Revamping America's Ponzi scheme

Ronald Blum

May 04, 1993|By Ronald Blum

CARLO Ponzi was an Italian immigrant who, in 1920, promoted a confidence scheme promising a 40 percent return in 90 days. The first investors were paid off with the proceeds from later investors, who swarmed in when it began to appear that Ponzi's claims were true. They got fleeced.

The tontine was a legitimate annuity scheme begun in France in 1653 by a Neapolitan banker, Lorenzo Tonti. Subscribers bought shares in an annuity fund with rights of survivorship. As participants died off, the survivors received larger and larger annuities, until the last one got it all. One Englishman named Jennings survived a tontine that he joined for $20,000, eventually collecting $600,000 per year before he died at 103 in 1798.

Our Social Security system is a sort of combination Ponzi-Tontine. Like a Tontine, you enter at an early age, but with a pay-as-you-go subscription proportional to your income. Like a Ponzi, those following you pay more and more into the system as they move through it. If you live long enough, the Social Security Tontine yields a big payoff, whether you need it or not. Social Security has become a longevity lottery, instead of what its name says, a system that provides security for the elderly or others who are incapacitated. The system often provides a pot of gold for many wealthy elderly who have no need of it, except to enrich their heirs. This drives up the cost to everyone.

The Social Security Ponzi is pyramiding on the backs of today's workers to an extent that it is inhibiting economic growth. Ultimately, like Ponzi's original scheme, it must collapse if productivity cannot keep pace.

When I began work as a part-timer in 1951, I paid $9 in Social Security on $600 of my income. When I got my first faculty position in 1964, I paid the maximum, $174 (3.6 percent) on my first $4,800. Nowadays you pay $4,246 (7.65 percent) on the first $55,500 of salary income and 1.45 percent on the next $74,700. And the hit is ballooning about 4 percent per year. The Social Security flea-bite has turned into a great white shark, its jaws opening ever wider. By the millennium, everyone will be working just to pay the medical bills of retirees.

Well, as I tell my physics students, I don't really mind, because they are the ones who will have to ante up. All the more reason to support education. If they do not work hard and produce a lot of wealth, where am I going to get the money for a really nice, comfy retirement?

After all, the $9 I gave Harry Truman in '51 is just a mark in a ledger somewhere. In my less facetious moments, I do wonder how young people can put up with it -- and how much longer they will put up with it. I'm frankly in awe at our kids' ability to absorb fiscal punishment, but I would not be surprised to read about Social Security riots someday. I'm awfully glad that I am to become a beneficiary rather than a victim.

What if we could save some dough, lighten the load on our productive workers and still care for our elderly? What if we viewed Social Security as a human right rather than a property right? As a form of national old-age insurance, something you get only if you have a valid claim, a real need? A corporate exec who retires with a golden parachute and an after-tax income over $200,000 per year should not get any Social Security payments after retirement. Somebody with no other income at all should get the maximum benefit, and there could be a sliding scale for everyone between.

We need to think of Social Security contributions as a progressive tax that you pay in advance, in the event that you get rich; a sort of reverse income averaging. If you don't get rich, you get your money back with interest; if you do get rich, you have the satisfaction of knowing that you made it big and did your share for the land that nourished your dreams and abundantly rewarded your efforts.

The resulting decrease in the Social Security payout would mean a corresponding reduction in the Social Security taxes of those now working, with no significant loss of security. For the sake of fairness and for political expediency, Social Security legislation could be grandfathered not to penalize those already retired. The costs to others still in the system could be progressively reduced until, in about 40 years, we finally get the awfully rich completely off the welfare rolls.

A fair system should also provide that if your after-tax income dips below the no-benefits level in any given year, you could apply a Social Security credit against your tax. When your tax drops below a certain point, it would trigger monthly cash payments from Social Security. So that if you get sick and the hospital takes away all your money, Uncle Sam will be there to catch you.

Since pension fund contributions are tied to probable future distributions, this approach to old-age insurance should result in an immediate reduction in projected costs and current retirement taxes. It may be objected that all this would be too complicated and anger the American Association of Retired Persons, which is to Social Security what the National Rifle Association is to guns. But all present retirees' interests would be safeguarded, the contributions of current workers could be steadily reduced and nobody will be deprived of a secure retirement. So it's really OK.

This proposal will not solve all the problems, but it's a step in the right direction. As for the complexity, rather than let my MBA and degree in math go to waste, I will be glad to work out the numerical details as a public service. I expect to have a lot of time on my hands in a year or so, since it hardly pays to continue working any longer than necessary.

Ronald Blum teaches physics at Towson State University.

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