Tag Archives: inflammatory taxes

Is Social Security a Ponzi scheme?

Is Rick Perry right or just looking for attention?

Hi Dad,
I’ve seen Rick Perry stating that Social Security is a Ponzi scheme.  I’m hesitant to buy into that view.  Slate Magazine put out an article examining – What would happen if we stopped Social Security right now.  
What do you think of Rick Perry’s statement?  Do you think we should get rid of Social Security?

 

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Cartoon courtesy of: Nate Beeler, The Washington Examiner, Washington, D.C.

 

Dear Daughter:
This cartoon appeared in the Sunday paper yesterday. It pretty much illustrates the reality of the situation. Perry needed a sound bite and he got it. 

The Truth about Social Security

The truth is more like the statement on the left. The Social Security funding methodology was developed at a time when the workforce was young and growing; where the population at work outnumbered the population in retirement. There would always be enough workers paying in to cover the blueheads drawing out. Now, of course, we have a burgeoning baby-boom generation that will (at the current pace) suck the system dry faster than you kids can replenish it.

The problem with Social Security in 2011

The problem (aside from the upside-down funding) is the expectation that Social Security will provide your average worker with a quit-and-go-fishin’ retirement. It wasn’t intended to do that and it can’t. It’s a safety net; a supplement; that’s all.
Back in the 80s, two things happened that make this all the worse. A change in the Financial Accounting Standards Board (FASB) rules required companies to fully fund their qualified pension plans. That made it a lot more expensive for employers to maintain traditional Defined Benefit plans. DB plans are the ones that provide a worker with a guaranteed annuity at retirement. They also put all the investment risk on the plan sponsor (the employer). Second, a financial advisor looking for an advantage for his client discovered an ignored chunk of the Internal Revenue Code in section 401, subsection (k). It’s a nice little tool that allows an employee to set money aside on a pre-tax basis to save for retirement. Only problem is, it’s too easy to get at your money out before retirement and all the investment risk is on the participant (that’s you) not on the employer. End result – employers are shutting down their pension plans and shifting the responsibility of your retirement back on you.
Oh, your question.

Inflammatory silliness

Yeah, Perry’s Ponzi Scheme comment is just inflammatory silliness. You will get a benefit from Social Security. You will likely have to pay more for it and wait longer for it. You should support federal level politicians who understand finance and who talk about restructuring Social Security funding to a system where YOU get out what YOU put in. There should be a cap on income that is replaced, but no limit on income that is taxed.
And don’t stop contributing to your 401(k).
Love,
Dad

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Filed under Retirement, Taxes