Social Security: A Ponzi Scheme?

What is a Ponzi Scheme?

A fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. (Definition from Wikipedia)

Is Social Security a Ponzi Scheme?

Initially the program was sold to us as an insurance, where money was set aside, invested, and paid back after retirement. How is the program financed now? Pay-as-you-go. By definition, this works like a Ponzi scheme. Social Security depends on taxes coming from young American workers to pay off the retiree's. The politicians will claim that we have the money in a trust fund, invested in government bonds. However, government bonds are not assets to the government, just like writing a check to yourself is not an asset to you. Since they are not assets, they cannot be used to pay off future retirees.

Additionally, consider Ida May Fuller, the first American citizen to receive a monthly benefit Social Security check; she paid $24.75 into the Social Security System, yet by the time of her death she had received $22,888.92. Millions of other Americans were able to get in early and withdraw much more money than they put in. Naturally, this will lead to future participants putting in more money than they get out.

Why has this Ponzi scheme worked for so long (74 years and counting)?

1. The government forces everyone to participate. If social security was voluntary, if would have already failed. Americans know it is an unfair program to begin with.

2. We have experienced long term economic growth generally, in the past 50 years, which has temporarily enabled us to afford Social Security. This has come from loose monetary policy and borrowing (inflation) rather than sound economic growth. It won't continue forever; as our economy corrects and contracts, there will be even less money going into social security; which of course will cause it to run out of funds a lot sooner. In the event of our currency weakening significantly, which is very likely due to our spending, Social Security checks will be paid, but they will have much less purchasing power.

But isn't Social Security for the public good?

Perhaps the program was enacted with good intentions. In theory, Social Security could be a fair, workable program; but in practice, it is not. You cannot trust career politicians to leave the surpluses alone; they will use it to buy votes.

As it turns out, Social Security has not been for the public's good. Those that got in early certainly benefited from the program, but at a substantial cost to later generations. And that later generation is the present generation. It's stealing money from young American workers who will never be able to recover the money they are paying into the system.

What is going to happen to Social Security?

It's not a matter of if the Social Security program fails; it is when. We might as well face the tough reality sooner rather than later. There are a few long term options:

• Increase taxes on current workers

• Decrease Benefits

• Inflate the currency and reduce the purchasing power of the benefits

None of these options are good, especially in a weakened economy. They will all be unfair. There are two other options; one is raising the retirement age. Americans are living longer, thus it is reasonable for them to retire later, since we can't afford the current system. However, the last and best option is to end the program.

What should replace it?

Nothing, eventually. Americans should be able to manage their own retirement money.

However, in the short term, I recognize we can't cut the benefits immediately. We've got some Americans that are depending on the checks to get groceries and pay bills. They have paid into the system their whole lives and lost a lot of money that they could have saved for retirement. It's unfair.

But so are all the other options. That's the nature of socialism. We need to bring an end to the program as soon as possible, before it implodes and creates a bigger mess.

The Social Security program has really proven the truth in Margaret Thatcher's statement: "The problem with socialism is that eventually you run out of other people's money."