Is Social Security a Ponzi Scheme?
Charles Ponzi became infamous for his Ponzi scheme. All it amounted to was taking in money from folks for a non-existent investment and then paying back big returns (to the first investors) from the receipts of newer investors. There never was any investment. It worked great in the short term as the early investors made huge returns on their investments from the new money flowing in from others who wanted to get rich quick. But ultimately the investors were bilked of their money. More recently Bernie Madoff did the same thing, but on a much larger scale.
Perhaps you heard or read that Texas Governor Rick Perry called Social Security a Ponzi scheme during a Republican Presidential debate at the Reagan Library (the Gipper must have been smiling). It was in reference to a quote lifted from his book, Fed Up! The not so mainstream media and other self-serving comrades were gleeful. After all, Social Security has been the untouchable “third rail” of American politics for decades. Barry Goldwater was Mau-Maued with the charge that he was going to destroy Social Security and more recently, Congressman Paul Ryan has been the target of demagogues in the Democratic Party with the charge that he too wants to destroy Social Security. Even Governor Romney stooped low to throw a little mud on the good Governor of Texas.
But mudslinging aside, is Social Security a Ponzi scheme? Let’s go back to the beginning, shall we? The Old-Age, Survivors, and Disability Insurance (OASDI) program, referred to as Social Security, was passed by Congress and signed by President Franklin D. Roosevelt into law in 1935. It was promoted and indeed its name states that it is insurance. So is it really insurance? Would it pass muster of any state insurance regulator?
As it turns out, my father worked in the insurance industry for more than 20 years. I’m certainly not an expert on insurance, but I did ask him a few questions over the years about how insurance works. It seems that state regulations governing the operation of insurance companies are quite strict. For example, Life Insurance Companies are strictly forbidden from simply paying off claims from incoming revenues from new policy holders. They can’t operate like a Ponzi scheme. They must maintain high financial reserves at all times so that all claims can be honored when they come due. Reserve levels are audited on a regular basis to make absolutely certain that your policy will be paid in full when you die.
If executives of an insurance company were to dip into the reserve fund for their personal benefit or for any other reason that created a dangerous low balance in funds available, they could and would be guilty of fraud and would go to jail. They would, in effect, be acting as Charles Ponzi did in the early 1900s and as Bernie Madoff did more recently. Ponzi and Madoff went to jail.
Accordingly, since Social Security was sold as “insurance,” and in fact the official name is the Old-Age, Survivors, and Disability Insurance (OASDI) program, it seems only fair to judge whether or not it has been operated with insurance standards as they are applied to insurance companies. Have sufficient financial reserves been maintained along with appropriate investments to ensure that those who contributed into the program will be paid a return from the funds they have “contributed”? As an aside, the word “contributed” is not very appropriate in this case since in reality, no one contributes to Social Security, they are forced to pay into OASDI. If you do not pay into Social Security or your employer fails to pay into Social Security, some men in uniforms with guns will come and cart you or your employer off to jail. In reality, Social Security is just another tax levied by the big government crowd.
But back to the question as to whether Social Security has been operated as a legitimate insurance program that meets with insurance standards for financial reserves. The answer is no for several reasons. First, Congress has “borrowed” from the Social Security fund to pay for general expenses. There is only an IOU in the Social Security account. So, on that basis, members of Congress should be carted off to jail. They have committed fraud, just as blatant as Ponzi and Madoff, but on a much, much larger scale.
Second, beneficiaries of Social Security were added as the program developed with the knowledge that the amount of their contributions would never justify the monthly benefit they would receive from the program. You might say that Social Security is insolvent by design. But, remember, those who drafted the legislation and the President who signed the legislation called it insurance, therefore they deserve to be held up to the standards required of for-profit insurance companies. So, FDR should have been carted off to jail for insurance fraud, along with other Presidents who went along with the scheme.
But forgetting all the lies and hypocrisy of those who passed the legislation in the first place, is Social Security financially sound today? Can it continue in its present form and provide the same level of benefits to young people who are forced to pay into it today for their future retirement? The answer is yes if we are willing to substantially devalue the dollar through inflation. In other words, if we make the dollar less valuable so that the money we pay to today’s seniors is less valuable, we might be able to raise taxes high enough to cover the cost of Social Security, but that would mean that Social Security was a lie in the first place. And anyway, there is always a day of reckoning.
The fact is that Social Security’s underfunded liability is calculated in trillions of dollars. That’s right, trillions of dollars. Send some more Congressional Ponzi’s off to jail. If this is not a blatant, in-your-face betrayal of the public trust, I don’t know what a betrayal is. Not only are there no reserves, but last year Social Security payments exceeded Social Security taxes. According to the Congressional Budget Office this trend will continue and accelerate as the Baby Boomer generation retires. By 2037, retirees will only get about 76 cents back for every dollar that they put into Social Security unless dramatic changes are made.
In March of last year Senate Majority Leader Harry Reid said, “…they [Republicans] claim Social Security is headed for bankruptcy. It’s not just an exaggeration that Social Security is headed for bankruptcy -- it is an outright lie.” Well, I suppose Reid is right, Social Security is not headed for bankruptcy, it is already bankrupt. Of course, he didn’t mean it that way. Harry Reid is a man with great power and responsibility as a public servant and instead of dealing with the bankruptcy of Social Security the most he could manage was demagoguery. Reid follows the Democratic play book—politics first, integrity second.
The jails would be bulging if we sent everyone who went along with the lie that Social Security is insurance. But they can’t have it both ways. Either it is insurance or it is just a Ponzi or Madoff scheme on a much bigger level.
It is, of course, as Governor Rick Perry said, a Ponzi scheme, although considering the size and scope of the fraud, I’m not sure that’s fair to Charles Ponzi. He was a piker, compared to the politicians who told us Social Security was insurance.
The issue is not whether Social Security is a Ponzi scheme, but how to stop the theft from today’s young people and give them a free market program that is truly self-funding and will allow them to get a better return on the funds they contribute. Let’s be fair to those who created Social Security. While some voted for the socialist plan with good intentions, those in leadership knew from the start that it wasn’t about retirement security, it was about gaining political power and control over the lives of Americans. It was about the redistribution of income. It was never insurance and they knew it. Social Security was a fraud from the very beginning. How do you say “Obamacare?”
We can’t, of course, tamper with the benefits being paid to those already on Social Security, nor with the benefits to be paid to those about to retire, but we do have a moral and ethical responsibility to give the young people of today a better free market option that does not include political power being invested in a few power hungry politicians and bureaucrats.
The 401(k) program has been a huge benefit to the workers of today and will, in most cases, provide retirement income four to five times that provided by Social Security. While I favor phasing out Social Security in favor of more 401(k) and IRA type programs, I’d certainly go along with changing the current program to one in which workers establish personal retirement accounts that they own and that they direct investments from. This would be a big step toward personal responsibility, less government and thus more individual freedom.
If we are to remain true to the vision of the Founders of this great Republic, we must look at all government laws and programs through the eyes of maximizing personal freedom and personal decision making. Washington, D.C. does not have a monopoly on intelligence and certainly not on wisdom. In fact, it’s too often an intellectual swamp compared to the common sense approach of the average American who lives within his or her means.
Let’s drain the swamp, shrink government, and thus maximize freedom and prosperity for all Americans.