CHAPTER 20 - CHAPTER 20 SOCIAL SECURITY Social Security known as OASDHI is the largest federal transfer payment program in the world($350B/year Old

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CHAPTER 20 - SOCIAL SECURITY Social Security, known as OASDHI - is the largest federal transfer payment program in the world ($350B/year) - Old Age, Survivors, Disability and Health Insurance. Started in 1935 as a compulsory, national retirement insurance, comparable to a private pension fund. However, SS does not operate on the principles of private insurance company or a private pension fund. For example , private insurance companies and pension funds have not been complaining about the problem of babyboomers retiring, there is no "pending crisis" for life insurance companies or for any private pension fund. Why? Big difference between private insurance/pension funds and SS. SS operates more like a Ponzi scheme. 1916 - Italian immigrant named Charles Ponzi created a large investment fund that paid very large dividends initially, but no investments were actually being made. What seemed in the beginning like a very profitable investment attracted new investors trying to get rich. Money from new investors was transferred to the old investors. The system had flexibility and boldness, and worked as long as an ever-expanding pool of suckers could be found - a "pyramid scheme." What causes a Ponzi/pyramid scheme to break down??? In contrast to SS, a private insurance company or pension operates on sound financial, economic and legal principles, following a Saving-and-Investment model. For a life insurance company, current customers pay in premiums. What does the insurance company do with premiums??? Operates as an "actuarial sound" operation. Pension fund takes current contributions and makes investments on behalf of the client. Unlike SS, fund is portable, transferrable, redeemable, etc. SS operates on a "pay-as-you-go" basis, that is really an intergenerational income transfer program, intergenerational welfare program. Current SS tax collections are paid out to SS recipients, no investments are made, no wealth is created. The system relies totally on future generations to pay in enough taxes to support SS recipients. When it started in 1935, there were lots of workers and few eligible retirees. Even in
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This note was uploaded on 11/25/2011 for the course ECO 202 taught by Professor Staff during the Fall '10 term at Michigan Flint.

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CHAPTER 20 - CHAPTER 20 SOCIAL SECURITY Social Security known as OASDHI is the largest federal transfer payment program in the world($350B/year Old

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