Of Course Social Security is a Ponzi Scheme!

According to BusinessWeek’s Michael Mandel (Is Social Security a Ponzi Scheme?), Social Security has all the characteristics of a Ponzi scheme – except that we can count on harnessing the free dividends produced by inventors of future productivity-increasing technology, thereby extending its sustainability indefinitely and … insert random leap of logic here … magically converting Social Security into … not a Ponzi scheme. Huh?

But there is one enormous difference between Social Security and a Ponzi scheme: Technological change. Over the past century, new technologies have enabled the output of the country to grow much faster than its population. To be more precise, the U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times. #

Assuming that technological progress continues over the next 70 years, and output productivity growth continues over the next 70 years, the finances of Social Security are relatively easy to fix. A fairly minor cut in benefits, combined with a relatively small increase in taxes, will bring the system back into balance again. (the latest Social Security report projects a 75-year deficit of $4.3 trillion. That sounds like a lot of money, but over 75 years it’s roughly $60 billion a year…not chicken feed, but not overwhelming) #

So, it’s a Sustainable Ponzi Scheme?

Mr Mandel would have us accept that because the government can use force against the population to accept higher pay-ins and lower pay-outs, Social Security is sustainable, and therefore not really a Ponzi scheme. In other words, Mr Mandel says that, yes, it is a Ponzi scheme, but because it’s run by the government, uh, it’s actually really not. What?

What is a Ponzi Scheme Anyway?

According to Wikipedia

A Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit.

According to investopedia.com, it is

A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors

What are the Criteria for Judging?

So, in order for Social Security to be a Ponzi scheme, it must meet these conditions:

1. pays returns to earlier investors with the funds of later investors;
2. promises high rates of return;
3. offers little risk; and
4. continues only as long as new investors enter the scheme.

And, indeed, Social Security meets these conditions!

1. Check. Even the Social Security Administration admits that beneficiaries receive funds directly from current workers.
2. Check. The first Social Security recipient paid in $24.75 but got $22,888.92 in benefits from the program. Not all of the first beneficiaries would have done so well, but they certainly could have expected some kind of windfall.
3. Check. It is the government after all, right?
4. Check. See #1.

A Ponzi Scheme – Backed by Guns. a.k.a Armed Robbery

Social Security is a Ponzi scheme. The reason it hasn’t failed yet is that we have no choice but to continue paying in ever-larger percentages of our earnings, and no choice but to accept ever-smaller benefit payments.

Systematic, Inescapable Theft

We are faced with no choices in this matter because:

• our employers automatically send the government their plunder. We never see it. So, if you don’t work for yourself, it’s extremely difficult to protect your property. And if you do, you have too much at stake – your business – to risk IRS action against you; and
• the government has guns and the ability to use them however they damned well please.

But is Social Security REALLY Sustainble?

No, not even that is true. Despite the fact that the program is still slightly in the black, by 2017 – or sooner – income will fall short of expenses due to the large numbers of retiring Baby Boomers. There will simply be fewer and fewer workers available to support retirees.

In fact, the 2017-2085 Social Security deficit (in 2008 dollars) is estimated at $28 trillion. Yet we’re in debt – just at the federal level – at least $10 trillion.

Don’t expect past surpluses – the ~$4 trillion “trust fund” – to delay the inevitable. The federal government spent those funds, leaving only another debt in its wake. It’s just not there.

Social Security is NOT sustainable, and will require either higher taxes, lower pay-outs, means-testing and/or greater inflation to fulfill the promises that have been made.

Is this Really the Best Way to Finance Retirement?

In the end, does it make any sense at all to force ourselves to accept a one-size-fits-all retirement scheme that lacks any aspect of saving or investing and actually loses money (due to administrative costs)?

If you had to design your ideal retirement plan, is this what you would come up with?

We Can Change This

We’re not locked into Social Security. We can abolish it any time we like. We can finance a reasonable transition plan for current and near-term retirees using savings from ending our wars and shuttering our extensive collection of foreign military bases.

Time is running out. Contact your representatives in Washington today via Downsize DC.

Photo credit: Daveness_98. Photo license.