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Wealth Virtues Journal: September 14, 2011

The Similarities of a Ponzi Scheme to Social Security

Filed under: American Wealth — Tags: , , , — James Ward @ 1:14 pm
© 2009 Poor Richard Web Press, LLC

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Much has been made of the statement by 2012 Presidential Candidate, Governor Rick Perry, on Social Security being a Ponzi scheme. I have also referred to Social Security as the same as you can see from my postings back in 2010 and early 2011.

But what is a Ponzi scheme and what does it have in common with our current means of providing income to those that have paid the Social Security tax?

As defined by Investopedia ( a Ponzi Scheme 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. The Ponzi mastermind gathers all relevant funds from new investors and then distributes them.”

 Social Security Ponzi Scheme

What makes Social Security different?  It is legal in the eyes of the courts because it was argued and ruled as a tax, and Congress has the right to levy taxes.  As in the case with any tax, there is no promise that you will have any specific return on what you have paid into the system.  For many people, they will receive less than what they have paid in FICA (Social Security) taxes, making this a losing means of investing. Rather, it is used as a security net for those that may be truly in need, or in an overwhelming number of cases, those who never bothered to save for their retirement.

What makes Social Security less desirable than a Ponzi scheme is the public / private sector inequity. Those working for the U.S. government and retire from it do pay the Social Security tax, and are eligible for benefits, however, they are paid by taxpayer money, which in turn, pays the social security tax.  In other words, the taxpayer funded government is paying their Social Security tax for them, and they still receive benefits.  As there are many hardworking folks in the government that do provide beneficial services, few people have a problem with this, including me, who spent 15 years as a government employee before going to the private sector.  The problem is when government grows to the point of ineficiency, providing paychecks to those that have no productivity, or who could be forced to be more productive in the private sector, we see an increased drain in available funds. Also remember that only 50% of Americans pay taxes.  I assure you that this is the upper 50% of income earners including the much maligned (by the Socialists in the Democratic Party) wealthy millionaires and billionaires, who also provide the bulk of private sector jobs to those who cannot, or will not start their own business.

Has Congress ever used funds from the Social Security fund (if fund is even the correct word) to pay for other government spending? If so, that is similar to what Bernie Madoff did in his Ponzi scheme, using funds from his clients on purchases from himself instead of investing the funds to assure a return on investment for his clients.

A Ponzi scheme, like Social Security works well only when there are more payees into the system than those that need to be paid. Unfortunately, Social Security will be completely drained by 2037 if it continues to operate at it’s current level. This is because there are less workers paying the FICA tax than there are Social Security recipients.  Also remember that because FICA is a tax, the government is actually under no legal obligation to pay you anything.  You may think you have “earned” your Social Security benefit simply because you paid the FICA tax, but sorry, if it isn’t earning interest in a private account, then you have earned nothing….zip…zero.  Get over your “entitled” delusion.  It is a word government uses to make you think that it is actually your money that you will be getting.  Politically it is, because who wants to scare those resilient voters who lived in the Roosevelt-Truman era believing that Social Security was a good idea. Those of us born in the 1960’s and later are more realistic. So what is the answer?

Having been a government employee starting in the 1980’s, I was one of the first generation of employees who was not allowed to be on the old Government pension system, but was put on, thankfully, the Federal Employee, Retirement System (FERS) that uses the Thrift Savings Plan as a no-kidding, transferrable, 401K.  I recommend that anyone born after the year 1999 should be wholly transferred from a Social Security system to a government-based individual system based on the Thrift Savings Plan.  Yes, you would probably need at least Three Trillion dollars in an untouchable interest earning fund to pay off the rest of those who are legally entitled to Social Security benefits. I would also allow anyone born after 1960 opt into a graduated system to be able to contribute into the fund for the remainder of their working years rather than pay Social Security.

Under the Social Security laws as they existed in the early 1980s, several thousand employees of Galveston County, Texas were allowed to opt out of the Social Security program, and have their money instead placed in a private retirement plan. While employees who earned $50,000 per year would have collected $1,302 per month in Social Security benefits, the private plan paid them $6,843 per month. While employees who earned $20,000 per year would have collected $775 per month in Social Security benefits, the private plan paid them $2,740 per month, at interest rates prevailing in 1996.

Here is a way for everyone to truly pay their fair share and actually earn more in retirement savings, because they are paying it to themselves in the form of a fixed percentage of pay into their own account.  They can also continue to contribute to 401Ks and IRAs as well, thus further increasing their wealth, and become less debendent on a failing socialist model…or Ponzi scheme.

If this model were to be adopted, individual American wealth would be the greatest seen in all of history by the year 2065.

So is the current model of Social Security a Ponzi scheme?  Read the definition of a Ponzi scheme again and tell me that it is not!

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