Social Security System: A Government "Ponzi Scheme"?

In his article, "Social Security: The Enron That Politicians Have In the Closet", Economist Thomas Sowell asserts that Social Security is nothing less than a government run "ponzi scheme" stating, "Social Security has been a pyramid scheme from the beginning. Those who paid in first received money from those who paid in second - and so on, generation after generation."

"Ponzi schemes" are illegal pyramid schemes where money from new investors is used to pay off earlier investors, a proverbial "rob-Peter-to-pay-Paul" scam. At least until the whole scheme collapses which they always do since by the very nature of such a scheme, they are unsustainable. According to information published on the U.S. Securities and Exchange Commission web site, "ponzi schemes" are the namesake of Italian immigrant Charles Ponzi, who swindled thousands of New England residents by encouraging them to invest in his international mail coupons speculation scheme in 1921. Ponzi convinced his investors that he could provide a 40% return in just 90 days compared with the then prevailing 5% bank savings account rate, taking in an estimated $1 million during just one three-hour period. While a few early investors were paid off to lend credibility to the scheme, eventually the remaining investors lost all of their money when the scheme collapsed.

Comparing the Social Security system to a scam might be a bit disingenuous, yet in so doing it is difficult to argue against the presence of some startling similarities. Like a "ponzi scheme", it has been since the beginning a "rob-Peter-to-pay-Paul" arrangement with the current generation of workers paying FICA taxes from which benefits are paid to past generations of workers. This worked well initially when there were substantially more workers paying the taxes than retirees drawing social security benefits, however in an era of declining birth rates, lengthening life spans and the beginning of "Baby Boomers" the largest generation ever, entering retirement, the picture looks less than rosy.

In fairness to President Franklin D. Roosevelt, whose administration drafted the Social Security Act as part of the New Deal, the idea was well intentioned. The Act was an attempt to stem the incidence of poverty that occurred among elderly Americans as a result of the Great Depression. According to Jim Walls, in his article, "Capitalizing on the Crisis of Opportunity" published on New Deal 2.0.com, the incidence of poverty, already high among the elderly, grew astronomically during the depression years, with unemployment rates for those over age 65 estimated at "well above 50%". Legitimate concerns over this led to passage of the Act and creation of a federal "old-age insurance" program where the elderly would receive monthly benefits from the government funded by a dedicated tax.

A major flaw in the system from the beginning was that it almost immediately began paying out monthly benefits to retirees who quickly drew benefits far in excess of what they had paid into the system. As an example consider the case of Ida May Fuller, of Ludlow, Vermont, a retired legal secretary. She is accorded the distinction by the Social Security Administration, as published on the Social Security Online web site, of being the first person to receive a monthly social security check. She retired at age 65 and received a check in the amount of $22.54 on January 31, 1940. Ida May Fuller paid into the system a total of $24.75 during the last three years of employment prior to her retirement. She lived to be 100, drew a monthly social security check for more than 35 years and received benefit payments that totaled $22,888.92. Far from the exception, this has in fact been the rule with many retirees under the system collecting far more than they contributed. By default if not by design, Social Security from the beginning has been a system where the contributions of current workers were paid out in benefits to retirees.

Never meant to be a comprehensive retirement plan but merely a supplement to stave off poverty among the elderly, social security benefits quickly became perceived as the former by many Americans. Caught up with the business of living: paying mortgages, raising families, providing for payment of their children's college educations, vast numbers of American workers came to rely on anticipated social security benefits as their only real financial preparation for retirement. The anticipated benefits came to take on the character of an entitlement for most Americans, which predictably led to social security becoming a "sacred cow" that no career politician dared to tinker with if he or she had aspirations of remaining in office. Pressure from powerful lobbyists for the elderly and constituents promised "political suicide" for any lawmaker who dared to talk seriously about reducing benefits. As a result, social security became another realistically unsustainable federal entitlement program. On the first page of the annual statement, Form SSA-7005-SM-SI, mailed out by the Social Security Administration to Americans during their birth month each year, is printed the ominous warning:

"In 2017 we will begin paying more in benefits than we collect in taxes. Without changes, by 2041 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 78 cents for each dollar of scheduled benefits."

Branding the Social Security system a "ponzi scheme" might be a bit harsh, yet the fact remains there are some startling similarities and by the admission of the Social Security Administration itself, prospects for sustaining this program look bleak indeed.

Sources:

Sowell, Charles. "Social Security: The Enron That Politicians Have In the Closet". Capitalism Magazine. June 22, 2009 http://www.capmag.com/article.asp?ID=1505.

"Ponzi Schemes". US Securities and Exchange Commission. June 22, 2009 http://www.sec.gov/answers/ponzi.htm.

Wallis, Jim. "Capitalizing on the Crisis of Opportunity". New Deal 2.0. June 22, 2009 http://www.newdeal20.org/?p=600.

"History". Social Security Online. June 22, 2009 https://www.socialsecurity.gov/history/idapayroll.html.

Your Social Security Statement (Form SSA-7005-SM-SI). Social Security Administration. February 20, 2009.