Saturday, October 16, 2004

Ponzi Scheme Requires Social Security Reform

Recently elected with renewed vigor President Bush is talking about privatizing portions of Social security. We should stop and consider what he has to say before writing off this significant opportunity.

First, is it fair to characterize Social Security as a ponzi scheme? defines a 'ponzi scheme' as an investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones. Are our children, currently entering the workforce, reasonably assured their monies contributed guarantee a government pay out in the end? Or, have the earlier investors been paid off with funds raised from those who contributed later in the scheme? Did 'New Deal' architect FDR perpetrate a fraud on the American people?

In contrast America's employers would never be permitted to run a retirement plan the way the government runs Social Security. Actuarially it is unsound.

How much monthly income would our seasoned citizens now have if they were permitted to invest their contributions in the market? Currently they FICA tax is 15.3% with half paid by the employer and half paid by the employee.

By comparison the average American contributes only 5.3% and the employer contributes on average 2.9%to a 401k account (see link). Imagine how much wealthier all seasoned citizens would be - how much wealthier our country would be if the entire FICA tax was invested in a separate account for every American.

Some say the government can administer the program for less claiming the administrative cost is approximately 1% of assets. They cite that low fee as if no one can do it more cost effectively. For a comparison let's just look at the Vanguard S&P 500 Index fund where the asset management fee is only 25 basis points to cover administrative fees. This is an example of a no load fund, which means the stockbrokers make no fees or commissions.

For those who don't know, 25 basis points is 1/4 of 1% or three quarters of a percent less than what many claim is the administration fee for Social Security. Private industry can almost always do it less expensively than government, or do I need to remind everyone how much the military pays for hammers and toilet seats.

When it comes to running programs the government does not generally do us any favors - it never has and never will. Although they are very good at making us think otherwise. Conservatives understand this basic principle. The liberals are still struggling to get it.

Above all don't despair. Change is inevitable. It will take time and cost a ton of money to make the transition from government to private industry. That means it won't happen overnight and most of us over 40 will probably be stuck on the old system. Just relax and open your minds for the sake of your/our children.

Reference Link