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.
, 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
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