Social Security

PART 1

What should we do with it? During the campaign, President Bush talked about his vision of "ownership" for Americans. He was talking particularly about "ownership" of their retirement plans, and "ownership" of their health care. Since being re-elected, he has renewed his pledge to modernize social security.

I think we can all agree that something has to be done. Do we raise the percentage witheld from workers paychecks? Do we reduce the benefits retirees are to receive? If so, how much and when? Do we delay the retirement age? Do we implement all, one, or a combination of these?

Or do we partially privatize social security? Who says we cannot partially privatize social security and still implement some of the other changes that have been suggested? I firmly believe the present system is antiquated. I also find the cut back of benefits to be the least desirable of all the options.

Social Security was never meant to be a retirement plan; it is not a true retirement plan where you save and invest and build up a nest egg to provide income during your non-working years, i.e. retirement. It is merely an income transfer plan in which current workers pay their taxes into the system and that money is then transferred to the non-workers (retirees) to cover the benefits that have been promised to them. It was designed to ensure that all workers would have some retirement benefits, and would not be completely penniless in their post-working years.

Some retirees will get more out of the system, while some others will get less, depending on a number of factors. How long you live will be, perhaps, the most relative factor in regards of how much, or how little, you get out of the system. In this regard, it is much like insurance. You have homeowners insurance if you own a home, and you pay for that insurance. Some people collect on their insurance (if their house burns down) and some people do not collect on their insurance.

We have known for a long time that this type of system was not sustainable. This kind of pay-as-you-go system only works when you have many more people paying into the system than there are people taking out of the system. It will work for awhile but eventually it is bound to fail. It really is like a ponzi scheme. What is a ponzi scheme?

From the U.S. Securities and Exchange website (http://www.sec.gov/answers/ponzi.htm)

"Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period�and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.

Decades later, the Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses."

It sounds really similar to the Social Security plan does it not? The money of new investors (that would be the current workers of today) is used to pay off earlier investors (that would be the retirees) until the whole scheme collapses.

Why does it collapse? Because remember, you have to have many more workers feeding into the system than you have taking out of the system, as stated earlier, to make it work.

When Social Security started, there were between 13 to 18 workers paying in for each person taking out. Now with the baby boomer population explosion (caused by WWII) nearing retirement, compounded by the fact that they (the baby boomers) had fewer offspring, we now have only 3 people giving in to the system for each person taking out. And within a few years it will be only 2 paying in, while 1 takes out; perhaps eventually even a 1 for 1 exchange could result.

(to be continued)