News organizations and politicians are outraged by the comments. They hope to “save social security” not call it a scam! Charles Ponzi went to prison for his scheme and that thought more than any other seems to be the driving force behind Perry’s back lash.
I’m no Perry supporter, but before you make too many decisions about his comments, it’s important to understand what a Ponzi scheme is and why people are scared to put Social Security in that category.
What is a Ponzi Scheme?
A Ponzi scheme is a surprisingly simple scam that plays upon our inherent greed. It goes like this:
- An investor tells you he can get you massive returns on your investment, making you 10 times what you invest in a couple of weeks!
- You’re hesitant, but he’s wearing an Armani suit, has a gold watch, drives a Lexus, and seems convincing. You give him $500 to test out the theory.
- Three weeks later, Mr. Investor returns with a $5,000 dollar check. He smiles as he tells you he’s found the secret that no investor wants you to know.
- Your eyes grow dollar signs and you hand the $5,000 back to him. A few weeks later $50,000 shows up on your door and you invest it back in to get even more money!
Unfortunately, the money is a lie. There was no sudden growth in the stock market, and no special method to guaranteed results.
The $500 you invested went to someone who invested $50. That person then put in $5,000 which Mr. Investor gave to you. When you put that money back in, Mr. Investor used it to get hundreds more to invest their money which was the $50,000 thousand he showed you. There was never any investment or real money; just clever accounting, fast rhetoric, and a scam that will eventually lose all your savings.
Why Ponzi Schemes Fail
The problem with Ponzi Schemes is people. There are only so many people in the world, and eventually the scamer runs out of money.
At that point the scamer can keep it going for awhile, but at some point the investors will want their money, the government will want their taxes, or some journalist will uncover the scheme. Either way, the show is suddenly over and the ponzi scheme fails.
This leaves the investors with nothing. It’s rare that ponzi money is found and even when it is, it won’t even cover the investments made — that was spent on the car, watch, and suit.
Is Social Security a Ponzi Scheme?
The short answer is yes. Social security takes money from the young and gives it to the old. It works for two reasons:
- Social Security is a law. Without the legal requirement, Social Security would have collapsed long ago.
- It is done on a massive scale. Since Social Security is a law, it can be forced upon every generation. Instead of convincing new investors, the government forces us to invest into the program.
This worked great when the program was started. The baby boomers were starting their lives and there were a dozen Americans paying in for every person drawing. In addition, when Social Security started, life expectancy was in the mid 60s. Since you start pulling at 59 and a half the people drawing from the fund only used it for a couple of years.
Now? There are 2 workers for every person drawing. In addition, life expectancy is now in the 80s! This is why Social Security is getting so much press and why Rick Perry doesn’t like it. There are too many people drawing from Social Security and not enough babies to cover the workers. By the time 40-year-olds hit 59 and a half the scheme will have failed.
Why Are We Scared?
The negative reaction to Rick Perry’s statement makes sense. When a Ponzi Scheme is uncovered it is immediately shut down and those involved go to prison. No one wants Social Security to end. Millions of people depend on it to survive. I have friends who need those checks to eat. It’s scary to think they might suddenly be without any money.
The reaction makes sense, but shows a misunderstanding of what Perry proposes. Any politician who ends Social Security is creating political suicide. Perry doesn’t want to end social security, he wants to replace it.
Perry, (much like Bush a few years back) wants to replace social security with a mandatory retirement savings account. It would shift from paying for someone else to paying for your future. The system does not end social security nor leave our friends and family without their needed income.
Understanding is Key
Social Security needs to be completely done away with. It won’t withstand another generation.
But, as voters and human beings we need to stay away from phrases like “Social Security is a Ponzi Scheme” or “Rick Perry wants little old ladies to go broke and die”. They want us to be manipulated by our emotional reaction. They hope we’ll join them in their hatred of the other side. Don’t play their game.
Stay informed. Know what’s happening. And vote wisely.