Some of our 2012 Republican candidates and others have called Social Security a Ponzi Scheme, but technically it is not. A Ponzi Scheme intent is to funnel money to the top dishonest people who started the scheme. While Social Security is somewhat pyramidal, the people benefiting from it are not the instigators.
Social Security is really a transfer of payments. The existing workers pay for the current people receiving benefits. This worked fine as long as there were more payers than receivers. As the ratio has dropped from 4 or more payers to two payers for each receiver the fiscal possibility of this continuing is becoming doubtful. Especially since there is an automatic cost of living rise for the receivers but not for the payers. In the 1930’s the life expectancy was much lower than it is now so the receivers are receiving longer and getting more than they ever paid into the system.
In reality Social Security is a welfare scheme that was conceived back in the depression to get people to accept it by NOT calling it welfare. But once you receive more than you paid into the system then it becomes welfare. It was disguised as a retirement plan and it partly is a retirement plan. The line item on pay stubs was FICA – Federal Insurace Contributions Act. It certainly was not insurance in the form of say an annunity that an insurance company would pay.
Initially excess money went into the treasury and was not really seen as an investment. Later on when politicians realized it was in trouble in the late 70’s they created the Social Security Trust Fund. So now it really looked like a retirement plan if you did not dig too closely. It is “invested” in Special Treasury Notes (A bit better than IOU’s but not much).
But is a real retirement plan invested only in bonds and only government bonds? Of course not, a real investment plan must be diversified. You need bonds from private businesses, municipalities (local governments), and some US Government treasuries, plus cash, plus stocks.
If you buy an annunity, the insurance company goes out and invests that money in a variety of places. If you put money in the bank the bank loans the money to a variety of other people and businesses to make a profit and pay you interest. The Social Security Administration is not a real bank. It cannot reloan the money it can only spend it in the current year and pay back the future interest and principal with future taxes. So those paying taxes pay for those receiving Social Security benefits.
Privatizing Social Security was one of the smartest things George W Bush proposed to do – but he chose to invade Iraq instead. So we are in one hell of a mess here. How do we get out of this mess. Well let’s leave that to a future post.
In the meantime peruse http://www.ssa.gov/
Thoughts on sinking and swimming and pads of butter. 