PrintAugust 22, 2010
Ida May and the Ponzi Scheme
Recently, the 75th anniversary of Social Security was celebrated by Democrats as a great achievement in government social programs. Nancy Pelosi was present at several events lauding this anniversary; some even featured gigantic anniversary cakes. But platitudes and oversized pastry aside, Social Security is a vexing societal enigma. It is a government program upon which many seniors depend in their retirement years, but it is also a program that will most assuredly bankrupt our nation if left in the hands of politicians to control.
The concept of social security in America was born in the desperate years of the Great Depression. President Franklin D. Roosevelt saw the concept of government-administered "social security" as a financial safety net for the elderly, widows, and orphans, groups that suffered great financial and societal upheaval at that time. But when it was enacted in 1935, the Social Security program was far from the universal safety net that both Roosevelt and the Congress had promised. Large segments of the population were prevented from participating in Social Security, including most African-Americans, people with non-factory jobs, and part-time (or intermittently employed) laborers. With time, however, these inequities in the system were addressed and corrected. Unfortunately, the scope (and cost) of Social Security was also greatly increased by other legislative actions.
Lurking in the history of Social Security are two prime examples of the potential problems that would be encountered with this social entitlement system. And these examples, in the persons of Ernest Ackerman and Ida May Fuller, should have been red flags to all Americans of the fiscal unwieldiness and burden that the system might present to future generations. Ernest was the first individual to receive Social Security benefits as a lump sum payout, and Ida May has the distinction of being the first person to receive monthly benefit checks from the Social Security trust fund.
Little is known about Ernest Ackerman except that he was a Cleveland-area trolley motorman who retired one day after the Social Security Act was signed into law. After paying a nickel into the program fund, Mr. Ackerman promptly received a lump sum payment of 17 cents. To be sure, we're talking pennies here, but that's not a bad return for one day's investment: 340%! However, the situation of Ms. Ida May Fuller really underscores the problems that can occur in a system as massive as Social Security: Her story is one of maximum return for a minor investment.
Ida May was born on a farm in Ludlow, Vermont in 1874. She worked as a legal secretary in Ludlow for most of her career, and after three years of paying Social Security payroll taxes, she retired in 1939 at the age of sixty-five. According to the Social Security Administration (SSA)'s website, the total amount of Ida May's contribution to Social Security was $24.75.
Apparently Ida May came from good Vermont stock, because she passed away in 1975 at the ripe old age of 100 years. And by the time of her death, she had received a total of $22,888.92 in monthly payments from Social Security. With her longevity, Ida May had achieved an impressive 92,480% return on her investment. Not a bad deal if you're Ida May, but if you're the administering the system, or if you're any of the other folks paying into it, then her example might be a source of consternation.
Ida May's example raises the question: Doesn't her situation qualify as a classic Ponzi scheme? Didn't she get much more than she put into the system -- at the expense of someone else? Isn't Bernie Madoff in prison right now for a remarkably similar "investment" scheme?
Certainly, Ernest and Ida May aren't the only examples of beneficiaries who extract more from the system than they've paid in (beyond any interest that their account may have accrued), are they? Based on the latest statistics available from the SSA (FY2003), there were 47 million recipients of Social Security receiving $39.5 billion in monthly payments. That works out to an average of $840 per recipient per month, or just over $10,000 a year in average benefits per person. This is not a large payout per person, but to understand the problem with the Social Security system, we need to go back to the example of Ida May. How many people collecting the $840-per-month amount actually paid into the system commensurate to the benefit they receive? Unless we consider benefits on a case-by-case basis, we just don't know. Regardless, we know this fact: At the present time (according to www.usdebtclock.org), the Social Security System represents an unfunded liability of $109,999,000,000,000, or approximately 110 trillion dollars for those befuddled by trailing zeroes.
Why hasn't Congress already addressed this Social Security situation in a determined and diligent manner? Obviously to those individuals who follow politics and the Social Security situation closely, the answer is maddeningly complex: It is not all recipients and dollars and cents. The answer is as much about reelection politics as it is providing entitlements. Social Security isn't called the third rail of U.S. politics for nothing -- plenty of political careers have evaporated because of even modest calls to do "something" about Social Security.
Notwithstanding fierce partisan politics, Congress has tinkered with Social Security in just about every decade since its enactment1. This tinkering consisted of adding new classes of beneficiaries and adding new benefits (like the G.W. Bush-era prescription drug benefit). And of course, there is the annual spectacle in Congress over the Social Security cost of living adjustment. But there has been little done to truly stabilize the financial situation of Social Security, or more importantly, to reduce the cost of the program. It seems that putting off action has been the most politically expedient solution for Congress.
Yet here we are today with $110 trillion of debt hanging over our heads. This amount of money demands action by our elected representatives in Congress. Nobody wants gray-haired seniors to be thrown out of the system, or to have serious cost-cutting measures affect folks who simply don't have the time remaining or resources available to make other accommodations. But "something" needs to be done, and it will require four disciplines from our elected representatives in Congress: courage, wisdom, honesty, and vision.
Let's face facts. The system is broken; the $110-trillion liability emphatically demonstrates that fact, as do the periodic predictions that the Social Security trust fund will go into the red sometime in the middle of this century. At that time, we will have to deal with not only unfunded liabilities, but broken promises and ruined futures. (And imagine for a moment the consequences of adding 10-20 million low-wage illegal aliens and their extended families to the Social Security system if immigration amnesty becomes a reality.)
There is no time like the present to start investigating alternative methods of insuring the financial security of senior citizens. Americans, and in particular the elderly, don't deserve procrastination and partisan gotcha politics. We need and we demand real action and real results.
Anthony G.P. Marini is a consultant, engineer, and strict Constitutionalist who resides in Massachusetts with his wife and four thrifty dogs. He blogs at The Sky's The Limit and can be reached at nolimits@tonymarini.com.
1For an overview of Social Security and associated programs, visit the SSA's website at http://www.ssa.gov/history/briefhistory3.html.
