IS SOCIAL SECURITY ANOTHER PONZI SCHEME?

Ida May Fuller, the first recipient of a Social Security benefit check in 1940, paid a total of $24.75 into the Social Security fund. Her first monthly S/S check was issued in 1940 for $22.54, almost as much as she paid in. Over the ensuing 35 years of her life, she collected a total of $22,888. Her case is reminiscent of the early investors of a Ponzi scheme. They get paid off from the investments of future dupes (or victims).

Social Security, a well-meaning program instituted to help seniors during their non-working retirement years, has turned into a financial nightmare for the workers of today (not for the present retirees), who are paying F.I.C.A. taxes and not expecting to collect anything when they retire. The cost of the program has mushroomed over the years from its inception in 1935. Let's take a look.

Social Security benefits paid out over the years are as follows:

1940- $35 million

1950- $961 million

1960- $11.2 billion

1970- $31.9 billion

1980- $120.5 billion

1990- $247.8 billion

2009- $650 billion and rising.

You can see from those figures the the costs of paying benefits are going up precipitously and eventually the system will go broke unless some changes can be made.

The tax rate set in 1935 was 2% (1% by employer and 1% by employee) on the first $3,000 of earnings. Today the rate is $12.4% on the first $106,800 of an employees taxable earnings. In short, we've gone from a maximum dual contribution of $60.00 per year to a maximum dual contribution of $13,243, and it still falls short of the funding liabilities. In 2005, the Social Security trustees estimated that the unfunded liabilities were $8.5 trillion. It is now thought to be (in 2010), $35 trillion. It is heading for a Bernie Madoff type financial meltdown as sure as night follows day.

In 1935, the average life expectancy was 61.7 years and the retirement age to collect S/S was 65 years old. In 1940, the life expectancy was 62.9 years and 20 workers contributed to fund the retirees. In 1960, the life expectancy was 69.7 years and 5 workers were contributing to support the S/S retirees. In 2005, 3.2 workers were contributing to one retiree and the average life expectancy was now 77.8 years. So as the “pot” of retirees keep expanding the supply of investors (workers) is declining.

Next year, 73 million “Baby Boomers” will begin to retire which will cause the senior population to double in the next decades, while the number of employees will either remain constant or decrease. There will not be enough workers to pay for these new retirees unless we do something and soon. Just like the schemes of Charles Ponzi and Bernie Madoff, the pool of new investors (workers) will not be enough to pay off the previous investors and the whole thing will come tumbling down like a house of cards.

When the first generation of S/S recipients got back in benefits was far greater than what they themselves paid in. You could say they got something for nothing. The same will not be said for future retirees. They probably will get back nothing for something.

That's the way a Ponzi scheme works, with the first wave of “investors” getting paid with the money paid in by the second wave and on and on. But, like Social Security, a Ponzi scheme creates no wealth, but only the illusion that cannot last. Ponzi and Madoff went to prison, but our lawmakers get re-elected for doing the same thing.

President Bush back in 2005, with the recommendation of Democrats Daniel Patrick Moynihan and John Breaux, tried to institute a “partial” privatization of Social Security, but was shot down by the Democrats who demagogued the plan as being “too risky” and a boon to the Wall Street tycoons. The plan simply was that a person paying F.I.C.A. taxes would be able to put aside 4% of his contributions into a private account that he would own and be able to leave for his heirs when he died (today when you die, no more S/S checks will be paid to anyone - with the exception of some reduced benefits to his widow and minor children). The plan, as proposed, was optional and anybody who opted out for the present S/S setup would be able to do so. Any young worker today, with any economic common sense, would jump at the the opportunity, because over the long term, and even with the ups and down of the market, to choose a plan that would give him two or three times the amount of retirement benefits that he would receive now under the current benefit schedule would be a “no-brainer”. Politics won out again, and as of the present time, our Social Security system will be going into bankruptcy in a few short years leaving our children and grandchildren high and dry. What a shame!

Conservative commentary by Chuck Lehmann