Social Security

 

Illegal Smile

Last time I checked my bankroll
It was gettin' thin
Sometimes it seems like the bottom
Is the only place I've been
I chased a rainbow down a one-way street dead end
And all my friends turned out to be insurance salesmen

Is insurance a bad thing?

People who say that Social Security Insurance is a Ponzi scheme neither understand Insurance nor a Ponzi scheme.  Insurance is a method to pool risk.  And as I have written in previous postings, risk is the product of likelihood and consequences.  If there is one chance in a thousand of losing a home (e.g. the likelihood) and that home is worth $100,000 (e.g. the consequences) , then 999 individuals would have a cost of $0 and one unlucky individual would have a cost of $100,000.  But if those 1000 individuals pool their risk, they would each pay $100 and the manger of the risk pool ( e.g. an insurance company) would pay the $100,000 cost to replace the home. You would use your own money to pay into the risk pool ( i.e. the insurance company), but once you paid, it is no longer your money.

A Ponzi scheme is not insurance, it is an investment.  Your money is your money even after it has been invested.  You expect to get back your money plus a Return, e.g. interest, On that Investment,  ROI.  If both your investment and its ROI comes from the investments paid by others, then it is a Ponzi scheme. 

Saying that you have “paid” into Social Security is one way that the Social Security benefit is computed, but the amount that you paid is NOT your money and ceased being your money once you paid it.  That makes it insurance (which is after all its name) rather than an investment. The fact that the government is serving as the insurance company does not change this.  Just because you call it your money, doesn’t make it your money. It used to be your money but is no longer your money.  If it is not your money, then it can’t be a Ponzi scheme.

The fact that government required you to purchase this insurance ( and your “contribution” to Social Security IS a purchase), does not change this fact.  My favorite sign in the last few years was “Government keep your hands off my Social Security!”  The irony was lost on the carrier of that sign.