Charles Ponzi would have been proud

Dan Sernoffsky

In 1920, an Italian immigrant named Charles Ponzi went into business in Boston, setting up an investment business that promised outlandish returns. Invest in the enterprise, he said, and that investment would be doubled within 45 days.

There were plenty of willing investors, and, for some, there really was the promised return.

The problem was that there really wasn’t an investment. The whole thing was a fraud, and the way it worked was that the early investors were paid with money collected from later investors. By the time the whole thing fell apart, a lot of people had lost a lot of money, and five banks wound up collapsing. It was a basic pyramid scheme, but thanks to the man who ran it, it got a new name. It is now known to history as a “Ponzi scheme,” and there a lot of people who try to run one.

One of those people was a guy named Franklin Delano Roosevelt. Only when he signed his Ponzi scheme into law in 1935, it was called “Social Security.”

That wasn’t really the case, but that’s exactly what Social Security has become, minus the claim of outlandish returns. Designed as a “pay as you go” system, Social Security has far outstripped its ability to do that, and the system is about to become insolvent.

The problem with Social Security is that is was based on a set of premises which may have made sense at the time of its creation, but which no longer exist. When Social Security was established, the average life span was in the range of 63 years, which meant that most people died about two years before they were eligible to collect. The average life span in the United States is now something in the neighborhood of 72, which means more benefits are being paid to a lot more people.

The original premise was also based on 1934 population figures and worked out that under the pay-as-you-go system, 42 workers were paying benefits for every one person receiving those benefits. By 1960, the ratio was down to five paying for every one person. Last year, it was down to three paying for every one, and projections indicate that by 2042 at the latest, it will be two people paying the benefits for every one recipient.

Overlooked, meanwhile, has been the rising cost of Social Security. Originally, there was a 2 percent withholding tax to cover the program. The percentage is now 12.4, which means most Americans are paying more in Social Security taxes than they are in income taxes. And while some may suggest that the Social Security tax is only 6.2 percent — the other half being paid by employers — the reality of the situation is that everyone is actually paying the full tax. The so-called employer contribution simply never shows up on the paycheck. Ask anyone who is self-employed about the rate he’s paying. The employer contribution lasts only as long as employment lasts.

To put it another way, if employers were no longer required to make that contribution and instead gave the money directly to their employees — a 6.2 percent raise — every penny of that raise would go to the Social Security (FICA) tax, along with the 6.2 percent that already shows up on the list of deductions.

In the 70 years since Social Security was enacted, Congress has controlled it and has used Social Security funds for whatever programs it has desired. The myth of Al Gore’s vaunted “lock box” is just that, a myth. The Social Security Trust Fund is a collection of government IOUs, essentially payable at the discretion of Congress. It may come as a surprise to many, but the act spells that out, stating “The right to alter, amend or repeal any provisions of this act is hereby reserved to the Congress.” Which means that Congress can decide to raise the retirement age to, say, 75, or about three years beyond the average life span. Which would mean fewer people surviving and thereby eligible for benefits.

Social Security reform, long called the “third rail” of politics, is finally being seriously debated. At the heart of the debate is the establishment of personal retirement accounts, which, unlike Social Security, would not only pay a higher rate of return, they would be personally owned and therefore could be bequeathed to heirs. The only real problem with PRAs is simply that they are personal, which would tend to make people less dependent upon the largesse of the government, even in their golden years.

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Dan Sernoffsky is an award-winning sportswriter and political columnist for The Lebanon Daily News in Lebanon, Pa. A career journalist, he is a graduate of Ottawa University, Ottawa, Ks., and attended graduate school at Central Michigan University. The father of four grown children, he and his wife reside in Lebanon.

dsernoffsky@yahoo.com