Sunday, March 01, 2009


The Washington Post today has an article about a family that lost hundreds of thousands of dollars in the Ponzi scheme perpetrated by Bernard Madoff. Without that money their retirement just became a lot more problematic. It's a sad story and you can't help but feel sorry for them.

It got me thinking, however, about a Ponzi scheme that all of us are forced to participate in -- social security. For those who aren't familiar with such schemes, wikipedia offers the following definition:
A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit. The term "Ponzi scheme" is used primarily in the United States, while other English-speaking countries do not distinguish colloquially between this scheme and other pyramid schemes.
Social security operates in a similar fashion. You pay money into the system and then receive returns at a future date from money paid by future contributors. Essentially, the money that you put in is not the money that you get back. Your money is not set aside in some account to await withdrawal upon your retirement. Rather, your money goes to pay people currently receiving benefits while your own benefits will be paid by people working and paying social security taxes at the time you retire.

Think about that: while Madoff is vilified -- justifiably -- for his scheme, this isn't too far removed from the way in which the government's retirement program that we are all forced to participate in operates.

Now, in recent years there has been discussion about whether social security should be privatized or undergo some other reform due to a shift in demographics (too few workers contributing money for too many retirees) that affects revenue projections. Advocates for such a move argue that privatization would let workers get a better return on their money by investing it in the stock market, while opponents counter that it would leave retirees vulnerable to downswings such as the current one.

Leaving aside which approach makes more sense from a purely financial perspective, what about the morality of the program? I find it offensive that I am forced to participate in such a program rather than being allowed to determine for myself how I would like to invest and save for retirement.

Rather than forcing people into social security, why don't we simply expand freedom and allow people to opt out of the program? Those that want to stay in should be able to do so while those who would rather fund their own retirements should have that right.

I suspect that most politicians would never go for this in part because it would allow people a de facto vote on social security that would demonstrate their lack of confidence in the system.

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