Is welfare a Ponzi scheme? Ctd

In my continuing series we look at the evidence that welfare may well be a Ponzi scheme.

Social Security, on the other hand, forces people to invest in it through a mandatory payroll tax. 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.

As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. 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.

The premise is entirely similar here.

Of course, Social Security and Ponzi schemes are not perfectly analogous. Ponzi, after all, had to rely on what people were willing to voluntarily invest with him. Once he couldn’t convince enough new investors to join his scheme, it collapsed. Social Security, on the other hand, can rely on the power of the government to tax. As the shrinking number of workers paying into the system makes it harder to continue to sustain benefits, the government can just force young people to pay even more into the system.

In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.

Just recently we had evidence that superannuation in New Zealand is unsustainable. The evidence is building, substantially that Social Security, or Superannuation as we call it here is a giant Ponzi scheme that is unsustainable with out drastic action.

 


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  • Pita

    Much, if not all Government expenditure is a Ponzi scheme. The issue is how do they increase revenue to maintain the merry-go-round? A carbon tax/ETS is a positive step in that direction.

    • thor42

      I beg to differ.
      The solution is not more tax. It is **less expenditure**.

      Axe “bludging for families”. Axe the DPB – why PAY people to breed, for f**k’s sake? As if we need more in the underclass. Raise the eligibility age of national super. Bring in work-for-the-dole for ALL so-called “unemployed”. To get any money, they must **work**, and I don’t give a f**k if it is scrubcutting, clearing drains, cutting tracks in the bush or whatever. No work, no benefit.

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