You Can't Cheat an Honest Man (45 page)

BOOK: You Can't Cheat an Honest Man

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One senator was so angry at the dissembling that he attacked Chater for using “Disneyland financial analysis.”

Stanford economist John Shoven puts it more plainly: “The current system simply isn’t financially viable. [It’s] akin to an inter-generation chain letter.”

Possible Solutions

“The growing disenchantment with Social Security is all but inevitable when you have a pay-as-you-go system in a low-growth world,” says White House advisory council member Carolyn Weaver:

It’s been coming for a while. [Soon] the same old, conventional fixes like raising taxes or reducing spending [on benefits] aren’t going to cut it. Those tend to shift costs to the younger generation and make their rates of return worse.

One poll, conducted by
Newsweek
magazine, found that 61 percent of adults are not confident Social Security will be solvent enough to provide benefits to them when they retire. This skepticism about Social Security, plus the fact that younger workers will not get the same favorable return rate on their investment as today’s retirees, is driving people of all political persuasions to believe the system should be fundamentally restructured.
In the 1990s, Social Security’s defenders have argued that the program can continue for 60 to 80 years with a few minor modifications. If retiree benefits are gradually decreased by 1 percent a year or the tax rate used to support it is increased by about 0.25 percent a year, the program could last another three generations.

The main problem with this scheme: The eventual collapse only grows bigger over time.

Raising the eligibility age would also expand the program’s horizons. The move from 65 to 67 takes effect gradually, adding two months each year starting in 2003. (Some pundits argue that congressional staffers planned the change in such a way that their own eligibility wouldn’t be delayed.)

Increasing the move from two months a year to three would mean the eligibility age would be 68 in 2012. The older starting age would lower the program’s annual expenses by an additional 5 percent.

Many reform plans call for Social Security to invest its surplus funds more aggressively. In 1996, a White House advisory council on Social Security reform split on two close variations of this theme. One group supported a plan that would invest as much as 40 percent of reserves in stock-index funds, reduce average benefits by 3 percent, raise taxes on benefits, and extend coverage to excluded state and local workers.

The other group supported a plan that would replace today’s system with a two-tier benefit approach. One tier would provide a flat benefit financed by almost two-thirds of the current payroll tax. A second would consist of an annuity created by mandatory personal accounts funded with the remainder of the tax. A tax increase would be needed to cover costs of a 70-year phase-in.

“We have to go to seniors, and say, Look, we can’t keep this up,” said Nebraska Senator Bob Kerrey. “Yes, poverty is a concern. But please don’t tell me that every American over 65 is foraging in the alley for garbage or eating dog food. They’re going to Vegas with their COLAS—while kids don’t have computers in class.”
The problem with changing from a pay-as-you-go program to a prefunded private retirement program is that one generation would have to pay twice—for the retirement of its parents and then for its own. But it’s a reckoning which some generation will have to bear.

“The issue is simply that Social Security has become nothing but a giant Ponzi scheme where they’re relying on new contributions to make the payment to existing retirees,” says Jon Fossel, chairman of mutual fund giant Oppenheimer Funds Inc. “As with all Ponzi schemes, eventually you hit the wall when somebody wants their money back.”

Allowing private investment introduces market risks into the Social Security equation, but proponents of this solution argue that a solvent system with risks is better than no system. Besides, most workers already plan to rely on other sources—separate company pensions, private 401(k) plans and IRAs—to provide the bulk of their retirement income.

In a 1996 speech, CATO Institute President Edward Crane made the philospohical case for privatization:

...Take Social Security. Never mind that it’s the world’s largest Ponzi scheme that is going to go broke in a decade if it’s not privatized. Just consider what we did when we nationalized retirement income in America. ...we discouraged the personal responsibility of thrift, of saving for one’s own retirement. Some people assumed the government was doing that for them through Social Security. Many more were simply unable to save because of the burdensome payroll tax which is larger than the income tax for most Americans.

This elads to a provocative thoought. Maybe Social Security
explains
the proliferation of smaller Ponzi schemes.

Be Careful, the Schemes are Pervasive

Got a few extra dollars? Worried about what the future might bring? Thinking that the Wall Street crowd hoards all the best deals for itself? Put your money with us. We have a track record of paying out investors. And, in the remote chance anything goes wrong, we have a special mechanism for getting paid.
The pitch should sound familiar by now.

It’s tempting to think that the comparisons between Social Security and what law enforcement types would otherwise call a “classic Ponzi scheme” is some sort of politically-biased rhetoric. (Most of the writing that’s critical of Social Security is described as politicallybiased...sometimes this is true.)

But, even if the comparisons don’t seem obvious at first glance, consider an interesting bit of analysis—from the SEC itself. In a prepared statement that the agency released for background on Melvin Ford’s Better Life Club Ponzi scheme, the Feds are more candid than you might guess they would be:

Q: Why is a Ponzi scheme any different from Social Security?

A: Social security is a compulsory savings program run by the government. If the social security trust fund runs out of money to pay back retirees, the government can raise money to make the payments through taxes. A Ponzi scheme operator...has nowhere to turn when the scheme goes bust. The last round of investors simply lose their money.

In the 1990s, most investors realize that John Maynard Keynes died a long time ago—and the blind belief that “government” has some kind of power beyond its individual pieces died with him.

The Fed’s promise that the government can enforce a
compulsory
Ponzi scheme aren’t worth any more than Melvin Ford’s incoherent talk about the velocity of money...or New Era’s larcenous gibberish about a board or high-roller philanthropists. In the case of Social Security, taxpayers are simply the Greater Fools who are forced by law to extend the scheme.

But they can’t keep the scheme going indefinitely. No foolish investor ever can. All Ponzi schemes collapse...the only question is when. Well-run schemes can last a little longer, if the perp manages the money well and takes out his or her cut slowly. But not even a savvy perp can keep prevent the final reckoning..
The questions to ask for context may be: Why are the things so pervasive? Have social welfare programs like Social Security created a lottery mentality in so much of the population that people can’t resist throwing a few extra dollars of good money after bad?

Looking back over the history of Ponzi and pyramid schemes—both recent and not—the answer comes back consistently.
Yes
.

Your money is a valuable thing. As you age, more of your money will be available for investments. Don’t trust it to any crook who promises big returns with little risk. Anyone making that promise—even if the
anyone
is a government agency—is lying. They’re just looking for what every Ponzi perp wants...a naive person who’s greedy, gullible and has some money to lose.

A Greater Fool, willing to bet heavily on a Great Idea. Don’t be that person.

PART ONE
How the Schemes Work
PART TWO
Why the Schemes Work
PART THREE
Contemporary Variations
PART FOUR
What to Do if You've Been Scammed