Reason #7: The Social Security Ponzi Scheme

Our politicians have treated Social Security like Ponzi’s infamous scheme.

One of the ways career politicians keep feeding the ever growing government beast is by cooking the books and robbing surpluses in one program to pay for deficits elsewhere. And no government program’s accounts have been fudged and fiddled with more than Social Security.

In 1920, an Italian immigrant named Charles Ponzi set up an investment scheme in which he promised people 50 percent returns on their investments after only forty-five days. It was a simple scam: he just used the proceeds from new investors to cover the payouts coming due. As long as plenty of new suckers kept sending in cash, it couldn’t fail. And for a good while, Ponzi’s scheme went like gangbusters. But then the money dried up and the whole thing came crashing down.

Our politicians have treated Social Security like Ponzi’s infamous scheme. Many people simply think of Social Security as another tax, but it’s actually supposed to serve as a giant savings account. In the end, that money we see taken out of our paychecks is supposed to stay our money, the people’s money. But our government has never actually saved a cent of it. Instead, it pays out what it needs to every year, then spends the cash left over.

Last year, the treasury took in $219 billion more than it paid out in entitlements. And just like every year before that, Congress couldn’t keep its greedy hands off all that excess dough. They looted the accounts and replaced the cash with “IOUs.” All told, they’ve written about $5 trillion in IOUs to entitlements like Social Security. To make matters worse, in 1975, Congress gave all future retirees a huge increase in benefit payments by pegging the amount they receive to the rise in average wages of American workers.

The Economic Policy Institute estimated that this “wage indexing” costs 60 percent more per retiree than if the government based payments on inflation instead.While “wage indexing” might be a better, and fairer, way to calculate how much people get, there’s no doubt that it’s a huge drain on the program’s accounts. And as usual, our lawmakers didn’t bother to figure out how to pay for it.

As with Ponzi’s scheme, Congress’s larceny and free-spending worked fine as long as enough new suckers replenished the outgoing funds. But the tax base for Social Security has been shrinking ever since it was created. In the 1930s, there were about seventeen workers for every retiree. That shrank to 5.1 workers per oldster in 1960, and is now down to only 3.3 workers today. But it’s only going to get worse.

As those tens of millions of Baby Boomers start hanging up their work-belts and briefcases in the not-too-distant future, there will only be two active workers for every one retiree collecting checks. By 2029, or even sooner, there won’t be enough money coming into Social Security to pay for all the checks going out.

And that’s just the beginning of the pain. All those graybeards and blue-hairs aren’t going to be collecting Social Security checks alone. They’re also going to be using Medicare, Medicaid, and other entitlements. To cover the shortfall, we’ll have to wade even deeper into debt as a nation. If something isn’t done to address this huge problem, by 2040 entitlement spending and interest payments on our deficit will eat up the entire federal budget! Forget about national defense, education, roads, NASA. Our entire treasury will turn into one big nursing home bill and credit card payment.

The saddest part is that all of this could have been avoided. If Congress had kept its paws off the Social Security Trust Fund, those trillions of dollars-plus interest-would still be there, waiting to cover the shortfall. But just like Mr. Ponzi back in the roaring twenties, the politicians seemed to think the scheme would never end, that there would always be a bountiful supply of suckers out there to send in their hard-earned cash.

NEXT: Reason #8: “Gerry-rigged” Congressional Districts and Invincible Incumbents