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Sunday, December 23, 2007

The Ponzi Scheme known as Social Security

UPDATE: While the story about Obama getting smacked is dated by a month and a half, the story of social security remains the same.

This is Charles Ponzi and he is the inventor of the scheme bearing his name, the Ponzi Scheme.

A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1]

This has long been illegal when tried in the private sector and yet I will attempt to show that the publicly financed Social Security is structured no differently than the most sophisticated Ponzi Scheme Charles Ponzi could have dreamed up. But first...

A hat tip needs to go to Michelle Malkin for pointing out this story. It seems that Barack Obama has made enemies with the nutroots recently. His crime is pointing out that social security has some problems. Social Security is the third rail for the base of the Democratic Party and much like someone's ugly wife, criticizing it brings an emotional response. He got hit by most of the usual suspects

All of which makes it just incredible that Barack Obama would make obeisance to fashionable but misguided Social Security crisis-mongering a centerpiece of his campaign. It’s a bad omen; it suggests that he is still, despite all that has happened, desperately seeking approval from Beltway insiders

....Barack Obama, please realize that you are assisting the right’s efforts to get rid of Social Security. Their strategy is to make the public think that the program is in trouble and then sweep in with their “solution.” …IS your heart in the right place? Social Security is not in trouble. Stop saying it is.

Now, the right blogosphere is having fun with this little political civil war however they should also remember their own threats against most of the candidates for the Rep nomination because they dared not toe the company line on things like abortion, campaign finance reform, immigration, etc. We all have our third rails and Democrats have among them Social Security.

I don't much care about this little battle. I frankly believe that Obama is better off taking them on. He has nothing to lose at this point anyway and the nutroots turn off as many people as they turn on. I am glad he said what he said and frankly showed political courage that I wish more politicians would show.

That said, I am much more interested in the problems facing Social Security and their solutions. I pay about seven percent of each check to social security and I don't believe that I will get anything when I retire.

A Ponzi scheme works as such. I came to you and promise that if you give me $100 today I will give you say $200 in the future. The way I get your $200 is from other suckers that are made the same promise. This works until I find no more suckers.

Now, the way Social Security works is that today's workers pay for today's retirees under the promise that once they retire, that day's workers will pay for them. That is no different than any other Ponzi Scheme only two things: 1) the government doesn't even hide that it is a Ponzi Scheme and 2) since the government is doing it instead of being illegal it is Social Security.

Frankly, the politicians can raise the age limit or the limit on income or any other limit, and it won't change the fundamentals behind it. If one group is used to fund the investment of another group, that PYRAMID scheme will fail once you have an imbalance in the investors. Say for instance, one month my ponzi scheme had a huge number of new investors and the next month I slowed down. I wouldn't be able to fund the new investors from the first month. That is what is happening now. It wasn't a month but years of baby boomers being born, and now there aren't enough workers to fund their retirement.

Anyone that knows anything about Ponzi Schemes knows that at some point there will be suckers holding the bag. It maybe the baby boomers if we don't figure it out, or it might be my generation or maybe even the generation after us. It matters not. The system is flawed. Social Security is among the worst ideas our government has created. It is a state sponsored legal Ponzi Scheme. That is what we should focus on. Everything else is trivial.


Anonymous said...

I totally agree that Social Security is a Ponzi scheme. But it should not be. And by Congress’ not talking about and taking action on converting it to a sound retirement insurance program, I think that Congress has made itself the biggest crook in the country. If a union leader stole massive funds from the pension program, he would go to prison. But congressmen-women use their robbery to gain re-election.

It’s easy to see that the program wasn’t totally a saving-for-the-future program at the beginning, because some people were ready to retire then. But it wasn’t long until there was some surplus, and that surplus should have been invested in real investments -- ones that provided a good return to add to the trust fund. By now, the program would be a retirement insurance plan built up ahead of time, instead of as yet another welfare plan. Instead, the amount that is left over each year after current benefits are paid is literally stolen by the government. The money is spent on other programs, and the Social Security fund gets little more than a promise that the funds will be provided when needed.

When the government spends money, it is gone. The government cannot return the same money it has borrowed. It must raise new money by taxing people again to provide the same funds; or borrow even more money; or cut benefits in order to avoid having to obtain new money.

If congressmen weren’t above the law, they would all be in prison. But the public won’t rise up against crooked politicians.

mike volpe said...

You raise some interesting and good points and I really can't argue with any of them, except to say that the structure of social security would have eventually lead us to where we are at no matter how well it was un.

While I agree that government spending the surplus when it should be saved and invested perpetuated the problem, at some point there would have been the sort of generational disparity that would have lead us where we are at.

Anonymous said...

Of course it is a Ponzi scheme. FDR was a closet communist. Screw Social Security and its negative return on investment.

mike volpe said...

I don't know if closet communist is a fair assessment however his response to the great depression certainly involved all sorts of government action. Whether or not that had any positive effect is up for debate, however he certainly wasn't afraid to insert the government within the economy liberally.

Anonymous said...

Many of FDR's New Deal programs were found to be unconstitutional by the Supreme Court and his programs did not pull the US out of the depression, but rather the economic needs of our economy to supply the US Armed Forces in World War II are what ended the depression. When FDR ran for President, he initially was no different than Herbert Hoover who stated that the role of the US Government was not to get involved in the charity business. The role of the Government in FDR;s view was quickly changed after he was elected.

bgbest said...

FYI - History Lesson regarding our Social Security.

Franklin Roosevelt, a Democrat, introduced the Social Security FICA Program He promised:

1 That participation in the Program would be completely voluntary,

2 That the participants would only have to pay 1% of their first $1,400 of their annual incomes into the Program,

3 That the money the participants elected to put into the Program would be deductible from their income for tax purposes each year,

4 That the money the participants put into the independent "Trust Fund" rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement Program, and no other Government program, and,

5 That the annuity payments to the retirees would never be taxed as income.


Q: Which Political Party took Social Security from the
independent "Trust Fund" and put it into the General fund so that Congress could spend it?

A: It was Lyndon Johnson and the democratic controlled House and Senate.

Q: Which Political Party eliminated the income tax
deduction for Social Security (FICA) withholding?

A: The Democratic Party.

Q: Which Political Party started taxing Social Security annuities?

A: The Democratic Party, with Al Gore casting the "tie-breaking" decid ing vote as President of the
Senate, while he was Vice President of the US.

Q: Which Political Party decided to start giving annuity payments to immigrants?

A: That's right! Jimmy Carter and the Democratic Party. Immigrants moved into this country, and at age 65, began to receive Social Security payments! The Democratic Party gave these payments to them,
even though they never paid a dime into it!

Then, after doing all this lying and thieving and violating
of the original contract (FICA), the Democrats
turn around and tell you that the Republicans
want to take your Social Security away!

And the worst part about it is uninformed citizens believe it!

SUPPORT FRED THOMPSON, the true conservative choice!!

Anonymous said...

Many of FDR's New Deal programs were found to be unconstitutional by the Supreme Court and his programs did not pull the US out of the Depression, but rather economic needs of our economy to supply the US Armed Forces in World War II. When FDR ran for President, he initially was not much different than Herbert Hoover who stated that the role of the US Government was not to get involved in the charity business. The first 100 days of FDR's New Deal changed all this. Congress rapidly went along with this due to the economic/political/social state of the US in the Depression. We have been left with the results of a program which were not necessarily intended to be in place forever, but once a governmental program is popular, it remains in place as no politician wants to lose his/her job by challenging it. It will only be challenged when the situation of not challenging the program would result in the job loss of the politician. As we are not at that point yet, Congress will let the program limp along, making the eventual "fix" be even more ruinous.

Anonymous said...

This is a real election winner argument. It's this kind of nonsense that is going to condemn the GOP to irrelevance. The fact that allegedly serious people are making it is indicative of the unreal world our party is slipping into. This is a program that provides over half their income for 80% of SS recipients. Given savings rates that number is not going to improve over the next thirty years. Does it have some funding problems yes but they can be fixed with relatively simple tweaks.

mike volpe said...

First, Mr. Ms. Anonymous,

I don't know any significant candidate for obvious reasons saying what I am saying.

Second, you back none of your assertions up with facts. For instance, you say that social security only needs to be tweaked but then provide absolutely no ideas for how it would be.

You claim that for 80% of retirees more than half their income is from social security. If that is true we have a lot of poor retirees. I know some retirees for which your scenario is true and they are very poor.

If you were to max out your social security benefits they would be just less than 2000 dollars per month. To max it out of course, you would need to be at or near
100k per year in income for a significant period of time. If that is the case, I hope you have something much more substantial than social security. If you don't, you have no one to blame but yourself.

Let's run a scenario. If you were to stash 100 dollars per month away for forty years at twelve percent per year, that would grow to just over 1 million dollars at the end. If you were making 50K per year, the 7.5% charged in your FICO tax would be 3750. That is three times the 100 dollars per month. Thus, if you merely invested your own social security income rather than having it taken from you, your 50k salary would make make you a millionaire three times when you retire.

Furthermore, unlike investment and savings, social security isn't transferable. Thus, while the money I stash away can be passed on to further generations, social security cannot.

Yes, social security is quite a deal.

Anonymous said...

Its doesn't matter which side you are on now. The only way SS will end is when the Young people of my generation (1970-19??) wake up and start yelling. The fact is the Baby boomers run the country at the moment. The Baby boomers aren't going to bite the hand the feeds them. We need to stop complaining and start running for office. Get the Criminal politicans out of office and put more of our generation to change things.

Anonymous said...

It's actually worse than that. Unlike a traditional pension, or an IRA/401(k) plan, you literally have no right to Social Security.

A Supreme Court case, Fleming v. Nestor, in 1960 decided this. The decision included the following interesting language:

"To engraft upon the Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands."

Clearly the justices were aware that establishing any concept of 'accrued property rights' would bring the whole Ponzi scheme down.

Renaissance Nerd said...

Social Security is the equivalent of older generations literally robbing those of us who weren't born at the time. And don't forget the 'employer contribution' half of the equation. You're not paying 7%, you're paying 14% (though this includes medicare, an equally larcenous program). Your employer wouldn't pay anything if you didn't work for them, therefore it's really your money and your contribution. But just as the Court decided in the 60's, we have no property rights to our 'contribution' because it is in reality confiscated propery. It is a sham at every level, and while I have no problem giving money to charity, I HATE beging forced to give money to charity, and that is all it is. The first generation to receive SS paid nothing in, and each generation since is forced to pay the last. I would gladly give up all 'right' to the 7% that my employer 'contributes' if I could have the other 7% to invest as I chose. And believe me, I wouldn't be investing in T-bills which is what they do with the surplus. I could get a better return on an ordinary savings account, to say nothing of an IRA.

The Dems have been thieves since they were called Anti-Federalists. Nothing has changed.