Friday, September 16, 2011

Actually, Social Security IS a Ponzi Scheme

Texas Governor Rick Perry has taken a lot of flack recently for saying that Social Security is a Ponzi Scheme in his book "Fed Up!" a few years ago. I'm here to shed some light on that statement: Social Security is very similar to a Ponzi Scheme.

To explain it layman's terms, if a Ponzi Scheme began in January with its first round of investors, it would require new investors in March to pay the January investors, new investors in May to pay off the March investors, and new investors in July to pay off May investors, because there is no actual securities or other stocks being purchased that can gain or lose. The schemer must pay off the previous investors (after taking his cut) or else the scheme will fall down on him faster.

Social Security operates on this premise, albeit not maliciously. While the original intention may have been that we pay into our own accounts and then draw on them once we reach retirement age, which has not materialized. This is not what happened. This is for a couple of reasons. One, Social Security was never intended to be a widespread retirement plan. The reason the age of receipt of Social Security benefits was set at 65 years old was because life expectancy at its outset was 64 years old. It was, like all unemployment insurance and Medicaid, designed to be a safety net. Now, with life expectancy at ten years older, now significantly more people are receiving benefits. Originally there was an expectation that there be more people paying in than actually receiving benefits.

At one point there was a trust fund. There was an account of money that was used to pay out benefits. It was raided on more than one occasion to pay for other things, and now that account is empty. Now current benefits are being paid with yours and my payroll tax money. They are taking our investment and using it to pay the previous investors who were expecting to receive their investment back at retirement. That my friends, is a classic example of a Ponzi Scheme.

Now, we have a problem. The money required to pay out benefits is about to exceed new investors (that is, wage earners) as the Baby Boomers hit retirement age. There will not be enough current investors (taxpayers) to pay the previous investors (retirees). In short, not only is social security a Ponzi Scheme, it's one that is about to collapse.

Rick Perry was absolutely accurate in portraying Social Security as a Ponzi Scheme. It is funded the same as a Ponzi Scheme, and it requires new investors to pay off the previous investors, just like a Ponzi Scheme. It's about to collapse due to inability to pay off investors, like a Ponzi Scheme.

On second thought, Social Security isn't a Ponzi Scheme. Participation in a Ponzi Scheme is voluntary.

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