Excerpt from Chapter 8 of Nobody's Fool
"The Citizen and Social In-Security"

Let us view the social security system as it exists today at the onset of the twenty-first century.  Since inception of the Social Security Act in 1935 as a program to provide payments to retired employees age sixty-five or over, it developed into something quite different.  Over the years Congress repeatedly amended the act by increasing benefits, expanding the category of recipients, increasing the tax rate and, most significantly, by the Social Security Act of 1965, adding hospital and medical care—Medicare—as an entitlement.  The original act provided that employer and employee each pay a 1 percent tax on the first $3,000 of employee's wages commencing in 1937.  At that time, with the nation engulfed in the Great Depression, benefits began meagerly.

What evolved over the decades would have defied the imagination of its founders.  Under the Federal Insurance Contributions Act (FICA), a combined tax rate of 7.65 percent is assessed on both employer and employee, 6.2 percent which in 2005 is imposed on wages up to $90,000, with the remaining 1.45 percent Medicare portion levied without limit.  For self-employed individuals, the tax is the sum of these amounts for a total of 15.3 percent.

Following the late 1970s, fundamental solvency of the program became the main concern.  Now faced with the escalating longevity of over forty million aged recipients, and compounded by the prospect of the baby boomers’ entry into the system, it appears certain that expenditures will soon overtake and overwhelm anticipated income.  A confrontation of epic proportion now exists between the vested retirees and the middle class earners from whom these current benefits are involuntarily extracted.  Aggravating this conflict is the growing awareness that the generous benefits currently bestowed on recipients will not be available to the present contributors.  The political ramifications are easily understood.  And at the center of the dispute is the uncertain status of those assets extracted over the years, presumably designated to provide future benefits, known as the "Social Security Trust Fund."  Despite differences of opinion as to the future availability or even existence of this fund, there is at least the illusion of its presence.  For many years, the fund regularly transferred these FICA taxes to the U.S. Treasury in exchange for what amounts to interest-bearing government IOU's.  The use of these supposedly sacrosanct social security monies by the federal government now constitutes a major controversy.  Despite the vow by successive administrations to "Save Social Security," and similar assurances by the Congress, huge sums continue to be dissipated on projects as diverse as aid to farmers and the steel companies, military pay raises, hurricane aid to Central American nations, and various military projects.  The frantic spending following the terrorist attacks on September 11, 2001, illustrates the fungible nature of federal accounts.  Whether any of the money will ever see its way back is the trillion-dollar question.  You may be the judge as to what intrinsic value to place on this trust fund.

Before proceeding further, there is a biographical tale that deserves telling.  It may seem unrelated, but there is a relevance.  The story involves an Italian citizen, born in 1882, who immigrated as a young man to Boston, Massachusetts, by way of Canada.   His occupations during his life included grocery salesman, sewing machine repairman, cafe waiter, and hot dog stand operator.  After several prison terms and eventual deportation, he ended his days in Brazil dying near-penniless in a Rio de Janeiro charity ward in 1949.  He receives but minor mention in encyclopedias, and relatively few accounts exist which document his life on earth.  However, for one short period from December 1919 to August 1920, he personified success.  His name: Charles Ponzi.  His claim to immortality: the Ponzi Scheme.

On the pretext of capitalizing on international exchange rate differentials through trading in postal reply coupons, he claimed to obtain annual returns far in excess of 100 percent.  On this basis he sold short-term notes to the public, offering as much as 50 percent interest in as little as forty-five days.  By systematically paying off earlier note purchasers with receipts from later customers, he rapidly developed for many Bostonians an image of authenticity and reliability.  Within a scant six months he collected eight million dollars from speculators eager for the promised rewards—a prodigious sum at the time.  Though not the first person to engineer such a scam, he qualified as the most colorful.  Not unexpectedly, when the investors ultimately began to doubt his ability to honor the note commitments, his financial collapse promptly followed, with imprisonment not long afterward.

Let us now return to the social security system and the logical question: Are there any lessons to be learned when contrasting its operation with the financial empire of Charles Ponzi?  Certain comparisons seem obvious, specifically that money is collected today to pay sums to those who decades ago paid significantly lesser amounts.  However, that fact in itself does not necessarily signal a calamitous end to the program.  Regardless of the similarities, there are two notable differences.  In the first place, Social Security functions legally under the direction, and with the full blessing, of the federal government.  Though it will encounter political challenges, and be forced to accommodate to changing tastes and national temperaments, conceivably it can continue as long as the United States government is itself viable.  Secondly, and of equal importance, short of actual citizen revolt it will not lose its source of funding since contributions are mandatory, not voluntary.

Whether social security is here to stay is less important to you than whether your participation is advantageous.  Most persons are locked into the system, as the ability to opt out requires determination, and the many complaints heard can be likened to Mark Twain's comment regarding the weather: Everyone talks about it but no one does anything about it.  The well-kept secret is that for persons in certain categories, inclusion in the program may be one of choice, not compulsion.

Before discussing who may be eligible to escape, either partially or wholly, let us look more closely at who is being best served by it, or perhaps more specifically, how you will be served by it.  This requires a scrutiny of the details—an irritation, perhaps, but vital.  Set about to gather the information.  There are numerous publications available (at bookstores for a price—at libraries for free) that cover the subject in detail.  A book previously mentioned, Everyone's Money Book, addresses the matter adequately.  Perhaps the best place to start is with the Social Security Administration itself through the nearest local office.  You can pick up several informative booklets at no cost, and learn of the benefits anticipated in return for the taxes to be paid.  Remember, though, that the more distant your probable retirement date, the less reliable the information, particularly in view of current political furor surrounding the system.  Amid warnings of impending disaster, I predict many changes.  One thing to expect: If the program is to survive in anything like its present form, contributions will rise and benefits will shrink.