Monday, May 11, 2009

The Biggest Ponzi Scheme Yet

Ponzi schemes have been in the news a lot lately. Bernie Madoff tends to grace the front page of some newspaper daily. America is justifiably in an uproar over the discovery of numerous frauds. However, there is one Ponzi scheme that has thus far been overlooked. This scheme has been running for over seventy years and affects every single American. It is none other than Social Security.

The Securities Exchange Commission defines a Ponzi scheme as a system where “money from new investors is used to pay off earlier investors until the whole scheme collapses.” (See When FDR created Social Security its aim was to immediately help the needy. The plan was (and is) funded by the younger generation, who would theoretically be funded in their old age by their children. Just like a Ponzi scheme, this requires an ever expanding base of funders. As old age lengthens and populations grow the ‘return to the investor’ needed to be larger and larger. This requires a continuous input of new payers into the system.

This worked for a while, as the population expanded; but as everyone now recognizes the post-baby boom generation is much smaller. Just like the Ponzi schemes of Madoff, Social Security is destined to collapse as new ‘investors’ are hard to come by.

To some degree, it is ironic that the government is so critical of Ponzi schemes on Wall Street while operating their own scheme. The fact, however, is that the collapse of Wall Street’s schemes hurt far fewer people than will the inevitable collapse of Social Security. Proponents in favor of an increased role for government in the economy need only look to this scheme to see the folly of expanded government.

As everyone knows, Social Security must be fixed. While American confidence with the business world is at an extreme low, there is no reason that we should put anymore faith in the government to manage our futures. At this rate, I will be very surprised if I receive any money from Social Security upon my retirement.

The fact of the matter is that we must switch from the pay-as-you-go system that we currently have to one based on investment. Democrats are hesitant to give individuals greater control over the Social Security investments because it would put a damper on wealth redistribution. Social Security serves as a prime way to take money from the wealthy and give to the poor. Seemingly, the vested interests in the current system are afraid of losing this mechanism. They prefer to maintain a broken status quo, rather than give each American the power to save for his or her own future. The government has to let ordinary Americans take retirement savings into their own hands. The wrecked paternalism of Social Security must be replaced with individual initiative coupled with government support and education. This is the only way to avoid a Ponzi scheme collapse of epic proportions.

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