Is Social Security a Ponzi Scheme?

The name calling involved is a distraction from the real problem – the problem of how to keep our entire economic system working with the massive shifting of people into the non-productive retirement ages. Besides the imbalances in pay as you go programs like social security and medicare, there is the problem of who is going to buy the securities that the retirees will need to sell to pay for living expenses? What usually happens when the market knows that someone MUST sell something? What percentage of the stock market’s total holdings MUST be sold over the next 30 years?

Everyone keeps pretending that this is some sort of marginal change situation.  It is definitely not.

What happens if the Boomers sell off causes the market to drop by another 25 – 30%?

Sounds crazy?  But the charts below from the San Fran FRB tells a story…

The solid line represents the ratio of middle aged people (40 – 49) to Old Agers (60 – 69).

This picture shows a 30% drop in PE.  If earnings are also challenged by the low or negative population growth during the same time period, the massive drop is stock prices is quite possible.

So even the people who did save for retirement may be woefully surprised that their money does not save them.

The stock market is but a large and often somewhated distorted mirror of the economy.  If the stock market is challenged by the low growth of the population and the shift from production to consumption of the large retiree population, then that is a reflection that the economy could be challenged in just the same manner.

That is the REALLY BIG problem that needs to be solved.

The Social Security problem is not at all difficult to solve.  According to the most recent actuarial report to the trustees, the shortfall in Social Security is 14% of projected benefits or 17% of projected revenues.  So anyone who can do arithmetic can work out some combination of increases to taxes and decreases to benefits that would bring the program into balance over the 75 year projection period.  Split it down the middle and decrease benefits by 7% and increase social security taxes by 8.5% and it is solved.  But the fact of the matter is that there is no serious consideration being given to any solution, let alone a straightforward solution like the above that anyone could understand.

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