Fund Your Utopia Without Me.™

14 February 2010


As the first recipient of a recurring monthly Social Security cheque, Aunt Ida was atop the pyramid of the Social Security Ponzi scheme.

As Stephen Mauzy so eloquently and accurately wrote, "Social Security was a sure thing in its infancy. Just think of Ida May Fuller (1874–1975), a nonexempt legal secretary from Ludlow, Vermont.  Aunt Ida exemplifies the advantages of getting in early and getting out early. She paid a whopping $24.75 to participate in Social Security. Her first monthly Social Security cheque was issued January 31, 1940, for $22.54. Within three months, Ms. Fuller's investment was in the black. Over the ensuing 35 years, she would collect $22,888.92 in Social Security payments.

Of course, only a small percentage of mankind was lucky enough to have been born in 1874. Everyone reading this polemic resides far down the pyramid — exactly where you don't want to be in a Ponzi scheme, especially in one where participants keep voting themselves greater remuneration. Social Security benefits totaled $35 million in 1940, soared to $961 million by 1950, rose again to $11.2 billion  by 1960, trebled to $31.9 billion by 1970, quadrupled to $120.5 billion by 1980, doubled to $247.8 billion by 1990, and nearly trebled again to $650 billion by 2009.

That's a lot of cash outflow, requiring a lot of cash inflow. The tax rate in the original 1935 rendition was 2%, half paid by the employee and half paid by the employer on the first $3,000 of earnings. Today, the rate is 12.4% on the first $106,800 of an employee's taxable earnings. In short, we've gone from a maximum dual contribution of $60 a year to maximum dual contribution of $13,243 — a 7.5% average annual increase."

The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programmes has reached nearly $107 trillion dollars in today's dollars and Laurence Kotlikoff, a well-known professor of economics at Boston University, puts the real figure over $211 trillion, but that's another story for another post.  Anyhoo...

In 1935, while Aunt Ida was typing up a brief for her boss, Congress passed the Social Security Act of 1935. The retirement age was 65. The average life expectancy was 61.7 years and a small lump sum was given to survivors upon the contributor's death. There were no long-term payments made to minor children or spouses.

In 1940, when Aunt Ida received her very first social security cheque, there were 159.4 workers for every one retiree.

In 1950, ten years into her retirement, there were only 16.5 workers per retiree.

In 1960, while Aunt Ida was pruning her rose bushes, the average life expectancy was 69.7 years and 5.1 workers were paying for her.
In 2005, while Aunt Ida's great-niece was cleaning her grave site, only 3.3 workers were contributing for each retiree, who was expected to live until the age of 77.8.

In 2010, there were only 1.75 workers for Aunt Ida's great-niece and every other Social Security recipient in America.

In 2011, Aunt Ida's great-niece will be one of the first of the 73 million Baby Boomers to begin to retire. During her working life, her average income was $43,100. She paid approximately $345,000 in payroll taxes.  Over her expected lifetime, she will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, according to estimates in an Urban Institute study. 

She and the members of the Silver Tsunami will cause the senior population to double in the next decades while the number of employees will either remain constant or decrease. 

Aunt Ida is important to remember because she proved that the system was a Ponzi scheme. She collected far more than was predicted and lived 36 years longer than the 65 year retirement age. Fortunately, there were enough workers to pay for her. Now, we have an astronomically larger senior population, which will explode soon, and they are living much longer than the Social Security fund can afford.

It was good to be born in 1874. For those of you born in the 1960s onward, you're no Aunt Ida. Sorry.