December 7, 2009
Watching Social Security Eat the Young Alive
By Bill Frezza
My 26 year old son got the most extraordinary letter from the Social Security Administration last week. In plain English it admitted that the system was a Ponzi scheme destined for bankruptcy more than a decade before he reaches retirement age. It warned that if he is to have any hope of retiring he'd better start saving on his own. Anyone who wasn't personally hypnotized by FDR knows this to be true. Yet I was still surprised that such a frank government confession didn't make national news.
The two-page pamphlet entitled "What young workers should know about Social Security and saving" reminds us that 50 million, or one in six, Americans will collect more than $614 Billion dollars in Social Security benefits this year. It informs young people that the Security Taxes they now pay go into a "Trust Fund" that is used to pay current beneficiaries. Paying off early investors with funds taken from later investors is precisely how Wikipedia defines a Ponzi scheme. The pamphlet advises that the Social Security Board of Trustees estimates that the "Trust Fund" will be depleted before my son's 54th birthday. Because people are living longer and the birth rate is low, it goes on, taxes paid by workers in the future will not be enough to pay the benefits promised in his personalized retirement account statement enclosed with the pamphlet. Imagine what hell would break loose if Schwab or Fidelity Investments enclosed a confession like this when they mailed investors their 401(k) statements.
On top of the negative rate of return young people paying into Social Security are expected to suffer, the pamphlet concludes that my son should plan on taking an additional 24% haircut on the benefits promised in his statement. This is the same healthy young kid being told that he will soon have to buy an artificially overpriced health insurance policy so his premiums can be redistributed to aging Baby Boomers lobbying Congress for free stuff.
Given the fact that Social Security will be bankrupt before my son even reaches my age, the pamphlet directs him to a handy web calculator that shows how much he will have to save every week if he hopes to retire on his own. Play with it for a few minutes and you realize that there is only one field in the calculator that really matters, and that is the rate of inflation. Plug in an annual inflation rate of one or two percent and the numbers look pretty reasonable as compound interest works its magic. But stick in the double digit inflation figures that were in vogue when Jimmy Carter was president and a funny thing happens. In order to prepare for retirement, young people would have to save more than they make!
Given the Vesuvius of cash the Fed pumped into the economy to disguise the real estate debacle, what do you think the odds are that inflation is going to stay at one or two percent?
Why do kids put up with this? Last time I checked they were old enough to vote. An entire generation is being systematically robbed by their parents with nary a peep. Why aren't they marching in the streets like we did? When they do show up at the polls like sheep ready to be shorn, they pull the lever for kumbaya politicians promising to stick them with the bill for an ever-expanding menu of unfunded middle class entitlements.
There only conclusion I can come to is that we Baby Boomers have infantilized our children into idiocy.
Our kids got so used to being taken care of, educated, clothed, entertained, and driven to the mall that they somehow got the idea that this life of Reilly would go on forever. Little did they know that we were luring them into an adulthood of intergenerational slavery. Baby Boomers made a mess out of what was once the most productive economy in human history. Rather than atoning for our errant ways by paying our own bills, we seem determined to use Congress to squeeze every last bit of cash out of anyone we can get our hands on before we shuffle off this mortal coil. Après nous, le Déluge.
Impoverished by our incessant demands for free government services, our children will most likely get revenge by not providing us with any grandchildren. Even if they wanted kids, how will they afford them if half their paycheck is confiscated to take care of us? As the most self-absorbed generation in American history, I suppose Baby Boomers will find it easy to live out their days bereft of grandchildren, much as the French and Italians have. Can this really be the Great Society we've been promising to bequeath to posterity?
Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com
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Another Govt run scam.
