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Is Social Security a Ponzi scheme? | Smith Investment Management

Is Social Security a Ponzi scheme?

September 12, 2011 by  

A def­i­n­i­tion of Ponzi scheme is…a fraud­u­lent invest­ment oper­a­tion that pays returns to sep­a­rate investors, not from any actual profit earned by the orga­ni­za­tion, but from their own money or money paid by sub­se­quent investors.

Social Secu­rity fits that def­i­n­i­tion per­fectly other that it a gov­ern­ment pro­gram where leg­is­la­tion passed the House and Sen­ate and was signed into Law by FDR…so it is not a fraud­u­lent invest­ment oper­a­tion.  But…it cer­tainly matches the rest of the def­i­n­i­tion…pays returns to sep­a­rate investors, not from any actual profit earned by the orga­ni­za­tion, but from their own money or money paid by sub­se­quent investors.

Social Secu­rity has Unfunded Promises of 15.2 Tril­lion Dol­lars. That num­ber reflects the cost in today’s dol­lars of pro­vid­ing ben­e­fits, above and beyond what cur­rent taxes will cover.  In other words…the Gov­ern­ment needs to set aside 15.2 Tril­lion Dol­lars in an inter­est bear­ing account to pay promised Social Secu­rity ben­e­fits, in addi­tion to col­lect­ing the exist­ing Social Secu­rity Tax at its cur­rent rate.

The US Trea­sury (IRS)  took in just over 2 Tril­lion Dol­lars last year. So…if the Trea­sury had just one bill to pay for the next 7 years it might be able to make up this short­fall.  With the US Trea­sury bor­row­ing 40 cents out of every dol­lar it spends it will not be mak­ing any spe­cial con­tri­bu­tions very soon. I read one report that said if full retire­ment age is increased to 72 or 73 from the cur­rent full retire­ment age of 67 (for baby boomers). And if a cap is put on infla­tion adjusted ben­e­fits and some are means tested out of benefits…Social Secu­rity is sus­tain­able at cur­rent tax lev­els. That would be an explicit default on promises made to mil­lions of people.

Social Secu­rity will be paid “pen­nies on the dol­lar”, through explicit default…or with “dol­lars worth pen­nies” through implicit default – which is print­ing a bunch more money.  Gotta cover that 15.2 Tril­lion some­how. Unfor­tu­nately that is the good news…the bad news is that Medicare and Pre­scrip­tion Drug are in the hole 100.1 Tril­lion.

So…is Social Secu­rity a Ponzi Scheme? No. But we do need to make up a new term…the “GONZI SCHEME”. A GONZI SCHEME is a Gov­ern­ment Invest­ment Oper­a­tion that pays returns to sep­a­rate tax­pay­ers, not from any actual profit earned by the Gov­ern­ment Invest­ment, but from Gov­ern­ments freshly printed money or money paid by sub­se­quent tax pay­ers.  Ponzi schemes do not end well, nei­ther will our GONZI SCHEME. In due course the like­li­hood of a finan­cial con­vul­sion is high.

Bot­tom Line: So what does this mean to investors? We need to order our invest­ments to sur­vive and hope­fully thrive despite the dif­fi­cul­ties com­ing in due course. I think we have some real abil­ity to help many investors in this area. Call or email us to see if we can help you.

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