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SSA - Its broken and it won't get fixed

We call Social Security benefits “entitlements” because they are benefits which have been derived by a formula and are paid to beneficiaries automatically, regardless of the budgetary decisions made by the executive or legislatures branches.

But according to Peter Schiff in his new book, The Real Crash the amount we can expect to pay in entitlement benefits (Medicare, Medicaid, SSDI disability and Social Security) could be as high as 3 trillion within 20 years. Add that total, plus interest payments on our debts, and entitlement payments are likely to eclipse our entire national tax receipts. All other spending will have to be done with borrowed funds.

When did the Ponzi Scheme start and how did it break down?

Although the Federal Government often touts Social Security as an entitlement program or an “insurance” program originally created to help workers “avoid the hazards and vicissitudes of life,” the bottom line is that Congress has the legal authority to change the benefits formula any time they wish (by changing the retirement age, readjusting the cost of living increase formula or deciding that you are too wealth to receive benefits).

So while we may call it an “entitlement” program, we will see in the years to come that paying into the SSA retirement or disability system may not entitle you to anything. In fact, it's nothing but a legalized Ponzi scheme.

Is Social Security just a giant Ponzi Scheme?

What is a Ponzi scheme? According to the SEC, a Ponzi scheme is “an investment fraud that involves the purported returns to existing investors from funds contributed by new investors…the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use the payments for personal expenses, instead of engaging in any legitimate investment activities.”

If this sounds familiar it is because it is exactly what is happening with the SSA system, but unfortunately, unlike Bernie Madoff's investors, you are forced to participate by the Federal Government. According to Schiff, in 2011, SSA benefits were expected to be $733 billion but taxes paid into the system were only $637 billion.

When did the problems start? On January 31, 1940, when Ida May Fuller, the first SSA retirement recipient who paid just $24.75 in SSA taxes eventually extracted $22,888.92 when she retired 36 years later. She, like many others, have paid into the system but they did not pay nearly enough.

Ponzi Schemes work until the number of contributors (workers) is eclipsed by the number of individuals extracting money (retirees), and unfortunately, we are almost to that tipping point. Currently, the number of retirees is increasing but the number of workers to sustain them through their retirement is decreasing.

In fact, there has been a drastic shift from the 1950s when Schiff reports, “There were 3.5 million workers paying SSA taxes and 222,000 retirees collecting it.” The ratio at that time was 159.4 to 1. The SSA estimates that by 2031 there will be 1 retiree for every 2.1 worker. This ratio is unsustainable, and the system is headed for collapse.

What are the solutions?

The truth is that Social Security is broken, and there is no good answer to how the system needs to be fixed. Everyone will suffer. Several suggestions offered by various politicians and political pundits is to slowly phase out benefits by raising the retirement age and removing those individuals from the program who do not need it. Some suggest doing away with the program entirely and privatizing retirement savings. The argument is that those who are truly destitute could be absorbed through already existing welfare programs.

Pandering politicians, on both side of the aisle, will most likely never have the guts to do what really needs to be done to save the system, and unfortunately, anyone who realistically suggests change is called a variety of names that are not fit to print.

What’s really going to happen? Most likely politicians will refuse to do the right thing, resisting all efforts to cut benefits to the elderly, and the Federal Reserve will continue to print money and buy government bonds, generating massive inflation which may stop SSA checks from bouncing but will reduce their purchasing power to nothing.