Natty Chatter

With the recent news of Bernard Madoff and his great Ponzi scheme, it behoves me to mention one of the greatest Ponzi schemes that exists still for Americans today, Social Security program.

Now according to historical records, the Social Security act was drafted by President Roosevelt (Franklin not Theodore) as a part of the New Deal. The original goal of the act was to "encourage older workers to retire" and create jobs for the younger generation. Oddly enough, the earliest age which benefits could be collected, although it would be at a reduce rate, was 62.

Regardless, in the past few decades, several amendments have been passed affecting the system, but in general the overall plan remains the same. Those who are employed have payroll taxes collected into the system which then disburses it to those who are retired and quality for Social security. However, this system is dependent upon having more people pay into the system than those who are being paid out.

In a fashion, this requirement is very similar to a Ponzi scheme were early investors are paid off with the infusion of capital by later investors. And in order to pay the later investors, more investors are required. At some point, the disbursements will be greater than the collections and the scheme falls apart.

To relate the Ponzi scheme to social security consider that the Baby Boomers (those born during the post-World War II baby boom of 1946-1964) will reach full eligibility age at 2012 through 2031. However, this demographic could start collecting social security which puts the eligibility years at 2008 through 2026.

Now granted of the supposed 79 million people which belong to this demographic, not every one of them will be collecting social security. Whether it's due to an early death or maybe due to their sizable fortunes, they won't collect social security. But even so, if only say 60% collect, that would still be over 47 million people collecting social security. In terms of dollars, we start with the average annual "benefit" of Social security which the Social Security Administration estimates to be about $15,000 for the year 2008.

However even if we kept the assumption that the $15,000 would not increase (or decrease) in the years to come, that would calculate out to nearly $711 billion dollars required per year to pay all 47.4 million retirees. That is well over double the amount that our government just spent to "bailout" banks and various other institutions due to the instability of the market.

Now I realize that folks would comment that surely not each of the over 47 million retirees would be collecting at the same time. Surely a few of them would have passed on by the time all the retirees are eligible. But even then, let say that a roughly 30% of 47.4 million don't make it all the way to 2031, that would leave still leave over 33 million retirees with an annual cost of $497 billion dollars. And that's assuming that the annual benefit still remains at $15,000 for the year 2031 which would be closer to $21,000 assuming a 3% increase every other year. This increase would reflect an additional cost of $198 billion dollars per year.

What solutions are there to this monumental problem? First, our current government needs to address this issue today and not wait for the piper to come knocking. Next, legislation needs to decide on either(or both) increasing collections or postponing eligibility ages. Both are going to be
very unpopular but necessary to correct this Titanic before it hits its iceberg. Following that, there needs to be a correction within the system itself. Sure retirement would create more jobs by allowing the younger generation to fill jobs that are vacated by an older generation but its my opinion that a better health care system would be more enticing that a meager government check.

In fact, looking at the biggest expense for the elderly, health care ranks as the top cost. But that is for another blog entry.

-C