Social Insecurity

When Social Security was set up in 1935, a trust fund was set up to keep the money collected in taxes, so it could be returned with interest to the taxpayer when he or she retired. This is called a "fully funded" system, one in which the full amount of money promised for the future is kept in a fund drawing interest.

But it took the politicians only four years to change the rules. After all, you can't expect them to keep their hands off a large sum of money. So in 1939 Social Security was transformed into a "pay as you go" system, one in which the amounts paid to beneficiaries come from the taxes collect the same year.

The Social Security tax you pay isn't put aside as a nest egg for you. It is paid out to others older than you. The money your grandmother receives from Social Security comes from your paycheck. And if you receive anything from Social Security, even if you've been paying into it for 40 years, what you get will be taken from the pay checks of younger people.

This is what is known as a Ponzi scheme.

Ponzi scheme are named after Charles Ponzi who set up a similar plan in Boston in 1920. He promised to pay investors 50% profit on their money in just 45 days. Gullible people poured money into his plan. But he couldn't possibly earn enough on the money to deliver the rate of return he promised. So when someone wanted to withdraw his principal and interest, Ponzi simply paid him from money's received from new investors. Eventually Ponzi couldn't meet the demands for repayment, and his scheme collapsed. He ended up going to jail for three and a half years.

Social Security is a Ponzi scheme pure and simple. However it differs from a private Ponzi scheme in two ways: [1] The government can't go to jail and [2] The government can change the rules at any time to keep the scheme going. In fact the rules are changed almost yearly, the tax rate is increased about once every three years. The amount of your wages that can be taxed has risen twenty times over?from an original maximum of $3000 in 1935 to $87,900 in 2004. And the benefit schedules are changed frequently. In short the government does whatever it needs to by a little more time for the system.

For those of you doing the math, the amount of your wages that can be taxed rose 2930% from 1935 to 2004.

But the game is getting tougher, life expectancies are rising, a larger and larger share of the population is retiring. Which means each working person is supporting more and more people who are collecting, not to mention the continual pressure on politicians to sweeten the benefits.

This in turn leads to a Social Security crisis every few years. Each time, it becomes apparent that at current rates of taxation and benefits, the system will be insolvent within a few years. To fix this, a bipartisan commission is appointed, some reforms are enacted, and Social Security is pronounced completely safe and secure for another 50 years. However, time seems to go by real quick in the political world. The 50 years only seem to last 4 or five years?until it becomes apparent again that the current rates of taxation and benefits, the system will be insolvent within a few years. So another bipartisan commission is appointed, some reforms are enacted, and Social Security is pronounced completely safe and secure for another 50 years. But then four or five years latter?well you get the point.

Of course part of the fix always is to raise taxes. The SSA tax rate has risen seven times since Social Security's founding in 1935. Today your employer must deduct 7.65% from your paycheck in addition your employer has to match that dollar for dollar.

Most people think Congress would never renege on its promises to Social Security recipients, no matter how bad federal finances become. But when the only alternative is to raise the Social Security tax rate to 35% or 40%, or to cut off food stamps to the poor, there may be no choice but to cut Social Security benefits. The politicians who were so hot to share the wealth will soon ask you to share the pain, at a time in your life when you may not have the option to go back to work and make up the difference.

Like I said before, Social Security started with the most laudable of intentions, but where we are at today, it is a nightmarish hell and every few years there is another Social Security crisis. Many polls show that most people today believe their children will endure a lower standard of living ?unlike past generations, which expected continual improvement. In 1995 a survey by Republican pollster Frank Luntz found that 78% believe it will be more difficult for the next generation to achieve the American Dream.

Now before anyone starts pointing fingers at the Republicans, they are not really at fault for the current mess. From 1935 to the mid 90's, the Democrats have been in more or less control of congress. And by Constitutional law, only the House of Representatives can make the budget of the United States of America. I am not saying that the Republicans are any better, what I am saying is that the fault lies primarily with the Democrats for the mess that Social Security is in.