Monday, September 12, 2011

Social Security: A High Speed Train to Extinction

There are precious few politicians who want to tell the truth about Social Security. Those who try to are demonized for attacking the elderly and poor. You know, old people will have to choose between eating and filling their drug prescriptions. It is the stuff of political theater.

I believe Social Security on not the third rail in politics, rather it is a high speed train to extinction.

Rick Perry has written a book titled, "Fed Up!: Our Fight to Save America from Washington". In his book he calls Social Security a Ponze scheme.

Is Governor Perry right and if so what should we do about it?

The Securities and Exchange Commission (SEC) defines a Ponzi scheme as follows:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Why do Ponzi schemes collapse?

According to the SEC, "With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out."

The Wall Street Journal September 12th op-ed titled, "Perry, Romney and Social Security", points out, "[T]he Urban Institute estimate[s] that a two-earner couple both earning an average wage who retire in 2010 will get $906,000 in benefits having paid $588,000 in payroll taxes. The same couple who retires in 2030 will get $1.23 million (in constant dollars) while having paid $796,000."

Sounds like the definition of a government run Ponzi scheme, doesn't it?

The WSJ op-ed goes on to state, "Even a pyramid system such as this could be solvent if it took advantage of compound interest. But the overriding problem is that not a dime of the payroll contributions the government collects over a lifetime is saved and invested for a worker's retirement. Social Security's pay-as-you-go financing model means that 12.4% of all wages are transferred to current beneficiaries, the surplus dollars are spent by Congress on other things, and Social Security gets an IOU from the Treasury." [My emphasis]

Sounds like the reason Ponzi schemes collapse, doesn't it?

So what are the solutions? There are four potential solutions: 1) raise payroll taxes; 2) reduce benefits; 3) privatize the system; 4) some combination of 1,2 and 3.

As Florida Senator Marco Rubio points out, "There was no thought given into how this was going to be sustained. When Social Security first started, there was sixteen workers for every retiree. Today there are only three for every retiree and soon there will only be two for every retiree.” Additionally, when Social Security was established the retirement age far exceeded life expectency. That has changed dramatically with seniors living longer and healthier lives, a very good thing. However, this speeds up the Social Security train towards extinction.

Time to put the Social Security train on the right track. To do that politicians need to get off the third rail and get on board or be left behind. Estimates are that Social Security and its sub-programs of Medicare and Medicaid have unfunded liabilities in excess of $200 trillion.

A looming train wreck is inevitable unless and until the train has a new conductor. It appears that conductor is Rick Perry. 

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