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Posts Tagged ‘Ponzi Scheme’

Early last year, the Center for Freedom and Prosperity released this video, narrated by yours truly, making the case that the United States and other nations should shift from a tax-and-transfer entitlement scheme to a system of personal retirement accounts.

Some left wingers criticized the idea, saying the big drop in the stock market in 2008-2009 is proof that personal retirement accounts are too risky.

You won’t be surprised to learn, though, that they are wrong. It is true that retirement income fluctuates with a system of personal accounts, but that simply means that it is difficult to predict how much more income one would enjoy when compared to being stuck with Social Security.

Here is the key section from a just-released paper authored by my Cato colleague, Mike Tanner.

Despite recent declines in the stock market, a worker who had invested privately over the past 40 years would have still earned an average yearly return of 6.85 percent investing in the S&P 500, 3.46 percent from corporate bonds, and 2.44 percent from government bonds. If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.

Some people doubtlessly will still be skeptical of personal accounts, thinking to themselves that a check from the government might be meager, but at least it’s guaranteed.

But that is a very foolish assumption. When the welfare state begins to collapse and it becomes apparent that higher taxes simply make a bad situation even worse, politicians will have no choice but to renege on unaffordable promises. Just look at what’s happening in Greece and elsewhere in Europe.

And as this chart from Mike’s paper illustrates, American politicians have dug a huge hole. Relying on the empty promises of Washington politicians will be far more risky than personal retirement accounts.

The chart shows big funding shortfalls, particularly once the baby boomers have retired. Most people, though, aren’t familiar with concepts such as “percent of taxable payroll.”

So let’s make it simple. If we look at all of the future deficits, adjust them for inflation so we can make an apples-to-apples comparison, and then add them up, the Social Security shortfall is close to $30 trillion.

We know that personal accounts work. Nations such as Australia, Chile, and Sweden have reaped big benefits by making the shift.

I’m not surprised that left-wing journalists want to trap American workers in a bad system. But I am disappointed that a lot of Republican politicians feel the same way.

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I was wrong yesterday when I said Social Security was akin to a Ponzi scheme.

It’s worse, as aptly demonstrated in this cartoon.

And let’s not forget the famous Bernie Madoff cartoon.

(h/t: Steve Horwitz)

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The editors at Bloomberg have decided that condemning younger workers to a more dismal future is the best way to deal with the Social Security program’s giant long-run shortfall.

They want workers to pay higher taxes to prop up the bankrupt system. And, in exchange for those higher taxes, they want to give people less retirement income. Here’s what they wrote in their editorial.

Social Security’s finances need shoring up. But there is nothing wrong with the program that Congress couldn’t fix in a week. Gradually raising the retirement age to 69, changing the formula for cost-of-living increases, and raising the cap on wages subject to the payroll tax would close most of Social Security’s funding gap for the next 75 years. Such changes would rely about 60 percent on tax increases and 40 percent on benefit cuts, and would mainly affect the wealthiest Americans by asking them to pay more and get less in return.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits. The folks at Bloomberg want to double down on that approach and make a bad system even worse.

And they want higher payroll taxes on investors, entrepreneurs, small business owners, and other “rich” people. Apparently, some people think it is a good idea to copy European fiscal policy at the exact moment that Europe’s welfare states are collapsing.

Not surprisingly, the editors at Bloomberg reject personal retirement accounts. I am 100 percent confident that they personally benefit from IRAs and 401(k)s, but I guess peasants like us are unworthy.

We don’t think private accounts should be among them. If workers divert some of their payroll taxes to an investment account, that would decrease the flow of money into Social Security and deprive retirees of benefits of equal value. Bad investment choices, or bear markets that lower returns on stocks and bonds, could add to their woes. In other words, private accounts would only make matters worse.

This is remarkable. They actually think that personal retirement accounts are more risky that the empty promises of politicians – even though the system has close to $30 trillion of unfunded promises (in inflation-adjusted dollars!), and even though we see in Europe that very bad things happen when the welfare state collapses.

This video explains why personal retirement accounts are a good idea, including an explanation of how we could transition to a new account and a discussion of how 30 nations already have adopted this pro-growth reform.

So here’s the choice we face. The Bloomberg editors want higher taxes and bigger government – an approach that dooms American to European-style stagnation (and that’s the optimistic scenario). Or we can go with personal retirement accounts – an approach that is working all over the world, while simultaneously boosting growth and creating more retirement security.

Seems like the right choice is rather obvious.

By the way, I can’t resist one last dig at the Bloomberg crowd. Their editorial is titled “Social Security Is No Ponzi Scheme,” yet nowhere in the column do they justify this absurd assertion. At least they should be honest and admit the current system is a pay-as-you-go racket that relies on taxes paid by young workers to finance benefits for old retirees.

And I also can’t resist linking to this cartoon, which makes the obvious connection between Bernie Madoff’s Ponzi scheme and the one the government imposes on us.

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Yesterday was the 129th anniversary of Charles Ponzi’s birthday. Normal people don’t celebrate the birth of con artists, but a tediously left-wing columnist at the Washington Post, Eugene Robinson, must be a big admirer of Charles Ponzi, because he seems very happy that people don’t want to “cut” entitlements.

According to the NBC/Wall Street Journal poll, three-quarters of Americans would oppose significant cuts in Medicare or Social Security.

The poll was dishonest, of course, since it was based on the Washington’s dishonest definition of budget cuts. In reality, the reforms that are being proposed would reduce the growth of spending. And I suspect that voters, if asked whether it is reasonable to have Medicare grow 5 percent each year rather than 7 percent each year, would provide more rational answers.

Heck, we already have good polling data showing that people support Social Security reform.

But public opinion is not the key issue. The bigger topic is whether anybody should be celebrating a government program that is actuarially bankrupt, particularly when it hurts minorities, penalizes job creation, and discourages savings.

But that’s just what some politicians are doing.

I’ve already posted a very funny cartoon about Bernie Madoff and Social Security, but hopefully this video has more substantive arguments for reform.

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A picture says a thousand words, and this Gary Varvel cartoon definitely exposes the government’s Ponzi system.

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