Tuesday, March 3, 2009

Am I Already A Victim of A Ponzi Scheme?

Now that the Dow has broken the 7k mark, I was looking to console myself with something I've done right. But unfortunately, it backfired and ticked me off even more.

I was patting myself on the back for not getting swindled by a Ponzi schemer like Bernie Madoff, but as I looked at my most recent Social Security benefit estimate, I'm starting to think perhaps I already am.

Suppose you hand money over to an institution on the promise that it will invest it for you, so that after a certain period of time, you can obtain a certain level of monthly income. But suppose it turns out that the institution that you were handing money to was basically operating on a "rob-Peter-to-pay-Paul" principle? The SEC calls it a Ponzi scheme or a pyramid scheme.

I previously wrote about how I'm not expecting to receive any Social Security benefits when I retire. And from reading other PF blogs, it seems like most of us don't. Doesn't that make us the biggest Ponzi suckers of all?

I was okay (but not happy) about not receiving Social Security benefits in retirement, when I was relatively confident that my 401k and other savings would give me an adequate return so that I won't have to rely upon Social Security. But now, with a possibility that my 401k investments and savings alone may not give me a decent standard of living in retirement, I'll be livid if I don't get back anything what I've paid into the Social Security system.

I'm particularly pissed since I'm discovering that it's more and more difficult to create a stream of income that would sufficiently replace the Social Security benefits I probably won't be receiving.

I previously thought that in addition to my 401k and Roth IRA, holding high-dividend yielding stocks/ETFs/funds and an immediate annuity, would be enough to give me a decent income stream in retirement. But I'm learning that it's prohibitively expensive to do so.

According to this article, an income stream that lasts your lifetime could be purchased via an immediate annuity with a lump sum payment. The immediate annuity allows you to achieve a higher income stream than you could earn from living off the interest income paid by savings, CDs or high-yielding bonds. That's because a straight life immediate annuity doesn't return principal when you die, and the annuity only lasts for your lifetime.

But risks associated with immediate annuities include default risks, fees and non-standardized benefits that make it harder to comparison shop between different insurance companies.

Based upon a quote from ImmediateAnnuities.com, a 67-year old female today would need to pay $361,441 in premiums to get $2,483/month. Assuming that my 401k will only generate, on average, less than 5% yearly return for the next 30 years, the premium alone will eat up 1/3 of my 401k balance!

And even if I create a decent portfolio of high-quality, high-dividend yielding stocks/ETFs/funds, there's always a possibility that dividends could be slashed.

If I can save the extra $500/month that I'm currently paying into the Social Security right now, I think I can probably do well enough to give my self a decent income stream when I retire. But I can never save enough while I pay into a system from which I will never see a return.


Sharon Rose said...

Hi there-I sincerely hope for you and everyones sake, you are proved wrong, it is a worrying situation.

Money Funk said...

Okay, you've made me depressed. Note to self: re reread this blog post and think of my own lacking finances and how I plan to fund and fulfill my retirement needs. ;)


K-money said...

Yes, the way Social Security is run it is like a Ponzi scheme, isn't it? My projected benefits are similar to yours and by the time I retire that amount of money may just pay my property tax without enough left over to buy food. Aack!

Anonymous said...

it is flat out depressing. when i move to the states I couldnt undrestand why people are paying for SS even though they know they will not able to get anything at the end. You are right about ponzi scheme we are the victims..I need to educate myself more about investment options too.

MoneyMateKate said...

My accountant, for some dumb reason, is always trying to tell me that Social Security isn't a tax, it's an investment in your retirement so I shouldn't mind paying it. I always say there's no point putting in more thant the minimum because SS will be so stripped down by the time I need it that I picture something akin to the UK system (as I remember it), where every pensioner gets the same amount from the government and is responsible for anything beyond that through IRA-type programs, insurance products, etc. I've always favored that idea because of the Ponzi aspect of our SS system - all you need is a demographic shift (e.g. reduced birth rate for a decade, average life expectancy extending 5-10 years, etc) to screw it all up.

Anonymous said...

It's funny because I asked someone what a ponzi scheme was and they said "it's like social security". I knew immediately what ponzi scheme meant after that! So true. I wish I could get some of that money too!

Miss M said...

Social security will still be around when we retire, it's just uncertain that they can pay full benefits at that time. Medicare is in far worse shape and should be a bigger concern. By the time we retire at the current projections they will only be able to pay us 70% of what they owe us, it's a lot more than zero. I don't count on it cause I like to plan conservatively, if I can fully take care of myself without SS then anything I get is a bonus. That's how people should plan, I think.

Anonymous said...

Like miss M, I don't figure SS into my calculations (that is, if I actually did any calculations beyond "save as much as possible") but I do believe something will be there. Just not what it "owes" us.

Abigail said...

As someone who's on disability, I can tell you that I have faith we'll get benefits. I know all these dire predictions can make you think otherwise, but they're seriously over-hyped.

The thing is, we're not paying money to SSA to invest for us. So it's not a ponzi or pyramid scheme. It's not an investment scheme at all. We're not investing. 401(k), IRA, stocks, bonds, whatever... Those are you investing for the future.

Social Security isn't keeping your money locked away in a little compartment with your name on it. As I am sure you know. Your money now pays for people drawing on Social Security now.

And when you retire, you will draw on the SS taxes that current workers are paying.

I think people are so busy investing in retirement plans that they forget that Social Security isn't an investment. It's a tax. It's a tax that you are legally mandated to pay.

An investment promises a rate of return or some profit thereof. You don't get that with Social Security. I can see how the blurring starts since you're told how much you'll get to draw on later. But that has nothing to do with the actual money you're putting in now.

The amount of taxes you pay over your working life will determine what percentage of benefits you get from the taxes other (current) workers are paying in while you're retired. But there is no investment on your part. Your money can't be withdrawn at any time with or without a penalty.

And it's thinking about it as an investment that gets people confused and scared. They think, "My money is going in and so much money is being paid out. Most of my money will be gone by the time I retire." Actually, all of your money will be gone. Someone else's money, however, will be there.

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