Thursday, September 15, 2011

Ponzi, schmonzi.....

There has been much talk recently of Ponzi schemes, and Social Security, and entitlements and the impact all these things have on the country’s finances and future liabilities.

Well…with so much confusion out there, I am going to try to shed some real light on what is actually going on.

Let’s start by looking at what a Ponzi scheme. In simple terms, I would be running a Ponzi scheme if:-
-         I induced you to invest in my venture by making promises of rapid large returns on your investment
-         I used your money to pay my living expenses, buy extra cars, sail my yacht, build a big house, eat caviar and lobster etc etc
-         I used your money to invest in my own business which was not growing and could never grow as fast as the promised returns on your investment
-         I paid investors the promised returns by using the investment funds from later investors to meet my liabilities
-         The early investors got all their money back plus the promised return while the later investors received nothing when the scheme collapses
-         The scheme relies on continually finding more investors and larger investments to continually be able to pay earlier investors back
-         The scheme falls apart when I am unable to locate enough new investors and prior investors start demanding their money back

So, the big question is, is Social Security a Ponzi scheme?

Many people argue that SS is like an insurance policy for old age. You pay your premiums and if you live long enough, you get more back than you paid in.

This argument has absolutely no legs.

The US government has, on two separate occasions, argued before the Supreme Court, that Social Security is a TAX, not an insurance policy. Their arguments were accepted by the Supreme Court who has clearly stated that there is no expectation of a connection between the amount paid in to social security and the amount one would expect to receive, over time, in SS payments.

It is very clear that the contributions that are forcefully taken from your pay check, and the contributions that are forcefully taken from your employer, are not in way similar to an insurance premium. They are taxes pure and simple.

The next argument that I frequently hear, is that SS is NOT an entitlement since we have all paid into it, and we are getting back our money, with interest.

Again, not true. See my argument above. What is taken from your pay check and your employer is nothing other than a tax. The government knows it and for 70 years , the American people have been paying a tax they thought was something different.

This is the greatest deception ever contrived by the big spenders in Washington. They were able to increase the tax rate by ….oooh….around 12% or so (your contribution and your employers contribution) with nary a word about taxation. Everybody thinks it is great to pay now and receive later….boy, did we buy a bill of goods!

Yes, I know that the SS contributions stop at a certain income level….but that doesn’t change the fact that this is a tax, and not your money.

Now, it gets interesting.

Initially, the contributions taken forcefully from your pay check were combined with the contributions taken forcefully from your employer, and were placed in some sort of SS Administration fund. The theory was that this would build up and provide the funding needed to meet the promises made by the government when they took your money in the first place.

But here’s something you don’t know!

Governments lie.

The funds in the SS Administration lock box, were seen by the government as taxation income, and so could be used by the government for whatever purpose it desired. It did not even have to consider what should be put aside for future SS payments since it was under NO LEGAL REQUIREMENT TO MAKE ANY PAYMENTS, as already determined by the Supreme Court when it stated that there was no connection between SS contributions and the expectation of a future annuity.

So, the government used that money. To make it look good, the government wrote IOU’s to the SS Administration (which is the same as me writing an IOU to myself – and worth absolutely nothing!!)

Now back to my earlier question…is SS a Ponzi scheme?

The technical answer to that is no, it is not. It is simply a tax that has been applied to your income, and to your employer. With no connection between the tax and the eventual annuity payment from SS when you are retired, there can be no Ponzi scheme.

I am 100% sure that the SS Administration and the entire government are thrilled every time someone like Rick Perry brings up the whole SS is a Ponzi scheme argument…why? Because it draws attention away from the fact that it is a tax, and promotes discussion about the insurance policy, our money and Ponzi type attributes.

Have you heard anyone EVER telling you it is a tax and has nothing to do with what the government provides in your old age? If you doubt what I say, 5 minutes of research on SS and Supreme Court and taxes will support what I say.

In a decision in 1937 upholding the Social Security Act, the Supreme Court confirmed what anyone who read the law would already have discovered: Payroll taxes weren’t held by the government solely for the benefit for retirees. On the contrary: Social Security taxes “are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.’’.

Likewise, for all the talk of Social Security as an “entitlement,’’ retirees have no ironclad right to that monthly check. “Congress can change the rules whenever it wants to”, the Social Security Administration’s website acknowledges. “Benefits which are granted at one time can be withdrawn.’’ That too was explicit in the law FDR signed in 1935. There are no “accrued property rights’’ in the Social Security system, the Supreme Court ruled in 1960. Payroll taxes withheld from your wages today don’t confer on you a contractual right to benefits when you retire tomorrow.

So how was this absurdity ever created?

By appealing to the baser instincts of people. The Great Depression left people in fear…they feared for their future, they feared for their ability to survive in old age. While there was some small confidence that the depression would one day end, the fear of survival in retirement was real.

So, FDR did what most politicians do. He lied. He told people that if they paid a SS contribution today, they would get guaranteed security in retirement. Even though he KNEW without doubt that this was just a way of getting more tax revenues during the depression.

He also knew that as the economy recovered, and more people would be back at work, SS receipts would increase and easily cover the payouts for those retiring. (Sounds like a Ponzi scheme to me!)

Futhermore, the earlier retirees received returns of thousands of % on their contributions….some paid in just $22 or so, and received $22,000 in retirement. (Again, it does not take long to research this.)

Todays retirees do not get anything like that return. Why?

Because while this s taxation and cannot therefore be a Ponzi scheme, the whole SS Administration operates following the precise formula of a Ponzi scheme.

So…is it a Ponzi scheme?

For all intents and purposes it operates as a Ponzi scheme…but the reality is that it is simply another form of taxation and your contributions do not guarantee any right to benefits later on.


Which makes Social Security the very thing that people argue it is not…an entitlement program.

So, what is the alternative?

Since SS is already an unconstitutional tax that has been approved by the SCOTUS, I suggest it be used as the way to solve the problem.

In Australia there is a system that requires every employee and employer to put a % of their income into a private, non-government retirement account. The employee has control and choice over the fund, the investment risk etc. The money in the account and the returns generated by the fund are not available until the employee reaches age 55 AND is permanently retired from the workforce. Should the employee die, the fund ownership forms part of his estate.

In other words, he is forced to invest but he owns the investment.

This would be found to be unconstitutional in USA even under the commerce clause in the same way that the mandate in Obamacare is unconstitutional, so this system would not replace the current SS system.

However, what if new legislation was passed that made it optional for employees and employers to invest in this type of fund, and that for every dollar invested there was a corresponding dollar reduction in the amount of tax for SS?

Do you think people would suddenly start investing in their own future and start abandoning SS in droves? I think so…and it requires very little legislative work to set up. At the same time, government could make assurances that people over 55 would receive the benefits they expect, although nobody would actually believe that.

I do not think it would be long before younger people were investing themselves and opting out of SS.  It would also very quickly expose the SS Administration pPonzi scheme and force the government to either cover existing recipients or make a lie out of the good faith of the US government .

Is Social Security an entitlement program? Absolutely!

Is it run as a Ponzi scheme? Absolutely!

Can it be fixed? Yes, it can!

But to do so needs a reality check that it is actually nothing more than a tax and the government has no responsibility to make ANY payments in your retirement.

It is time for the Country to know the truth…and stop believing what is nice and fuzzy to believe.


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