In an October 2010 Digest, we cited new Social Security statistics and characterized recipients as “on the dole.” Our feedback was inundated with angry e-mails. We published many of them over the next two days… Then on October 21, Porter responded in his Friday Digest with the following discussion of how Social Security’s finances are the definition of a Ponzi scheme.
Many readers hated the message… but the numbers speak for themselves. And note… since this essay appeared, the Urban Institute think tank has updated one of the reports Porter references. The dollar figures have grown, but the discrepancy remains.
“Let me add my voice to William Sutherland’s taking offense to your characterization of Social Security recipients being ‘on the dole.’ Your flippant answer about being ‘willing participants’ in a Ponzi scheme made me see a whole lot of red also. No where I read does it give a worker in this country an ‘opt out’ alternative to contributing to the system.
“I know you are around 40 yrs. old. I remember full well thinking Soc. Sec. wouldn’t be around for me when I was 40, and making plans for at least a 3-legged stool of retirement benefits centered around real estate holdings, IRA/401k contributions, and Soc. Sec. should it be there at that time. Guess what? I’m now there, and I don’t feel one bit bad about taking back from a system that gave me no alternative. And I don’t consider it ‘on the dole’ to use your own words.
“You are the perfect example of the ‘arrogance of youth’ IMHO. Had I been able to contribute that 13% ‘tax’ (employee/employer contribution) to an IRA or 401k for the number of years I was robbed of that right, I full well believe I could have turned it into a nest egg that would have supported me for the rest of my life at a far greater level than the paltry amount I receive on the ‘Government dole’. Pull your head out of you’re a**, apologize to the many Seniors who feel the same way as I, and, if you have an alternative to the present state of affairs, print THAT rather than a flippant insult to the many who have gone on before you.” – Paid-up subscriber George Earhart
Stansberry Comment: George, I believe you’re probably speaking for a large number of our subscribers. And as bad as this will probably be for my business, I’m not going to apologize for anything, nor retract a word of what I said. (Note: I didn’t write that Social Security was the “dole,” that was Goldsmith. Instead, I’ve been saying that Social Security is a crime.)
The fact is, George, if you’re a willing participant in Social Security (that is, not someone who pays because he must, but someone who receives benefits because he can), you’re taking part in an enormous crime. You can ignore these facts if you want to, but that doesn’t make you any less guilty of willingly participating in a crime. Let me explain these facts to you.
According to the Social Security Administration, the average one-earner family retiring in 2010 contributed $352,000 to Social Security and Medicare via taxes and payroll contributions. They are expected to receive $798,000 in benefits, or roughly 126% more than they contributed.
Obviously, Social Security wouldn’t be so popular with the voters if they weren’t expecting to get a heck of a lot more out of it than they put in. That’s common sense. These numbers just prove it. And if you’d like to see all the numbers yourself, be my guest.
I wish Social Security’s assets had actually been invested during the life of the fund. If they had been, there’s a reasonable possibility these benefits would be legally available for distribution. But the fact is, they were not. The fact is, Social Security was, is, and will always be nothing more than a government-mandated Ponzi scheme. The money isn’t there, George. And it never was. It’s that simple.
We have hundreds of years of common law and several decades of statutory laws and judgments on the books in the United States to deal with the legality of such schemes and the proper way to handle their unwinding.
The principle of the law is simple: The remaining assets of the fund are to be distributed to the contributors of the fund based on the size of their net contributions. That is, if you’ve been receiving benefits for years and are now getting in excess of what you contributed, you are not entitled to anything, legally. On the other hand, if you haven’t gotten back what you’ve put in, you’re entitled to your pro-rata share of whatever is in the fund. And that’s it.
What’s happening instead is current contributions are being used to pay for current distributions. That’s the very definition of a Ponzi scheme. Ponzi schemes are illegal because they benefit early participants at the expense of later participants. You might not recognize that you’re taking part in a crime, but that doesn’t change the fact that you are. There’s no other proper way to describe what’s happening.
By the way, not only are current contributions providing current disbursements, but the current contributions are falling short of the required distributions. As a result, tax dollars are being used from current budgets to shore up the shortfalls. Thus, our characterization of Social Security as “dole” is entirely accurate. Our subscribers can get mad at us for pointing these facts out, but that doesn’t make them any less true.
We are at the beginning of a very, very big problem. Millions of Americans have come to depend on the lies and schemes of a bankrupt government that’s been conducting an enormous fraud on the American people. We have no chance at solving these problems if we’re not even allowed to speak about them accurately.
The Social Security Administration is actively engaged in a Ponzi scheme. It is a fraud in every respect. It’s a crime to willingly participate in a Ponzi scheme because you’re taking assets that have not been earned by the fund and will never be repaid to the current contributors. Those are the simple, plain facts. You might not like them. And you might hate me for pointing them out, but that won’t change a thing.
I realize how important Social Security is to millions of retired Americans. Something like two-thirds of all retirees are completely dependent on Social Security. It’s horrendous that this has occurred … and that all of these people are now dependent on a crime. I don’t mean to suggest that these people should be cut off. Obviously, our government has made promises to these people and many others nearing retirement. Those promises should be honored.
But they shouldn’t be honored through a Ponzi scheme. They shouldn’t be honored by allowing one generation to rob another. They shouldn’t be honored through a system that, were it conducted by any other institution in our society, would have been shut down decades ago with its leaders put in prison.
We deserve much better from our government. But we’ll never get it if we’re afraid to talk about what’s really happening in our country.
[Stansberry Note: A week later, the outraged feedback continued to pour in… So Porter dedicated part of the following Digest to further detailing this position…]
Most of our subscribers were deeply offended that we would accuse them of benefiting unfairly or unethically from Social Security. Some people (not many) raised what they thought were clever technical loopholes, like the real value of their contributions (as opposed to the inflated dollars they’re receiving now). Others argued that our facts were wrong… that they weren’t receiving more than they paid in.
But most people simply are angry because I’ve suggested that they shouldn’t be entitled to the benefits they’re receiving because they’re participating in a racket. They don’t seem interested in the facts, only in making sure I know they would like to kill me for bringing them up. And of course, many, many people canceled their subscriptions in response.
Fortunately, I decided a long time ago that I wasn’t interested in having the biggest financial publishing company in the world. No, I’d like to have the best financial publishing company in the world. And there’s a big, big difference. To become the biggest, you accept advertising from every securities salesman in the world. You write a bunch of fluff. And you sell your subscribers down the same river of ignorance that they sailed in on. To be the best, you tell your subscribers the truth as you see it, even when you know they won’t like it. Sometimes the truth is a bitter pill. And so it is with Social Security.
If you’re angry at me for pointing out the unpleasant facts about Social Security, you’re angry with me for being a dedicated and honest financial writer. You’re angry with me for doing the very thing you’ve paid me to do. You’re angry at me for serving you in a way you’re too narrow-minded to even understand. But… no matter what you decide about what I’ve written… it won’t change any of the facts.
The analysis I cited was prepared by the Social Security Administration. It is accurate. It shows the unmistakable progression of a Ponzi scheme, where early “investors” receive windfall returns, while later “investors” receive greatly diminishing returns – until, finally, the system collapses.
For example, using average figures for a couple retired in 1960, your total Social Security and Medicare taxes paid were $18,000 (in constant, 2011 dollars). Total benefits received were $248,000 – a return of 1,277%. By 1980, those amounts were $104,000 contributed and $512,000 in benefits, a return of 378%. And by 2010, the returns had fallen considerably – now $352,000 in contributions were worth only $798,000 in benefits, a 226% return.
The “returns” would have long since turned negative, except for the fact that Social Security taxes have been increased 40 times since the program began. That was necessary because today only three workers must support each retiree (down from 16-to-1 in 1950). By 2030, the numbers will fall to two workers supporting each retiree. And unless the taxes are increased again – and by a huge amount – the entire system will collapse. What will the folks retiring in 2030 say about those who got their benefits today, while they were working hard to support them? And what do you think those workers will do in 2030, when faced with Social Security taxes that make up a majority of all of the taxes they must pay? The whole thing will collapse – just as every Ponzi scheme must.
As everyone by now understands, the core problem is that Social Security was never the insurance scheme it was sold to the public as being. Instead, it is purely an intergenerational redistribution scheme, where current workers are taxed to support retired workers. That is, it is a government-administered Ponzi scheme that’s destined to collapse.
If more people understood what Social Security really is and why it will ultimately collapse, we at least have a chance to reform the system without reneging on any of the promises that have been made to people 50 and older. I do not advocate limiting or reducing benefits for anyone who is currently receiving benefits. What I propose instead is that we develop a bona fide pension system, so future recipients will not be forced into robbing their grandkids.
You can argue (and many have) that they’re not stealing anything because they contributed for years. And if those contributions could have been invested, they would have been worth a lot more than what they’re likely to get back, etc. That’s all fine and good. If it makes you feel better, that’s fine with me… But it’s all a lie. The money was never invested. It’s a Ponzi scheme. That’s the whole point.
You can pretend you would have gotten whatever interest rate you like… but guess what? The money was never invested. The money you paid into the system was paid out to the government (the general fund) and recipients. And as of last year, current tax revenue is being used to support shortfalls in Social Security and Medicare spending. Thus, like it or not, the line we published about being on the “dole” is absolutely correct.
How could we reform the system? It’s not that hard. First, you allow anyone with 20 years until retirement to opt out of the system entirely. These people are allowed, instead, to make contributions to privately managed pension funds. As with Social Security, they would have to meet minimum contribution requirements, and the government would provide a guarantee for a future minimal rate of return. Everyone would voluntarily opt out of the existing program, because the minimum contributions would be smaller and the future returns vastly more attractive.
Additionally, some exchange value would be offered for previous contributions to the system – though not at a one-to-one ratio. For folks too close to retirement to effectively use the new system, the old system would remain in place, backed by tax revenues, not the artificial Ponzi scheme.
This, by the way, is exactly what happened in Chile in 1981. That’s when its Social Security system, which had been in place since 1920, collapsed.
The longer we postpone this transformation from Ponzi retirement plan to actual pension funds, the more expensive the transition will be. And there’s one other key benefit to understand. When people are allowed to actually save for their own retirements, rather than being forced into paying for the retirement of older generations, the internal savings rate of the country soars. Chile averages internal saving rates of more than 20% of GDP. If we did the same, our currency wouldn’t be on the verge of collapse.
Having bona fide pension funds, instead of the nonsense we have now would be a huge economic advantage for our country. So… if you care about the future ofAmerica, tell your Congressman you don’t want to be a part of a Ponzi scheme anymore. Tell them to fix Social Security. And stop shooting the messenger.
A version of this article first appeared on May 5, 2013 in the Masters Series, published by Stansberry & Associates Investment Research, an independent investment research firm. You can visit them at www.stansberryresearch.com. Porter Stansberry is the founder of Stansberry & Associates Investment Research.
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