve earned the right to the program’s benefits. Think again. FICA stands for Federal Insurance Contribution Act, implying that Social Security is an insurance policy—but nothing could be further from the truth. There is no policy. Nor is there any contract—except the one assumed by the taxpayer. This was confirmed by the US Supreme Court in Flemming v. Nestor (1960), which established that entitlement to Social Security benefits is not a contractual right. What this means is that Congress can giveth and can taketh away anytime it pleases.
FICA is actually a payroll tax collected from the current generation in order to make retirement payments to the older generation. There is nothing wrong with the concept of a younger generation paying for the older one as long as we are honest about it. According to an August 10, 2012, Washington Times editorial, “Social Security operates the way Bernie Madoff ran his scam. Functionally, both are termed Ponzi schemes, where current receipts are used to pay off earlier investors.” Texas Governor Rick Perry echoed the sentiment during the 2012 Republican Presidential debate in California when he said of Social Security, “You cannot keep the status quo in place and call it anything other than a Ponzi scheme.”
The best argument showing that Social Security is a Ponzi scheme is illustrated by Figure 7.1, which shows that the ratio of workers per beneficiary has been decreasing dramatically since 1950. There were 16 workers paying into Social Security to support one recipient in 1950. The Social Security trust had built a reserve since there were more workers paying into the system than beneficiaries. But by 2010, only three workers were supporting one recipient.