Perhaps the greatest ponzi scheme of all time is the United States social welfare program named Social Security. Wall Street and Bernie Madoff can’t even come close to this house of cards.
Signed into law by Franklin Delano Roosevelt in 1935. The Social Security Act provided benefits to retirees and the unemployed, and a lump sum benefit at death. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers’ wages, half directly as a payroll tax and half paid by the employer. When you examine your next pay stub, keep in mind the amount withheld for Social Security is what you have paid. Your employer has matched that amount in payment as well.
Social Security payments are made from those Social Security deductions you and your employer pay into the system. The check being received by your retired friends are not from funds hidden away in a secret monolithic Social Security “lock box”. Those funds are from the account which you and employees like you pay into that account. The surplus funds which were collected over the years have been “borrowed” by our government to fund other programs.
While Social Security has over the years paid for itself (more money came in than went out) no one properly planned for the inevitable. The day of reckoning when just the opposite begins to occur. While the prior estimate for this was supposed to be 2016, it has been revised to 2010. That means that during this year Social Security will pay out more than it takes in.
I would like to take this opportunity to present a true life scenario of a single man entering the workforce in the late 1980s. At that time the Social Security tax was just over 10%. Since 1990 it has been just over 12%. That burden being divided ½ paid by the employee, ½ being paid by the employer.
Our example is as follows:
1986-1989 his earnings are only part time and they only total $10,000 per year.
1990-2035 his earning fluctuate. He has no formal education and he averages $40,000 per year during these years. During the 80s his contributions to Social Security are about $3000. During the next 40 years his total contributions are $223,000. This places his total contributions at $233,000. Half of those were paid by him, the other half by his employer. According to Social Security, his monthly benefit upon retirement age of 66 is just over $1600 per month. If he lives to the ripe old age of 78 he will have received all of his money back. Of course, if he lives past 78 he will be collecting more than he paid in. However, if he dies before 78 and has no spouse those benefits are simply gone to be swallowed up by the system.
What if, he had the “opportunity” to choose another option? What if those funds were still deducted however he had the choice to save and invest them? How would this work out for him?
Lets use the same figures as mentioned above. His contribution of $233,000 over 50 years. Keep in mind, these options do involve risk. Past results are no indication of future results but we use those historical track records to estimate the future.
If he invested $388 per month for 50 years earning approximately 10.8% (average stock market gain since 1950) his total value at age 66 would be in excess of $9 MILLION! WOW! $9 million. With that nest egg, you could give yourself a raise. If that money was just in a safe in your house earning no interest, you could take $5000 a month out every month until you were 123 years old! Maybe you want a new home. Maybe you want to give it away. Makes no difference. Its yours my friend, do with it what you want.
What if the stock market scares you? What if you were to only seek out guaranteed secure investments and you only received less than ½ of that 10.8% return in the former example? How would you fare if you only accumulated a 5% rate of return over those 50 years? Your total would still be over $1 million! Once again, this is your money. Money that you can take at age 66 and wallpaper your walls with if you so desire. Try that with Social Security. With $1 million earning no interest, you can take out $2500 every month until your 98 years old! Once again, we substantially outperform Social Security and have the very important option to do whatever we like with that “nest egg.”
If these figures seem shocking to you, you can verify them by running the numbers yourself. Simply take $388 every month and use any online savings calculator to determine the results. Use the Social Security programs own website to estimate your future “benefits.”
I doubt this article has ignited any firestorm to drastically revise or change the Social Security program. However, if it did open someone’s eyes as to the scam which it is, or shock someone into realizing the value of saving and investing, then the time used to research and write was time well spent.
Tags: social welfare, social welfare program