by its own standards, even…
Santelli is right on in this video, even though Friedman really got him by saying his idea was idiotic. A recent Forbes article explains why:
For starters, let’s be clear on what a Ponzi scheme is.
Say you’re in a scheming kind of mood and looking to get rich off it. Say you’re Bernie Madoff! You start by convincing a small group of people, say five of them, to each give you some money, say $1,000, with the promise that each month thereafter, you’re going to give them $50 back. That works out to $600 over the year, or a 60% rate of return. Not too shabby! These people are a little skeptical at first, but the promised 60% rate of return seems worth the risk. So you collect $5,000, but pay out $600 to each of these five people, $3,000 in total, leaving you ahead by $2000 at year end. So far so good — stick with me…
Here’s how you’ll fund the $3,000 you’re going to pay to those five people.
Not long after the first five, you find ten other people to also give you $1000, with the promise that they, too, will get $50 back each month thereafter. You take in $10,000, and over the course of the year, you pay back the $3,000 to the first group of five people, leaving you with $7,000 from the group of ten, plus the full $5,000 from the group of five, for a total of $12,000. But you still owe the group of ten $6,000. That’s OK, because after you pay them, you’re still ahead by $6,000.
You can repeat the same funding mechanism to pay back that group of ten. Find another ten people, or ideally, more than ten, promise each of them $50 a month, and pay them by using the incoming cash from yet another group of people. Keep this going for a while and all the people earning 60% a year on their money might even turn you on to their friends. It almost seems like a virtuous circle.
All the math for this will work out great provided you play by some simple rules. You absolutely must keep finding more people to pay in. You might need to start promising a lower return to new “investors”, just to help the math. Oh, and you’ll want to keep everyone in the dark about what’s really going on.
But eventually there just aren’t enough people in the world to solicit. And eventually some smart cookies begin to suspect too much of a good thing, and start asking pesky questions.
Now let’s examine Social Security.
When Social Security was started in 1935, workers paid 2% of their first $3,000 earned, or a maximum of $60. Of course, only those aged 65 and older could collect anything, and many of those collectors conveniently died not long thereafter. So even without full participation by every wage earner, the number of people paying in dwarfed those being paid out, and money began to pile up in what became known as the “Social Security Trust Fund”.
As trends (and thankfully, lifespans) have changed, the payer/payee relationship has not stayed constant. Michael Tanner of the Cato Institute documents some of the demographics as follows:
In 1950, there were 16 workers paying taxes into the system for every retiree who was taking benefits out of it. Today, there are a little more than three. By the time the baby boomers retire, there will be just two workers who will have to pay all the taxes to support every one retiree.
Think Cato’s some radical right-wing organization? Ok then, let’s see what the official Social Security Online website has to say in their 2010 summary:
Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.
Forcing people to pay for others is wrong. Saying X is a crime, punishing citizens who do X, and then doing X yourself is wrong. Social Security is wrong. Phase it out ASAP.
[Edit: Statist Keynesian shill admits it.]