Mr. Ponzi and Social Security

Mr. Ponzi’s name has been bantered all around the media this week. Watch below as Rick Santelli from CNBC and Thomas Friedman from the NYT stoop to calling each others idiots over Mr. Ponzi.

Is the Governor right? Is Social Security a Ponzi scheme? Let’s start by taking a look at what a Ponzi scheme is?

In 1920 Charles Ponzi was convicted of defrauding investors out of millions of dollars. He devised a plan where investors were promised enormous short term gains on their investments. These profits would range from 50%-100% in 30-45 days. Investors however would not be paid by any actual earnings of the company. Profits were generated by new investors entering into the scheme. For Ponzi to continue the scam and the promise of high returns, an ever increasing flow of new investors was needed. Eventually the scheme was discovered and he was arrested.

These schemes are always destined to collapse. The out flow of earnings to earlier investors eventually overwhelms in flows of new capital. Those entering into the scheme  at the beginning can do well but those at the end usually lose their investment.

Now let us examine some facts of Social Security. When Social Security was first instituted the maximum contribution was 2% for employee and employer up to $3000. Thus the maximum pay in was $60 per person. Today the maximum rate is 12.4% for those earning more than $100,000 per year.

For those born in 1877 and retiring in 1942 the average rate of return on their contributions was 36.5%. However for those born in 1950 their rate of return would average 2.2%. Unfortunately those born in 1975 will see their rate of return drop to 1.8%. This number is continuing to fall. Apparently it was beneficial to get on the Social Security bandwagon early.

Consider Ida Fuller. She was the first American to receive a monthly Social Security check. By the time of her death she received a total of $22,888.92. Her total contribution to the system was $24.75. That’s a handsome profit. She got in early.

In 1935 there were 45 people paying into the Social Security system for every one person receiving benefits. Today that number has fallen 3:1. The rate of return has fallen drastically to a point where it has barely kept up with inflation. The maximum contribution of $60 in 1935, adjusted for inflation, is equal to $990 today. However currently the maximum contribution is over $12,000.00. Also the system may be insolvent. It is said that young people today have a better chance of seeing a UFO than a Social Security check.

While it seems that Social Security has many aspects of a Ponzi scheme the Social Security Administration has vigorously denied this. Click here.

There are however, other aspects of the Social Security system that need considering. Social Security is basically a contractual system. Citizens contribute and the government promises to provide benefits at a certain age. However, what if the government raises the original retirement age from 65 to 67. Has the government broken its contract?

Now, what if a person bought an annuity that promised to start paying benefits at age 65, then that company refused to pay until 67. Would that company be subject to prosecution. Probably.

Also key here is that this contract is not a voluntary contract. Citizens are forced to enter into the contract by threat of violence. Imprisonment. Money therefore is forcibly transferred from one group of people to another. The nobility or good intentions of the act is irrelevant. Taking money from people against their will is a violation of the 8th Commandment. Interestingly the citizens of Galveston, Texas were allowed to opt out of Social Security. Subsequently they earned a greater rate of return on their money and some became millionaires with the money they saved. Click here.

The fairness of the system should also be questioned. If a segment of the population has a lower life expectancy than another group would not the benefits of the system be skewed to the group that lives longer. Some have suggested that since the life expectancy for blacks is lower than other groups, blacks are treated unfairly by Social Security. Not only do they receive fewer benefits, their children also stand to inherit less. Click here.

This leads us to those who die before they reach retirement age. If a person started to contribute to Social Security at age 15, by age 65 he would have contributed for 50 years. But if they were to die at age 65 before they received their first check they would receive nothing. Their children also would receive no part of that money. Since it is a pay as you go system, those 50 years of contributions went to someone else.

A crucial question, especially for “baby boomers”, is; will Social Security be there for me.  It must be realized that Social Security was based on politics and a socialist ideology. It was a means to control large amounts of private capital and large segments of people. It was not based on Biblical principles. Click here.

If the political landscape changes, obviously Social Security can change. Suppose younger voters perceive that they are paying enormous taxes for a system, they will never realize benefits from. Theoretically they could vote to take granny’s benefits away. This could be done by raising the retirement age, means testing (if you have or make more than a certain amount your benefits are adjusted) or, they could do away with granny altogether. Which do you think they will chose?

There are legitimate roles for government. Protection against fraud and theft are some of them. Providing people, as FDR said, “with some measure of protection” against “poverty ridden old age”, is not one of them. The government is failing miserably at this attempt.

Notice what Alf Landon said during the 1936 presidential campaign,

Social Security is unjust (emphasis mine), unworkable, stupidly drafted and wastefully financed.” Beginning in January 1937 it would impose the largest tax bill in history. The administration said the taxes would go into a reserve fund, which would pay the old- age benefits. In fact, he charged, the Treasury would buy government bonds with the money and spend it. It was as if a father took deductions from his children’s wages to invest for their old age, invested them in his own IOU, and spent them, leaving the children nothing but those IOUs. Hence its forced savings were a cruel hoax.

The idea that a paternalistic government can provide cradle to grave care for its citizens is a cruel hoax. Its a hoax that must be funded with ever increasing transfers of money. All hoaxes, including Ponzi schemes must come to an end. If not done away with by voters, they will fail by their own weight.

To see how much socialism is biblical click here.

For an excellent resource for the biblical nature of government click here.