Is Social Security a Ponzi Scheme?

Topics: Social Security, Retirement, Bernard Madoff Pages: 7 (2286 words) Published: February 26, 2014
Is Social Security a Ponzi Scheme?
What if I told an individual that if they paid me a percentage of their money every two weeks, for let’s say 30 years, I would repay them increments of their money every month until they die. I would not save any of their money but instead I would solicit money from others and my new contributors will pay me for the portions that I owe them. To top it all off, this will be my only source of income, and I cannot make any guarantees to the repayments; however, I solemnly promise that they will receive their money. Would they really be interested in investing with me? At this point those individuals are most likely thinking I have heard of something like this; is this illegal? Nonetheless if it were in fact legal for me, a private citizen, to offer them this opportunity would they even invest? At this point they are most likely saying “No Way Jose!” and quite frankly, I do not blame them. This investment “opportunity” that I have described is better known as a Ponzi scheme, and it is illegal. However, there is an investment “opportunity” that is quite similar to one that I have previously described that every working citizen in the United States does contribute to (if not out of sheer desire to do so, then by obligation) and it is the Social Security Benefits Program.

Social Security is a mandated supplemental retirement program in the United States that was established by Franklin D. Roosevelt in 1935. This program came about due to the Great Depression when many Americans were out of work and the retired elderly were left in poverty. The sole intent of this program is to ensure a threshold subsistence level in which a worker that has paid into the program would not fall. Social Security is funded through payroll taxes in which a certain percent of a worker’s income goes directly to the program to help provide benefits to current recipients. Social Security benefits consist of retirement benefits, survivor benefits, and disability benefits. Retirement benefits are for those workers that have at least 10 years of employment and 40 credits. As of September 2010, a worker born after 1929 receives credit for every $1,120 he earns, up to four credits a year. A worker cannot receive benefits until he is 62 or older. Survivor benefits are benefits received when a wage earner dies, his spouse, children and parents can be eligible for Social Security survivor benefits. A divorced spouse can receive payments if the couple was married for 10 years or if she is raising the deceased’s children. If the wage earner provided 50 percent of his parent’s support, the parents are eligible for benefits. Disability benefits are benefits received when a worker is diagnosed with a medical condition that prevents him from working. The individual must have a medical condition that will last at least one year or will result in death.

The first Social Security recipient paid just $44 in Social Security taxes, but collected $20,993 in benefits. This was all possible because there were many workers paying into the system and only few retirees taking benefits out of it. In 1950, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to two. Citizens should not be forced to contribute their hard earned money to a fictitious money scheme such as the Social Security benefit program but rather have the choice to participate or invest in a private retirement savings plan. Social Security as it exists today is both a Ponzi scheme and failure of epic proportions and should be revised in order to better serve the public (What is Social Security).

To begin I will start with a brief history and description of a Ponzi scheme to set the stage for this argument. According to the Securities Exchange Commission (SEC) a Ponzi scheme is an investment fraud in which an organizer promises payments of returns to older investors from funds...

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