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Social Security - A Ponzi Scheme
The Lawrence Journal-World recently published an editorial, "National Divide," linked to President Obama's economy speech given at Georgetown University. The forum users at one point began a sidebar discussion of Social Security.
An astute user, Did_I_say_that, made the comparison of Social Security to a Ponzi Scheme. Is there a legitimate comparison of Social Security to a Ponzi scheme? Let's take a look at the Security and Exchange Commission's (SEC) definition and signs of a Ponzi scheme from their Ponzi Scheme - Frequently Asked Questions page.
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
With only minor changes the above description of a Ponzi scheme can be adapted as a description of Social Security.
"Social Security is an investment that involves the payment of returns to existing investors from funds contributed by new investors. The SSA solicits new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. Social Security attracts new money to make promised payments to earlier-stage investors to use for personal expenses."
With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.
Although there is a continuous supply of new "investors" into Social Security, the second reason for collapse - "when a large number of investors ask to cash out" - is occurring now. Baby Boomers are now starting to draw Social Security and the raw number threatens to overwhelm an already strained system.
According to the SEC, "Many Ponzi schemes share common characteristics." Here are some of the warning signs:
High investment returns with little or no risk.
Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
Some of the first "investors" in Social Security, those retiring in 1960 and having paid in for nearly 23 years, would have made life time contributions of $17,600 (single male, 2010 dollars). This same group experienced individual lifetime payouts of approximately $125,000. The differential has slowly been shrinking. A person retiring in 2010 may only collect $417,000 for his $345,000 contribution. Additional comparisons of individuals and couples may be found in the Urban Institute report, Social Security and Medicare Taxes and Benefits Over a Lifetime.
Overly consistent returns.
Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
Unlike private retirement programs and investments, Social Security has always provided consistent and typically increased benefits. Prior to 1950 this was accomplished irregularly via legislation. However, in 1950 Social Security recipients were given a 77% increase in benefits and have had a Cost Of Living Allowance (increase) every year since then, with the exception of 2009 and 2010.
Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Funds collected from employees and employers for Social security are accounted for in the Social Security Trust Fund. Well, kind of, that is. Actually, anything over and above what is actually budgeted to be spent is put in the trust fund. The trust fund, not subject to SEC regulations, loans money to the Federal government at a conservative interest rate.
Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
Needless to say (yet, I find the need to say it), the government always exempts itself from its own regulations. There is no license to "sell" Social Security ... unless it is a license to steal.
Secretive and/or complex strategies.
Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
Issues with paperwork.
Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
Issues with paperwork? See above list of Social Security Publications.
Difficulty receiving payments.
Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.
Although there are some examples of late payments, and a few times that all payments were delayed, Social Security has been consistent in its payments to recipients. However, as every senior citizen can tell you, Social Security is constantly held hostage by Congress and payments are continuously the subject of threats. Normally, the threat comes as a warning from the minority party, "They want to cut Social Security and starve grandma." Congress, regardless of party, should not have the power to threaten grandma.
Social Security promises a higher dollar payout for deferring (roll over) retirement.
The Last Word
So, is Social Security a Ponzi scheme that is doomed to crumble in upon itself and leave millions of Americans without promised benefits? A Ponzi scheme? The Social Security Administration states that it has "nothing in common with Ponzi schemes." Imagine that! Doomed to crumble in upon itself as it pays out more than it receives? You bet your sweet bippy!
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