Sunday, September 11, 2011

Is Social Security 'A Ponzi Scheme'?

Part of the fallout from the GOP debate involves the question of Social Security.

GOP Candidate Rick Perry has gone on record calling the program a Ponzi Scheme. Is he right?

Before we can answer that, we need to look at exactly what a Ponzi Scheme is, as a number of people might either not understand the term or have a mistaken idea of what it actually is.

Charles Ponzi was an Italian immigrant in Boston with a criminal background who invented a scam in 1919 that lasted for quite some time. He claimed to be able to provide a 50% profit on investments within 90 days by redeeming international postal reply coupons bought overseas in foreign currencies, redeeming them in US dollars and making the profit.

The reality was that the built-in limitations within the system and the red tape involved made a 50% return in 90 days a fairy tale. Yet Ponzi continued to attract investors and pay them off at his advertised rates.

How he did it was simple..he simply used the new suckers' money to pay off the older ones.And as word spread, there was an ever-growing pool of suckers available, and a lot of 'investors' who didn't even bother to take their profits but let them ride, piling up 'fortunes' on paper.

Banking laws were a lot more lax then, and Charles Ponzi was able to keep the scam going for almost two years before the Boston Post ran an expose that revealed, among other things, that the existing supply of postal reply coupons was not adequate to cover the returns Ponzi was supposedly making and that he was merely robbing Peter to pay Paul.

Ponzi attempted to pay off his investors by 'borrowing' money from the vaults of another bank he had control in, the Hanover Trust and by taking out fraudulent loans at other banks. But by then the local bank commissioners had taken a look at what passed for his books, seized control of Hanover just in time and put a hold on his other assets, and Ponzi went to jail. His investors were lucky to end up with an average of 30 cents on the dollar.

Note than Charles Ponzi's little endeavor failed for three reasons - bad publicity cut down on the pool of new suckers, he was stopped from borrowing his way out and he had no ability to generate fresh debt or print new money.

Now, let's examine the basic model of Social Security. It doesn't recruit suckers by appealing to their greed,but instead makes participation mandatory except for government employees with their own pension funds. Instead, it promises guaranteed benefits for life in exchange for paying into the system.

Also, unlike Mr. Ponzi, Social Security is backed by the full faith and credit of the US Government which does have the ability to borrow, take on fresh debt and print money. So where's the problem?

The government originally established the Social Security trust fund in 1935 during the Depression as a way of providing a kind of very basic and supplemental social safety net for destitute seniors. In 1935, there were 7.8 million Americans age 65 ( the original retirement age) or older, about 5.4% of the US population. Overall life expectancy in 1935 was only 58 years old for men and 62 for women, so a lot of Americans who started paying into the system back then never lived long enough to collect benefits, especially since a little item known as WWII was just around the corner.

The actuaries figured out that a person who was 65 in 1940 would be able to collect benefits for an average of 12.7 years for men, 14.7 years for women.

There have been some major changes since then.

According to the last census, today those Americans aged 65 and older now exceed 35 million, over ten percent of our population and growing. And they're living a lot longer. While the feds are trying to stem the tide somewhat by raising the retirement age,the numbers are simply overwhelming..especially since the Social Security Trust Fund has essentially been looted by Washington to pay for domestic spending programs. This notably started with President Lyndon Johnson, who was the first to establish precedent by hacking into the system to pay for the Great Society.

Another factor is the huge influx of illegal aliens into the US. While some of them have paid into the fund, many have not or have not paid enough for a long enough period to receive benefits. Many illegal aliens in this situation go on the rolls of Social Security's Supplemental Security Income ( SSI) program, which provides a monthly check and doesn't check things like immigration status too closely. Many legal immigrants with green card status or a handy anchor baby born in the US bring over family members via ICE's family unification program and promptly apply for benefits for the new arrivals, even though they have never have paid into the system at all.

So Social Security faces the same basic problem the Ponzi Scheme did. There's a diminishing pool of new 'customers' paying in - only about 1.75 private sector workers for every retireee - and an ever increasing amount of 'investors' to pay out. While there's no official ban on more federal borrowing to continue to pay off the 'investors', there's a practical limit to how long it can go on, especially since the money to buy federal debt to fund the new spending is increasingly coming from overseas.

The big difference between a Ponzi Scheme and what the Social Security program has become is a lack of criminal intent. Only the end results have become equally criminal...that, and Washington's refusal to do anything about the situation.

Social Security is either going to be reformed or it's eventually going to be eliminated. The politicians in DC land are eventually going to have to face up to that, because there's no third choice.

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Anonymous said...

In the 1970s, I occasionally wrote letters to several newspapers, & I employed that very term, ' Ponzi Scheme ' , when discussing this issue. Joshuapundit has employed this term also ; the Texas gov has employed this term also. Most people have known for a very long time that the scheme is unsustainable. But the earliest baby-boomer turned 60 on 1 Jan 2006, & no one in DC-la-la Land wishes to tread on the toes of people in their 60s, 70s, & 80s, for there is where true electoral power, influence, PAC donations, & Senate & House chairmanships lie. You have to tread on eggs there.

For you post-Baby-Boomers, ie, post-1959 US persons, don't expect to live to collect anything in return for your taxes. Congress has already ' pulled some fast ones ', eg, if you were born on 31 Dec 1959, you are allowed to collect on a certain date ; however, if you are born on 1 Jan 1960, you must add 2 ( two ) years plus a day before you are permitted to collect. ( If memory serves me, they have long since pulled all the orphan & blindness benefits which were once integral to the system. I believe the programme was originally intended & devised to be much more than a pure retirement scheme. Please correct me if I'm wrong, for I am no expert on this historical topic & matter & these details. ) They inevitably will revisit the age issue & will attack some of the access of perhaps, maybe, even late baby-boomers of the late 1950s.

They have also robbed current beneficiaries by employing a deliberately corrupted inflation-adjustment scheme whereby food & fuel costs have been deliberately under-calculated & new technical marvels like i-pods & gigantic, circus-sized television sets have been deliberately over-calculated ( because, after all, as the Feds see it, how many elderly people actually eat anymore ? , or fuel their cars with petrol anymore ? There is a site whose name I've forgotten, but I think that it is called shadow stats, or close to that, which has calculated that since the inception of this ' new math ' , in 1978, most of the real inflation has been ignored ).


Zachriel said...

"In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called "pay-as-you-go" system. Some private pension systems, as well as Social Security, have used this design. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end."

A Ponzi scheme can never be made perpetually solvent. There are a number of valid proposals to make Social Security perpetually solvent, including increasing the retirement age slowly over time, or with an increase in the payroll tax.

louielouie said...

in your last paragraph, i believe you are refering to "cost of living adjustments" (COLA).
i don't believe your statement of under-calculating food/fuel is accurate.
a more accurate statement is that these items have been "deleted" when calculating COLA.
that is why hussein was able to state that the inflation rate, which is the link to calculating COLA, is only 1.57%.
i don't have the technical expertise to explain it, but that is how the economy is going to be monetized to "rob" from these 60, 70, & 80 year olds without them ever knowing it. their pension checks don't go up, but like you say, the cost of food/fuel does/is going up. significantly. the elderly are simply going to lose purchasing power.

louielouie said...

while i believe the legal term for social security is "compact between the generations", i have always considered it a ponzi scheme.
in reading about it, i stumbled across a very interesting person.
if you want to find out when social security should have set off bells and whistles, read about ida mae fuller. ms. fuller was the first recipient of social security benefits. i'm sure my numbers are not correct but i believe she paid in something like $56 to the system. by the time she passed in the mid '60s, she had withdrawn over $22K dollars. quite the investment.

Anonymous said...

To LouieLouie :

Yes,COLAs are the adjustments which are effected in response to the deliberately corrupted inflation-adjustment schemes whereto I was referring. I was trying to eschew some of the technical argot & jargon whereto I am admittedly prone.

The site I mentioned en passant, & have just re-discovered yesterday morning, is called www dot shadowstats dot com. There is a precis titled ' Consumer Price Index / October 1st 2004 / Government Economic Reports : Things You've Suspected But Were Afraid To Ask ! ' ( www dot shadowstats dot com/article/consumer_price_index ) which summarises this intelligibly & brilliantly & terrifyingly. No maths required for comprehension. I'm rubbish at maths, ( unlike my late father, my late mother, & my late daughter -- it skipped me ! ), but I had no difficulty whatsoever following the succinct analysis. Also recommended : ' Alternate Inflation Charts ' ( www dot shadowstats dot com/alternate_data/inflation-charts ). If you like horror films, there is the new, but very lengthy, ' Hyperinflation Special Report ( 2011 ) / March 15 2011 [ Ides Of March, no less ! ] / Special Commentary Number 357 ' which created a nice case of insomnia for me last night. ( www dot shadowstats dot com/article/hyperinflation-special-report-2011#_Toc287944634 ) I beg Joshuapundit's indulgence for all these off-site refs. I 1st stumbled across that site about 3 years ago but subsequently forgot about it till a passing reference at Dick Morris' site ( another grateful acknowledgement ) reminded me about it. It is chock-full of, or, ? , chock-a-block with nutritious economic info in easily digestible form. Never forget the maxim of the old indienne : scientia potestas est : knowledge is power. Learn the tricks & ticks of the trade of the crooks & denizens of DC-land.

To Zachriel :

It is much, much too late to simply ' increas[e] the retirement age slowly over time ' . I proposed that in the 1970s, but now you would have to drastically increase the collection age, for the sheer quantity, the sheer numbers, of baby boomers is too great. You can't have 3 social-security recipients for every 1 taxpayer. That is why I'm begging any of you post-1959ers to wake up, for you are not yet in the powerful grey-haired geriatric age cohort which the politicians are afraid of, & you might see your social-security age raised to the 70s !

If either of you disagree with me, please respond swiftly & quickly, for I have volunteered to leave again on Fri in order to fill in for an ill person at another location for a business of mine ( Halloween Is coming up & it's important to be at full strength ! )