It is often said that Social Security is not a fully funded system. To be "fully funded" means that there is an accumulation of capital assets during one's working life that will provide in retirement a stream of income and/or capital distributions that is sufficient for that person's consumption needs. A fully funded system creates wealth and improves the economic condition of both the retiree and the payer of the stream of retirement benefits. Social Security, on the other hand, is a zero-sum game that transfers existing wealth from the payer to the retiree without a contemporaneous improvement in the economic condition of the payer.
One analogy to understand what "fully funded" means is an orchard of walnut trees. In a fully funded system, the nut farmer purchased a farm and planted an orchard when he was young. Over his life of work and cultivation the orchard grew to maturity. When the nut farmer became elderly, he used or sold both the continuing fruits or income of his work (the nuts) and the capital (lumber from the trees) in order to pay for his continuing consumption needs. At the end of his life, he may or may not have a part or all of his orchard remaining to pass on to his heirs, depending on the size of his orchard (capital), the extent of its nut production (income), and his own level of consumption in retirement.
Under the Social Security system, no traditional capital fund is established to produce a stream of income. In other words, no walnut orchard is planted and no nuts are produced. Instead of retirement payments coming from a stream of income and capital distributions, Social Security payments depend on direct income transfers from one group of people to another without a corresponding increase in wealth. Social Security is a zero-sum game. In a fully funded system, the retiree gets the income from the sale of nuts and lumber, but the payer of the income also gets the value of the nuts and lumber that are purchased. Under Social Security, the retiree gets the income, but the payer of the income (the taxpayer) gets no corresponding economic value. Instead, the taxpayer gets only the promise that some future taxpayer will engage in the same zero-sum game for his benefit.
