How would you react if Sam, your financial advisor, came to you with a strained smile stretched across his chubby cheeks and said, “Remember that money you asked me to invest?”—you had invested $100,000 with him to build your retirement—“Well, umm…I don’t have it anymore. I gave it to someone else to make good on a promise.”
You almost lunge for him but for his placating hand gestures. “But it’s all under control,” he insists. “All I need from you is a couple hundred thousand more to make good on another promise. I am a man of my word, after all. That’s why you can trust me. I promise that I’ll pay you back, with interest of course.”
No doubt you refuse his demands, file a lawsuit for fraud and report him to the authorities, probably landing him behind bars to share the fate of Bernard Madoff and Charles Ponzi who gave name to his scheme. Your anger is justified. Even with the lawsuit, you never actually recover all of your money. Sam was running a pyramid scheme—taking money from one person to fund the “investment” of the first, and then taking money from another to fund the investment of the second, and so on—which meant there were many others duped by Sam, leaving not enough money to go around.
But relax. What has actually happened to you is far, far worse. Your retirement financial advisor is not your buddy Sam; he is your Uncle Sam, and the program is called Social Security. Our collective investment in Social Security isn’t just a few hundred thousand dollars; it’s trillions. Your money is not being used to fund your own retirement; it is being used to fund someone else’s. Worst of all, there is no refusing Uncle Sam’s benefaction. It’s a Ponzi scheme with a gun to your head.
Recent events do not inspire confidence that the pyramid will survive long enough for us to collect. Uncle Sam is now asking us to give him more money. He wants to raise the federal government’s debt ceiling to avoid a default and keep this charade going. Just last year Congress raised the debt ceiling from the already high $12.4 trillion to a whopping $14.3 trillion. Now we are bumping against the ceiling again, with debt approaching nearly 100% of 2010 GDP.
Congress is in the midst of debating another increase to the debt ceiling and will need to reach a decision soon. If the debt ceiling is raised, the pyramid scheme becomes another generation’s problem. If the debt ceiling is not raised, then the pyramid scheme collapses and forces us to make hard decisions. These hard decisions have been foregone for too long. Leaving the debt ceiling in place is the right thing to do, so that Social Security, the financial pink elephant in the room, can finally be addressed. For better or worse, we have inherited this Ponzi scheme. The question now is whether we are going to continue to perpetuate it. Ours can be the principled generation that finally says no.
Rather than forcing everyone to keep and lose a large portion of their retirement money in a Ponzi scheme, we would all be much better off planning for our own retirements through private investment and insurance plans that follow transparent and legal accounting rules. When Texas allowed for such an opt out in 1980, the private plans generated benefits of nearly $7,000 per month compared to Social Security benefits of $1,300 per month for employees earning $50,000 per year. In fact, when Social Security benefits are compared against contributions, a male earning $95,000 per year and retiring in 2045 is estimated to lose over $200,000 by participating in the Social Security system, according to Joseph Fried in “Democrats and Republicans – Rhetoric and Reality.” There can be little question that private markets outperform Social Security.
The private markets also provide honest accounting and transparency that is lacking from Social Security. The Social Security Trust Fund is said to have a $2.5 trillion surplus. Except there is no surplus. “Surplus,” when used by the government, refers to money you give to Social Security that actually stays there to fund your retirement, as opposed to funding someone else’s. In ordinary parlance this isn’t called a surplus; it’s just called a regular funded account. But even the funds for your retirement are not really there. The federal government has borrowed your retirement funds to pay for its other expenditures and given you IOUs in exchange. Charles Ponzi would be proud to see the United States government utilizing multiple layers of his namesake.
The government has enough debt. The debt ceiling debate is our reality check. Rather than raising the debt ceiling, we should begin the long needed phase out of Social Security. The solution is not that complicated, but it does require sacrifice. By phasing out benefits and contributions based on number of years to retirement, we can ensure that seniors who have relied on social security still get most of the planned benefits and that younger people have more capital to plan for their own retirement with private options. Benefits and contributions would be higher for those near retirement and lower for those far away. Since the young would be paying less into the system than the seniors are collecting, it would require the government to cut spending elsewhere (which is probably a good thing in itself) to fund the wind down of Social Security. It will cost money. It will be unpopular. But it is the principled thing to do.
Cartoon reprinted with permission from www.coxandforkum.com