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Social Security is a Ponzi Scheme

July 22, 2012

I am sure many of you have heard many times over already the phrase “Ponzi scheme” used on the news in the past two years. I bet some of you if not many of you are probably afraid to admit that you are not sure what that is. After all, when everyone is throwing around a brand new phrase as if its always been around, who is going to be the first one with the courage to ask, “what is a Ponzi scheme?” Also, the answer you get from the average person may be of no help as people rush to offer a soundbyte of information that only serves to show how little they themselves actually know of the new phrase. I myself was one of those people who was afraid to ask, but because I am an avid reader, I learned what a Ponzi scheme is and now I would like to take you the reader out of your misery and enlighten you and you dont even have to admit that you learned it here first.

So what is a Ponzi scheme? Named after Carlos Ponzi who was an Italian immigrant who couldnt or didnt want to hold down a job, came across a clever way to make money. During his day, the postal service sold coupons that could be redeem for postage. You could mail a letter to your sister in Switzerland and  you would stick in the envelope a coupon that she could redeem for the postage necessary to write you back.

These coupons often sold for less than the cost of the postage, and so Ponzi could have agents buy, for instance, Swiss coupons or French coupons in bulk when they were relatively cheap to postage, and then sell them in those countries for a markup. This was a guaranteed profit, on a small scale. But this wasnt the scheme.

Ponzi lined up investors in his business. If he was making 50 percent return for his money, he promised he could do it with your money, too! Millions of dollars poured into Ponzi’s fail-safe investment plan. But Ponzi wasnt investing the money in postal coupons because there were only a few thousand postal coupons in existence and much like Goldman Sachs who has a derivatives exposure of $44.192 trillion which is more money than exists on the planet, Ponzi’s investment portfolio far exceeded the value of every postal coupon on the planet as well.

Ponzi, was simply taking investors’ money and not investing it, which should lead people to question investment firms like Goldman Sachs and Bank of America who has a derivatives exposure of $50.135 trillion. How can they have an investment portfolio of money that doesnt even exist? When it came time to pay off the early investors, Ponzi tried to convince them to reinvest. If they didnt want to reinvest, but demanded their payout, he paid them, but not from any investment earnings, but simply from the money he had taken from later investors.

Needless to say Ponzi got filthy rich but sooner or later a Barron’s report raised serious questions about his investments and as more and more people starting asking for their returns, which of course Ponzi did not have, the government got involved and Ponzi went to jail. So there you have it, thats a Ponzi scheme.

However, in the case of big banks such as Goldman Sachs, Bank of America, Citibank with a derivatives exposure of $52.102 trillion and Social Security, these institutions will not be shut down and its owners and managers end up in jail because they have the protection of the government, but make no mistake the banks are engaged in Ponzi schemes and Social Security is a Ponzi scheme.

In fact, during the Great Depression, people lost faith in banks and made a run for them, meaning hundreds of people wanted they deposits back and of course the banks could not deliver because they didnt have it, the money had been invested and reinvested three times over.

So we have the same situation with Social Security and make no mistake it is a Ponzi scheme because there is currently no money in Social Security for those of us who are currently paying into it and  we will face this reality in the next 20 years or so.

The idea of Social Security as a self-funding, reliable source of retirement security is a joke. Social Security taxes no longer cover Social Security benefits. In 2011, benefits were expected to be $733 billion, while taxes were estimated at $637 billion (Congressional Budget Office, 2011). And guess what, if you read this and decide you dont want any part of it, you are out of luck because paying into Social Security is not an option. For every year from now until the end of time, Social Security is projected to pay out more than it takes in and if you are considering suing the government its already been tried.

The First Circuit Court of 1937 upheld Social Security as unconstitutional  and this was supported in case-law after case-law until the Supreme Court found a way to overturn the decision without addressing the key issues at hand. Is this a tax or is this a benefit centered on the general welfare clause of the Constitution? Well, the Supreme Court under Roosevelt resolved all this by amending the Constitution by judicial decree. In other words, the Supreme Court repealed the Tenth Amendment stating the government has the ability to redefine the meaning of general welfare to suit its fancy.

The thing is this, if Social Security is a savings plan, why dont I own and have access to the money? If its an insurance plan, why am I not legally entitled to the benefits?

Things are just going to get worse for the Social Security program. As unemployment continues to grow and as much as this scares me to think about it, it will continue to grow, there will be fewer workers paying in. With jobs hard to find and wages stagnant, people are retiring earlier than they otherwise would.

Demographics are also driving Social Security toward insolvency. After World War II North America enjoyed a baby boom, but those baby boomers didnt have as many kids. The result, as the Social Security Administration puts it: “After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.”

In 1950, there were 35 million workers paying Social Security taxes and 220,000 retirees collecting it, a 159.4 to 1 ratio. Now, with baby boomers retiring and job growth near zero, that ratio has begun plummeting.

In 2010, the number of beneficiaries grew by 1.5 million, while the number of workers grew by 700,000. From 2000 to 2010, the number of recipients grew by 18.2 percent, while the number of payers grew by less than one percent. This trend is only going to accelerate. By 2031, SSA forecasts there will be one Social Security retiree for every 2.1 workers. This is unsustainable.


From → Economics

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