It's amazing that some people are still not recognizing the reality of Social Security. In an article today, a writer reassures people that as bad as things are in the market right now, it could be worse. How? We could have privatized Social Security and now retirees' Social Security benefits would be nuked by the market.

http://money.cnn.com/2009/01/13/news/economy/sloan_retirement.fortune/index.htm

That scenario is what could have happened to many people under President Bush's proposed Social Security privatization program. It would have required people of modest and very modest means who invested their Social Security taxes in the market to turn some or all of those accounts into annuities when they hit retirement age. (Yes, Bush never proposed a specific plan - but annuitizing private accounts for some people is what his 2001 Social Security privatization commission proposed.)

Current Social Security benefits, of course, are set by a formula that isn't affected by markets moving up, down or sideways.

As I recall, President Bush discussed the partial privatization of Social Security. The proposal in the 2005 State of the Union was to eventually allow a paltry 4% of a citizen's Social Security taxes to be set aside in privatized retirement accounts . So Bush's plan would not have made a significant difference in the benefits in the article's example. Only the 4% of the individual's Social Security account would have been negatively impacted while the other 96% would remain intact.

However, what is more worrisome is the boldface text. The author seems to love Social Security because benefits aren't set by a formula that is affected by markets moving up, down or sideways. In other words, he loves the fact that Social Security isn't subject to economic reality.

Only it is.

In the same State of the Union message, President Bush reported:

Thirteen years from now, in 2018, Social Security will be paying out more than it takes in. And every year afterward will bring a new shortfall, bigger than the year before. For example, in the year 2027, the government will somehow have to come up with an extra $200 billion to keep the system afloat -- and by 2033, the annual shortfall would be more than $300 billion. By the year 2042, the entire system would be exhausted and bankrupt. If steps are not taken to avert that outcome, the only solutions would be dramatically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs.

The reality is that there is no such thing as a free lunch. The reason why Social Security seems great to so many people is because it's a "guaranteed" benefit that seemingly is impervious to market forces. But the reality is that the day is growing ever-closer when Social Security will not be able to afford to pay the benefits it has promised. The federal government will then have to start paying back the money it has borrowed from Social Security--but the government doesn't have the money. So it will either have to engage in more unsustainable borrowing from the public (resulting in ever-increasing budget deficits), further reduce Social Security benefits, or go back to increasing federal taxes or Social Security taxes.

Obama has predicted trillion-dollar per year deficits in coming years... and by the time he leaves office (if he gets a second term), Social Security will be as little as two years away from facing a cash shortage. How is Obama going to fix social security? Or will he leave that to the next president to fix?

People thought Bernard Madoff was the greatest thing since sliced bread and gave up conservative and "more risky" investments for what they thought was a guaranteed payout through Madoff. That's what people thought until it was revealed that Madoff was running a huge Ponzi scheme and they had lost all their money. Now they would have much rather invested in more typical investments that paid a smaller return and were subject to occasional outright losses... at least they'd have some of their money.

Someday people will have to wake up to the reality that Social Security is not sustainable in its current form. It's a Ponzi scheme a thousand times larger than Madoff's Ponzi scheme and the only thing that can save it is the fact that the government can unilaterally force you to contribute more and more to prop up the inherently unsustainable design of the system. It's like Madoff investors finding out he was borrowing from Peter to pay Paul in his Ponzi scheme but then his investors are forced to give Madoff more money to pay Pal.

Madoff is going to jail. Yet we are compelled by law to continue contributing to Social Security, a Ponzi scheme far larger than Madoff's.