Social Security: America’s 75 year old chain letter

The Social Security program turned 75 years old on August 14th and the political class and their allies in the media, academia and the business world toasted the event extolling the virtues of America’s longest and largest chain letter. Make no mistake about it; Social Security is a chain letter.  Think of Social Security as Bernie Madoff on steroids.

While Bernie Madoff is in effect serving a life sentence for conducting a $50 billion Ponzi scheme, Social Security’s Ponzi scheme is worshiped by politicians across the political spectrum as a federal program that “works.”  If Bernie Madoff could have legally coerced an unending stream of new investors to join his Ponzi scheme, he could have been in business indefinitely.

Social Security ‘works” because the federal government has the power to force workers to pay into a system that is unsustainable.  Social Security is unsustainable because it is not invested in real assets—stocks, corporate bonds, real estate, etc.   Social Security has invested its surpluses in U.S. Treasury securities for the past 75 years.  In other words, Social Security is another way the federal government finances its budget deficits.  FDR was clever enough to figure this out when he created Social Security.

In addition, SS has become the only or major retirement income for tens of millions of Americas.  SS has become America’s seniors “crack cocaine.”  Most seniors could not live without their monthly SS checks because they were not able to use the money that Social Security expropriated from them to create a portfolio of assets that would have provided the capital to invigorate the private sector—the economy’s engine of growth and job creation—and provided them with a better return than their Social Security benefits.

Although Social Security is sending checks to tens of millions of Americans every month, there is a fiscal nightmare on the horizon.  Even SS’s trustees admit it in its latest annual report to Congress: “The combined assets of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds will be exhausted in 2037, the same as projected last year.  The Trustees also project that program costs will exceed tax revenues in 2010 and 2011, be less than tax revenues in 2012 through 2014, and then permanently exceed tax revenues beginning 2015, one year earlier than estimated in last year’s report.”

Unless Social Security taxes are increased markedly or benefits reduced substantially, or the retirement age raised, or some combination of the three alternatives, it will go belly up in less than thirty years.   How anyone can assert SS ‘works” in light of SS’s financial shortcomings, is the height of irresponsibility.

What is the solution?  I spell it all out in my 1995 book, Tax Free 2000, which is still available on www.amazon.com.  I outline how to phase out Social Security over the next several decades so current retirees and soon to be retirees are paid off.  In the meantime, young workers would have to create super 401(k) plans to fund their personal retirement accounts instead of depending on Social Security’s chain letter for their retirement.

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