Social Security - A Ponzi Scheme?

Rick Perry made a splash in the recent presidential debate & in his book with his claim that Social Security is a Ponzi Scheme – like the fraud that Bernie Madoff ran & wound up in jail for. There are also many pieces I have received travelling around the internet making people erroneously feel that they are entitled to Social Security & Medicare benefits just because they had money withheld (e.g., – "I've been paying for it all my working life") from their paychecks when they were working or because they are now paying premiums, deductibles, & coinsurance in the case of Medicare. Exacerbating the situation is that the internet pieces take offense @ the word "entitlement" & believe that employers paid an equal share of the payroll taxes for both these programs.

 

The reality is that all of the proceeds collected from people make up about 25% of the cost of Medicare Parts A, B, & D – this is why they are going broke & also why senior citizens like the programs so much.

 

As for Social Security benefits – they are not guaranteed.  Just like all entitlement programs, they can - & have been – changed by Congress. The Social Security administration itself says so & so did the Supreme Court when it ruled, in Fleming v. Nestor, that workers & retirees have no legal claim to benefits, regardless of how much in taxes they have paid into the system. For example, people who found their benefits taxed in 1983 & those who had those taxes raised in 1994 can not feel that there is a guaranteed benefit amount.

 

Also we should dispel the illusion that companies pay half of our Social Security & Medicare costs.  If employees' productivity did not cover these costs the company would go out of business in direct proportion to the size of their workforce. Each of us pays the full 15.3% of payroll taxes – half out of our salaries & the other half out of our productivity. The companies pay nothing.

 

A Ponzi scheme is an operation that pays returns to its contributors by subsequent contributors (if any - or certainly less contributors in the case of Social Security), rather than from any actual profit earned.  Such a scheme is destined to collapse because the cash flow, if any, becomes less than the payments of the original contributors.  This is the standard definition of a Ponzi Scheme & it defines Social Security to a tee.  Further, when Social Security began in the 1930s life expectancy was 64 years – meaning that someone in their twenties, thirties, or forties who originally paid into the system to help the elderly would actuarially not live to collect any benefits themselves.  This not only takes the term "Ponzi Scheme" to another level but shows the fraudulent premise this government program was founded upon.

 

It is important for seniors to understand what is happening to their Social Security & Medicare benefits.  Finding & voting for the right presidential candidate in 2012 could not be more important if you are totally dependent on these programs which far too many seniors are – 18% of seniors only source of income is Social Security.  To further help I present below my letter published in 2005 on this subject.  Please note that the references I made to year 2018 now are closer to 2015.  Also please note my reference to a Ponzi Scheme in describing Social Security – long before Madoff or Rick Perry.

 

June 22, 2005

 

Dear Editor,                                                                                                                                                   

 

In Martin C. Stark's letter to the editor in the June 16, 2005 Reporter he relies on the Social Security Trust Fund to fund any shortfalls between incoming FICA taxes & the outgoing beneficiary payments after 2018. 

 

We should understand that this trust fund is nothing more then a stack of IOUs that is not backed by real assets.

 

Tracking the current Social Security surplus you will find that the money is received in a Social Security surplus account, from which it buys the Government bonds that make up the trust fund.  From there it is moved to the general treasury from which it all has already been spent financing roads, foreign aid, & other current government consumption.

 

There is no real money in the trust fund so that when 2018 comes & we call on the trust fund to support the actuarial shortfall we will have to sell the bonds (but to who?) or print more money thereby causing inflation.  The other choices are to raise taxes or lower benefits.  Social Security cannot continue under the current system based on this information. 

 

The Social Security solvency problem can very easily and fairly be solved by replacing the wage index formula for calculating benefits with the CPI formula – see Susan Lee's Wall Street Journal article dated November 23, 2004.

 

Mr. Stark claims that benefits are guaranteed for life – this too is not true.  Quoting from the aforementioned Susan Lee article – "Social Security benefits are not guaranteed.  Just like all entitlement programs, they can - & have been – changed by Congress.  The Social Security administration itself says so & so did the Supreme Court when it ruled, in Fleming v. Nestor, that workers & retirees have no legal claim to benefits.  Regardless of how much in taxes they have paid into the system." 

 

For example, people who found their benefits taxed in 1983 & those who had those taxes raised in 1994 can not feel that there is a guaranteed benefit amount.

 

Mr. Stark asks, "What type of social security insurance system do we want…?"   My answer is that we want a system of me taking care of my retirement & him taking care of his.  FDR created Social Security to help the elderly after the Great Depression because the elderly had no time to recoup their loses from that terrible economy. 

 

We should not have private accounts because of any Social Security system solvency problem but quite simply because they are a better idea in a free enterprise capitalistic country.  Young people should be learning to take care of themselves since they are the only ones they can really count on anyway, as they will find out as they go through life.  In every plan presented to date each person has the option to remain in the current system. 

 

However, someone with a personal account will have real assets in an actual account with their name on it for retirement & also will have the ability to leave these assets to their heirs - both unlike in the current system. Personal responsibility is the virtue - not looking for government guarantees in a system that is just a Ponzi Scheme waiting to tumble as described before.

 

Finally, Mr. Stark is correct when he states "If it (personal accounts) runs out, its your problem" – and that is exactly as it should be.  When people realize that they are responsible for themselves & will not be taken care of by some government program, they will work, save, & invest to make sure that they do not run out & they & the country will be much better off for their efforts. Social Security should be there only for the needy as FDR intended. 

 

The incentive should be to not want to be one of the needy but rather one of the self-sufficient.  I believe that this is where President Bush is trying to lead us on the Social Security issue.