The United States federal government defines a “Ponzi Scheme” as “an investment fraud that pays existing investors with funds collected from new investors.” As it turns out, Uncle Sam is giving Charles Ponzi and Bernie Madoff a run for their money — literally.
In 1935, President Franklin D. Roosevelt signed the Social Security Act as one of many New Deal social welfare measures. The law established benefits for the elderly and other vulnerable citizens — wresting away such caretaking responsibilities from states, localities, and families.
Social Security’s reserves are funded by mandatory “contributions.” The program started with a combined 2% tax on workers’ incomes, split evenly by employees and their employers. Today, it is 15.3%. Considering that employers merely cut wages to minimize the added expense, most of the overall tax implicitly comes from workers’ salaries.
Why the 650% increase in payroll tax rates? As explained by Cato Institute senior fellow Michael Tanner, the tax rate is an attempt for the federal government to prevent its pyramid from collapsing:
The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long‐lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.
As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even. Eventually the pyramid crumbles.
Because participants in the upper tranches of the pyramid are compensated by new recruits, Ponzi schemes do not require legitimate investment activity. Social Security reflects this reality as well:
A small portion of that money is used to buy special‐issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.
The difference between Ponzi’s deception and that of the federal government is optionality. While investors who grow wise to Ponzi schemes can cut their losses and exit, participants in Social Security have no such luxury.
In essence, fiscally responsible Americans are shelling out one-sixth of their income every year to keep afloat a sinking ship intentionally constructed without a hull.
The Congressional Budget Office predicted in 2018 — notably, two years before the massive fiscal strain of COVID-19 and the lockdown-induced recession — that Social Security would run out of reserves by the early 2030s. To save the program for future generations, lawmakers must restrict benefits and increase taxes — for example, by raising the full-benefit retirement age to 70 and hiking payroll taxes by another 2.5%.
Simply put, regulators need to broaden the base of the pyramid.
However, such a prospect is easier said than done in the face of a looming demographic crisis. In 1960, American women bore an average of 3.65 children. By 2010, the rate dropped to 1.93, with birth levels again reaching record lows in 2020. Other factors — skyrocketing government debt, trillions in new spending from the Biden administration, a declining labor force participation rate — only place more pressure on the longevity of Social Security.
Perhaps it is time for the United States to start cutting its losses.
The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Daily Wire.
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