NOTE: The post that follows is a flagrant violation of my own 199-word limit, per the slogan of the Itty Bitty Witty blog. However, I previously wrote this piece for another blog two years ago. Unfortunately, NOTHING HAS HAPPENED in the past two years to shore up Social Security. If anything, the situation has gotten worse, as we now know just how dysfunctional Congress has become, as evidenced by the debt ceiling brinksmanship and pathetic, short-term resolution. The outlook for Social Security is bleak, but never hopeless. This is America.
Since “Ponzi Scheme” has been repeated a billion times of late in the media, ever since Bernie Madoff made off (pun intended) with billions of dollars of investors’ money, I felt this was the perfect time to talk about the Ultimate Ponzi Scheme–Social Security. What makes it the Ultimate? Three factors make it untoppable, even by the biggest cons ever to walk the earth: millions of beneficiaries, government mandated contributions by all workers, and an endless source of funds to keep the scheme alive for now.
First, for those of you with an ounce of doubt regarding whether Social Security could truly be considered a Ponzi scheme, let’s review a few facts. My favorite online dictionary (www.thefreedictionary.com) defines a Ponzi scheme as follows:
Ponzi scheme: A fraud disguised as an investment opportunity, in which initial investors and the perpetrators of the fraud are paid out of funds raised from later investors, and the later investors lose all funds invested.
Social Security is, in fact, disguised as an investment opportunity. Put your money in each week while you are working, and the government will send you checks after that until the day you die. Not a bad deal, for those who collect the checks. That leads to the next part of the definition. Those who collect on Social Security are funded by contributions made from later workers. Everybody knows by now that there is no pot of money in the Social Security trust fund. On the contrary, the checks are going out as fast as the government can bring the money in from current workers making their contributions. This leads to the last part of the definition–later participants lose all funds invested. There has been plenty of talk about when Social Security will go bust–start paying out more in benefits than it is taking in by way of contributions. The question is not whether Social Security will run out of money but when it will run out. Whether it is my generation or my baby boy’s generation, Social Security will go bust, and there will be lots of contributors who do not see a nickel of their money ever again. So, there you have it. Social Security fits the definition of a Ponzi scheme very well. Now, let’s get back to talking about why it is the Ultimate Ponzi Scheme.
Let’s start with the beneficiaries. If you are like most Americans, you have family members who wait for the check to show up each week from the good ol’ Social Security Administration. Since Americans are notoriously poor savers, far too many Americans live off this money and could not make ends meet without it. Then, there are the other seniors collecting their checks and heading to the casinos or far away places for nice vacations. I have read statistics supporting that senior citizens today have a higher standard of living than in past generations. This is all well and good. Who doesn’t think that Grandma, Grandpa, or your parents should have a nice retirement? However, all of these goodhearted people are pawns in the government’s Ponzi scheme. Why? Because they are voters, and because they believe they are entitled to their government check, no matter how insolvent the system might be. This means that any attempt to fix the problem will be political suicide, if it means reducing payments to beneficiaries, unless the politicians behind it are shrewd enough to put the biggest burden on the smallest number of constituents. Surely, that is where the solution will come someday (but not now, for heaven’s sake).
Next, let’s talk about government mandated contributions. While some people feel sorry for the unsuspecting victims of Bernie Madoff’s Ponzi scheme, one thing is for certain. Nobody made those investors put their money with Madoff. It was by their own doing that they chose Madoff and believed in his big lie. Social Security, on the other hand, has one-upped all other Ponzi schemes by making it federal law that everybody must contribute, whether they want into the scheme or not. I am 37 years old as of this writing, and I am here to tell you that I would waive my future Social Security benefits in exchange for the choice to stop contributing immediately. Why? Because I do not believe in the Ponzi scheme. Unfortunately, if I did find a way out of my Social Security obligation in each paycheck, I would likely end up in prison for tax evasion. What a deal for the federal government! Cook up a scheme that steals money from those who keep the lie going, and toss them in jail if they somehow stop making their payments. The SEC requires that mutual funds and publicly traded companies provide a wealth of information regarding the risks of putting money into their mutual fund or stock. However, it is OK for the federal government to knowingly collect regular contributions from millions of young workers when there is no disputing that Social Security will become insolvent before some of those workers can collect anything. If that doesn’t qualify as fraud, then I don’t know what does.
Lastly, let’s talk about the endless source of funds to keep the scheme alive for now. It is no secret that the U.S. government has no qualms about spending more than it takes in. This is how we get to a budget deficit projected in 2009 alone of about $1.8 trillion. Our total national debt is estimated to be $11.8 trillion right now, and the government estimates that the next 5 years will add about $9 trillion more to this figure. What this means is that the U.S. government, unlike you, me, or anybody else managing a budget, can solve its budget problems by simply borrowing more money. How does it do this? It does it by selling government bonds to investors, domestic and abroad, who still believe that U.S. government bonds are a risk-free investment. As long as the rest of the world stays just a bit more corrupt, a bit more socialist, and/or a bit less supportive of individual liberties and the pursuit of happiness, people will lend money to the U.S.. Whereas Bernie Madoff’s house of cards would surely have collapsed on its own if he had not fessed up, the U.S. government can keep the music playing, so to speak, for as long as it wishes. All it needs to do is keep borrowing to meet its obligations, and it will not have to admit to the whole fraud. If this seems too good to be true for the U.S. government, that is because it is too good to be true. There will be a day when U.S. government bonds will not be perceived as “risk free.” Investors will demand higher rates of interest on government bonds, and the government will be facing the same bleak situation as all those gullible ex-homeowners whose mortgages suddenly reset in accordance with the terms of their variable rate mortgages. The government can tinker with just about every element of the free markets (and it has), but it cannot ultimately outwit the worldwide markets for debt, which presently make it possible for the U.S. to borrow at rates of interest that are not indicative of the true risk involved.
So, as you can see, there can be only one Ultimate Ponzi Scheme, and Social Security wins the award. What should be done about it, you ask? The President and Congress need to share the facts with Americans, and they need do what is most equitable. Without question, the government will have to break its promises to many Americans, but bad news is not like wine–it doesn’t get better with age. In the name of equity, even current beneficiaries should take a hit. Actuaries need to help figure out what will be required to shore up Social Security, and Congress should take a long and hard look at Social Security before deciding whether to save it. The private sector has long since gone away from pension programs (defined benefit, like Social Security) in favor of 401k plans (defined contribution). Maybe it is time for Social Security to bite the dust also. If each American could see an actual account balance and have some say in how that money is invested, then personal accountability could start to make its way back into society. Guaranteed checks from the government sound good, but there is no such thing as a free lunch, as the expression goes. I, for one, do not like being made a pawn in a Ponzi scheme. In my lifetime, I have contributed $60,000 to Social Security, and my wife has contributed $48,000. Still, I would rather that Social Security be exposed for what it is–the Ultimate Ponzi Scheme–than have to continue contributing to the scheme until the day I retire. What is lost is lost, but what money I still have I can put to productive use in my own retirement planning.