Aug 26, 2014 Posted by AGA Editor

Is Social Security is a Ponzi scheme?

Let’s take a look at the at the facts and then you decide if Social Security is a Ponzi scheme.

First, understand that Social Security coerces us through force to be a part of it. Since SS began in 1935 the full force of the U.S. government has compelled all it’s citizens to suffer by it, such that we all do so now. It’s not voluntary by an means. Does any business use force to get you to use their services? Think about it.

Let’s think about this while you’re at it. You invest in a program that uses threats and force to get you to participate, you have no clue (nor will they tell you) how your investment is being made, you have no idea what fees you are going to incur over the life of the investment, and you have no idea what the rate of return you can expect on your investment. Does that sound about right?

Are we crazy?

To better understand Social Security as an investment, one should look at the workings of private sector annuities, pensions, trusts, and similar investment options. In such cases purely voluntary investments are written and enforced by courts; clients pay money into the investments, the fiduciary invests and grows it, and over time pays back funds with a gain to clients. Of course, results depend on the investment, but the integrity, safety and soundness of this private contract-based system fosters saving, investment and prosperity. If fiduciaries or trustees violate contracts in any way they can be sued, fined and jailed.

A Ponzi scheme, like Bernie Madoff’s scheme, is an operation that pays alleged “investment returns” to clients from the clients’ own paid-in funds and with payments by subsequent clients, rather than from investments in productive assets or securities. The scheme entices new entrants by false promises of returns that are unrealistically high, ever-rising, or even abnormally-stable, all of which require ever increasing inflows and hordes of additional dupes, to keep all the scheme going. Unless the scheme keeps growing and spreading, in time it must collapse, as the outflows swamp inflows; the game halts when claims exceed the cash.

In other words: A Ponzi scheme is generally a system in which investors think they’re investing in something real but are instead being used to pay one another back. Eventually, the scheme runs out of new investors and collapses.

Here’s how the Social Security Administration — which by the way, has a whole web page explaining why its not a Ponzi scheme — describes Social Security: “It would be most accurate to describe Social Security as a transfer payment–transferring income from the generation of workers to the generation of retirees–with the promise that when current workers retire, there will be another generation of workers behind them who will be the source of their Social Security retirement payments.”

Both Social Security (since 1935) and it sister program, Medicare (since 1965) have been insolvent for years, as is typical of a Ponzi scheme, and despite the increases in the tax rates they inflict and the number of people they force to pay into them via automatic paycheck deductions. FICA and Medicare tax rates, combined (and also for employers and employers, together), increased steadily from just 2.25% of pay between 1935 and 1953 to 4.50% by 1960, 6.90% by 1970, 8.10% by 1980, and 15.3% by 1990 (where it now stands). Meanwhile the income on which these higher tax rates apply has been repeatedly increased.

One might expect our Government to establish a “trust” fund, invest it productively, and pay higher benefits. This is not so. In the 1960s Congress and Treasury began raiding the Social Security fund while leaving behind an ever-rising pile of non-tradable Treasury bonds (now worth $2.6 trillion).

If any private fiduciary were to raid your investments or unilaterally alter the terms of your annuity or pension, against your well-being, he’d be prosecuted, fined and jailed, and a civil action for restitution would be filed to retrieve your assets. But you can’t sue the Social Security Administration and you don’t even own the assets it has taken from you over the years.

Social Security is already revealing the cracks. Social Security is broken. To float the system, it robs from the young and redistributes wealth to the old. It’s time to restore some generational equity. That includes giving greater freedom over retirement and savings decisions to workers, instead of saddling them with government forced control and ever increasing taxes.

Some of us are already being forced to confront the fact that Social Security will not be there for us.

It’s not that far fetched that Social Security is a Ponzi Scheme. In fact, it could go down as the most successful Ponzi scheme in the history of the world.

Are you awake Yet?