Governor Rick Perry of Texas is trying to be the Republican candidate for
President 2012. He has recently came under fire and criticism for stating
that the Social Security system in this country is a Ponzi scheme. He has
been criticized by politicians in both major political parties and a
variety of different journalists. The question, therefore, is the
following: given the Social Security structure, is it a Ponzi Scheme?
Before answering that question, consider a random set of Ponzi scheme
definitions that pop up when you Google "Ponzi scheme:"
- An investment swindle in which some early investors are paid off with
money put up by later ones in order to encourage more and bigger risks.
- A Ponzi scheme is a fraudulent investment operation that pays returns
to separate investors, not from any actual profit earned by the
organization, but from their own money or money paid by subsequent
investors. - A fraudulent investment plan in which the investments
of later investors are used to pay earlier investors, giving the
appearance that the investments of the initial participants dramatically
increase in value in a short amount of time. - A Ponzi scheme is a
type of securities fraud where the promoter makes some sort of false or
misleading statement about an investment (often including a guaranteed
high rate of return) and pays off older investors with newer investor's
monies. Eventually, when the promoter can't find any new investors, the
scheme collapses. - A dishonest and usually illegal business in
which many people are persuaded to invest their money and the money of
later investors is used to pay the people who invested first. - A
form of fraud in which belief in the success of a nonexistent enterprise
is fostered by the payment of quick returns to the first investors from
money invested by later investors. These are different views of what a
Ponzi scheme are but most have some common features: - Later
investors' money is used to pay earlier investors. - Money is not
invested or earned, just shuffled from later investors to early
investors. - Dishonesty, fraudulent, misleading, and other negative
adjectives are used to describe the process. Now, what is Social
Security: - Today's workers are forced to give up some of their
earnings in order to pay today's retirees, all for a promise that some
Americans in the future will be forced to give up their earners to pay
today's workers when they retire. In other words, later investors',
today's workers, money is used to pay earlier investors, today's
retirees. - Social Security taxes collected today are not placed in
an investment account of any type, the money is either paid out directly
to today's retirees and if there is any money left over, it is given to
the political class, via the Treasury Department, to fund today's
government functions. In other words, today's Social Security taxes are
not invested, just shuffled from current workers to current retirees.
- Citizens are told that there are $2.7 TRILLION worth of money in the
Social Security trust fund (it isn't, see President Obama's comments
below), citizens are told that Social Security is a great retirement plan
(it isn't, see the analysis below), and citizens are given the
impression, via their Social Security account statements that they have
an account with actual money/wealth in it (they don't). Sounds
misleading, fraudulent, and dishonest to me. Looks to me that
Governor Perry got it more right than wrong when describing the Social
Security process as a Ponzi scheme. Such schemes are illegal unless they
are run by the government. Let's move on to some candid comments
made by President Obama. These comments were made in the middle of the
debt ceiling negotiations when it looked like the negotiations might
fail, resulting in a possible shutdown of the Federal government. In his
typical class warfare mode, the President stated that unless he got his
way in the debt ceiling negotiations, the government might shutdown and
Social Security recipients might not get their checks. Consider the first
two paragraphs from an August, 2011 CBS News online article:
President Obama on Tuesday said he cannot guarantee that retirees will
receive their Social Security checks August 3 if Democrats and
Republicans in Washington do not reach an agreement on reducing the
deficit in the coming weeks. "I cannot guarantee that those checks
go out on August 3rd if we haven't resolved this issue. Because there may
simply not be the money in the coffers to do it," Mr. Obama said in an
interview with CBS Evening News anchor Scott Pelley, according to
excerpts released by CBS News. But wait a minute!!!! Didn't Joe
Biden recently say that Social Security was solvent with $2.7 TRILLION in
the trust fund? Didn't Harry Reid state a few months ago that he was not
going to support any effort on changing Social Security since the trust
fund had over $2 TRILLION sitting in it? If that is the case, how come
there would be no money to pay out to current retirees almost immediately
after the government shut down? Why couldn't they just temporarily tap
that $2.7 TRILLION trust fund? Why couldn't they? Because the
coffers would be empty. Remember, this is a Ponzi scheme, money coming in
from today's workers (later investors in Ponzi terminology) is
immediately paid out to early investors (early investors in Ponzi
terminology). That $2.7 TRILLION in the trust fund is nothing more than
an accounting entry, it is not a true wealth entry. It consists solely of
accounting/paper/near worthless IOUs that the Treasury promised the
Social Security process over the decades. That true wealth was paid out
to previous retirees or the political class long ago. The coffers
would actually be empty. 2011 is the first year when Social Security will
be in a negative cash position, i.e. Social Security taxes collected this
year will be less than what is paid out in benefits. Obama appears to
understand the fragility of the system. It is quite worrisome that
Biden and Reid do not understand the very basics of the Social Security
system because if they do not understand the fragility, they are unlikely
to work on fixing the root causes of the crisis before it is too late. Or
maybe they do understand the core problems but are just being deceptive
about them, hoping that we will not realize how bad the situation really
is. In either case, do not expect any comprehensive or elegant solutions
to a quickly growing financial crisis. Finally, it is difficult to
agree on what is the biggest Social Security lie, the lie that Social
Security is financially solvent and has $2.7 TRILLION worth of wealth
lying around waiting for us of us to retire or the lie that the Social
Security system is a great retirement option. Earlier this year the Urban
Institute published an analysis which showed that on average, the typical
American will pay more into the Social Security system than they will
receive in retirement checks over their lifetime, hardly a good
retirement option. In 1998, the Heritage Foundation did another
analysis which showed that an average American couple living earning an
average American household income would get $430,000 in Social Security
benefits in their lifetimes. However, if they had been allowed to keep
their money and invest it in a tax deferred investment account, investing
half of their funds in T-Bills and half in a stocks, they would have
$975,000 available at retirement, more than twice what they could expect
from Social Security. Another verification that maybe Social Security is
not a great investment vehicle. As a numbers person, I decided to
check out these two analyses relative to my own situation. I went to my
own Social Security "account" statement and built the following simple
model: - From my account statement I could see how much money I had
donated to the system each year during my working life. - I doubled
that amount to account for the money also sent to the Social Security
Administration in my name by my employers. - I assumed that I was
able to keep both pots of money and place them in a tax deferred IRA-like
account that was invested in an S&P 500 index mutual fund. - I
found the annual investment returns of the S&P each year over the past
forty four years, the length of time I have been working and being taxed
by Social Security. - I assumed that going forward from 2011 that I
moved all of the accumulated investments and contributions to a
conservative investment fund earning 4% return a year, a typical
investment strategy as you get closer to retirement. - When I
turned 65 I would start drawing down money out of the account for living
purposes. The results are pretty depressing and stark: - If I
withdrew twice the amount of money from this tax deferred account that
Social Security says it will pay me at age 65, I would never deplete the
account, regardless of how long I lived. - If I withdrew three
times the amount of money from this tax deferred account that Social
Security says it will pay me at age 65, I would deplete the account when
I reached the age of 97, assuming I live that long. - As a further
example, if I had invested all of that money in Treasury Bills over the
past forty four years, I could withdrawal three times the amount of money
from that account until I was 94 years old. Another positive asset
of this approach, if it had ever become reality, was that I would control
all of my assets. I would not be subject to the whims and changes that
the political class can legally impose on Social Security. Yes, even
though Social Security can tell you what you are likely to get back form
them when you retire, that can be changed at anytime by Congress, the
President, and the political class, just another negative of this
process. Thus, no matter how or who cuts the data and what type of
analysis is done, it is pretty apparent to anyone with an understanding
of basic math that this is a lousy retirement plan. Unfortunately, most
people in the Washington political class apparently do not have a basic
understanding of math. No matter how interesting it is to do these
what-if analyses, we are stuck with today's reality. This reality
includes a dwindling number of workers to support a growing number of
retirees, a cash flow situation that is negative and contributing to our
national debt, and a political class that is either in denial or in
ignorance when it comes to understanding the Social Security problems and
processes. Which leaves us with the need to fix the current system
using the three steps: 1) Gradually raise the retirement age to 70
years to account for the changing demographics and provide some financial
breathing room to the financials, but include a hardship exemption for
Americans that cannot afford to wait until age 70. 2) Prohibit
Social Security retirement checks to Americans with a net worth value
over $3 million since they really do not need a monthly Social Security
check to live comfortably. 3) Uncap the maximum amount of income
that can be subjected to Social Security tax, reduce the Social Security
tax rate, and expand the types of income that can be subjected to the tax
in order to have every American pay the same percentage of their incomes
into the process. The first step in fixing the problem is
recognizing reality: this is a Ponzi scheme that is rapidly approaching
its collapse point, it does not have TRILLIONs of dollars of wealth
sitting around waiting to be paid out to future retirees, the system is
in a negative cash flow situation today, and it is really a horrific
retirement investment option. Until our political class recognizes
this reality and has the courage to tell us the truth and implement the
necessary changes, we can be sure that Social Security will face the same
fate of every other Ponzi scheme in history: collapse.
Related Articles -
obama, biden, social security, retirement, ponzi scheme, rick perry,
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