Social security complications set to worsen

By Colleen Sinsky

When Charles Ponzi created the first large-scale pyramid scheme in the United States back in 1920, he hit on an idea that has been copied countless times by con artists and the federal government alike.

What's now known as a Ponzi scheme works by luring investors with a promise of impossibly high returns. The first ones to jump on the wagon are richly rewarded, and publicity of their success brings in more unsuspecting investors. Their so-called investments begin to form the base of the hollow pyramid.

Older investors are paid off with the funds coming in from the late joiners, in a quiet "rob Peter to pay Paul" move. The system works until either the promoter disappears with the swindled money, or suspicions arise and what can be compared to a bank run occurs.

At this point, nervous investors realize that their money is gone. This inevitably leads to a widespread panic.

Interestingly, the federal government passed legislation creating the national Social Security program in late August 1935, just 15 years after Ponzi's original scheme collapsed under its own weight.

The first recipient of Social Security benefits was Ida Fuller, who received her first Social Security check in 1940. Fuller was a legal secretary from Vermont who had invested only $24.75 of her earnings and reaped over $22,000 in benefits over the course of her 35-year retirement.

This widely-publicized return created confidence in the new system, and until the last decade, the security of the billions of dollars that were invested hadn't been questioned. However, now that baby-boomers are beginning to retire and the workforce is shrinking, the plan is beginning to unravel.

As a nation, we've poured our life savings into a shaky pyramid whose foundation sits on unrealistic optimism.

Social Security was touted as the lifeline to the elderly and disabled, and while the ratio of workers to retirees has been favorable, the system has worked.

Exactly like a Ponzi pyramid scheme, there are no real investments being made, and the returns that are being paid out have only come from the non-renewable dues from the American workforce.

Those withholdings that always ruin a little of my joy when opening a paycheck are not being put into a lockbox or low-risk mutual fund -- they've been replaced by IOUs from the government, which has imprudently spent the money that retirees will be expecting in the not-so-distant future.

Just eight years from now, Social Security will cash in on these IOUs to write checks to retiring baby boomers, and inevitably, some combination of higher taxes or benefit cuts will have to be employed to create the money.

The sustainability of the Social Security plan has been proven fallacious as economists and other realistically-minded people are actually crunching the numbers and finding a shortfall of $4.3 trillion -- yes, trillion -- over the next 75 years.

I find it hard to believe that supposedly educated people have made careers out of designing something that could fail this catastrophically.

In the 1950s, each retiree was supported by 16 workers. Taxes were low, the elderly received their safely-funded checks and everyone was happy.

Fast-forward to today, and the ratio is a dismal 3.3 workers for each retiree, and by the time I'm 37, the ratio will be just 2 workers for each retiree.

Obviously, something has to give here, but we cringe at the possibility of even higher taxes and cutting benefits. Even while the looming Social Security crisis has become a cornerstone in political debates, there are still a few politicians with their heads in the sand who'd rather hide from the problem than make prudent changes now.

Mark Weisbrot, co-director of the left-leaning Center for Economic and Policy Research, writes that the impending implosion is an "unlikely event," and he adds that it "may occur in the far-off, science-fiction future." By "far-off, science-fiction future," he means 2042.

Maybe for Weisbrot's generation, 33 years from now is "science fiction," but I'll be 53 -- very much alive and very much working. If Social Security is going to be exhausted by then, it is a burden that no one who is alive now can ignore.

If we can collectively ditch the Ponzi-style Social Security system and embrace personal retirement accounts, American workers would be more motivated to plan for retirement.

They would know that what they put away was actually going into a safe investment account with their name on it.

We would then eliminate the inefficiencies and contorted incentives created by a system under arbitrary government control and encourage more responsible saving.

With Social Security so close to collapsing, the best resource we can turn to might be Bernard Madoff, who after all, does have extensive experience in vaporizing billions of investors' dollars.

Colleen Sinsky is a junior economics major.