Wednesday, September 21, 2011

Social Security: A Ponzi scheme that must be saved

When Rick Perry referred to Social Security as a "Ponzi scheme," he was right on. As Charles Krauthammer explains in the New York Daily News, in a Ponzi scheme, investors eventually get their money back with interest--but what they get back consists entirely of money put in by later investors. Eventually, the scheme runs out of investors and collapses, and everyone remaining in the system loses everything.

In Social Security, the same thing happens. A 75-year-old beneficiary is not getting her money back--that money went to pay someone who retired years ago. Instead, she is getting the money that is paid into the system by current workers. It works exactly like a Ponzi scheme.

The difference, of course, is that people are required by law to invest in Social Security. Thus it is assured that the system will never completely run out of investors, which is why Social Security has not collapsed. The thing is, even if it never completely runs out of investors, it will still fail if there aren't enough people paying into the system to support the current beneficiaries.

Fixing it, however, is not hard to do according to Krauthammer:

"Three easy steps: Change the cost-of-living measure, means test for richer recipients and, most important, raise the retirement age. The current retirement age is an absurd anachronism. Bismarck arbitrarily chose 70 when he created social insurance in 1889. Clever guy: Life expectancy at the time was under 50.

When Franklin Roosevelt created Social Security, choosing 65 as the eligibility age, life expectancy was 62. Today it is almost 80. FDR wanted to prevent the aged few from suffering destitution in their last remaining years. Social Security was not meant to provide two decades of greens fees for baby boomers.

Of course it's a Ponzi scheme. So what? It's also the most vital, humane and fixable of all social programs."

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