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Bernie Madoff’s got nothing on this new Ponzi scheme.

With $88.9 trillion in liabilities, it’s much larger. And like all Ponzi schemes, it’s just a matter of time before it collapses.

Madoff stopped investing his clients’ money in the mid-1990s. He kept his clients happy by showing them fake statements with great investment returns. And whenever a client requested cash back, he would just meet that request with money from new investors.

As long as he had more money coming in than going out, he could run his Ponzi scheme.

That’s why the scheme began to unravel in December 2008, when the market downturn accelerated. With the market crash, investors panicked and tried to withdraw $7 billion from the firm. Madoff simply didn’t have enough to cover that avalanche of withdrawals.

There’s something similar going on with Social Security. Let me explain.

Following in Madoff’s Footsteps

Social Security is a “pay-as-you-go” program, where money put in the trust fund is used to pay current beneficiaries. This works well as long as there are more workers than retirees.

This is equivalent to Madoff meeting withdrawal requests with money from new investors. Once the withdrawals became larger than the inflow of cash, the scheme collapsed.

Unfortunately, Social Security is following in Madoff’s footsteps. There are way too many people retiring and not nearly enough workers to support them.

Back in 1950, for example, there were 16 workers paying for each retiree’s Social Security benefits. Today there are only 1.75 workers for each beneficiary.

And the situation will get much worse. The number of Americans drawing on Social Security is expected to increase by another 35 million by 2035.

Now you understand why Social Security, in its current form, is nothing more than a giant Ponzi scheme. The government simply doesn’t have enough to pay for what it’s promised.

The Social Security Board of Trustees projects the trust funds will be exhausted by 2033. But it could happen much sooner.

Just two years ago, for example, the board was projecting exhaustion by 2037. Then in 2011, it changed that projection to 2036. And this year, it says 2033. Do you see the pattern?

Besides the growing number of retirees, the fund is also struggling with low investment returns.

You see, the trust fund must, by law, be invested in U.S.-government securities. In order for the program to work, the trust fund would need to generate some nice returns. But with government securities paying next to nothing, that’s impossible.

The average rate of interest earned by the fund has declined from 6.1% in 2003 to 3.9% today. This is going to go even lower as the fund rolls maturing, high-yield bonds into bonds that pay a lower interest rate.

Don’t Be a Victim of This Ponzi Scheme

Without changes, the Social Security system is going to collapse.

Unfortunately, there are way too many Americans who still seem to think they can rely on Social Security for their retirement. According to the Employee Benefit Research Institute, for example, 46% of all American workers have less than $10,000 saved for retirement.

I’m in my 30s, so I’m convinced Social Security won’t be around by the time I retire. Yes, the program will be there for you if you’re approaching retirement right now. But that doesn’t mean you don’t have to take any action today.

The average payout for a retired worker in August was just $1,235.63. And the payouts will get much smaller. Once the trust fund is exhausted, benefit payments will suffer a huge cut.

That’s why Social Security cannot be your only source of income in retirement years. It’s time to take control of your retirement. As sovereign individuals, we are responsible for our own financial future.

You need to put in place a solid portfolio of income-producing assets, such as the ones I mentioned here and here. That’s the only way you can protect yourself from the largest Ponzi scheme in history.

Regards,


Evaldo Albuquerque

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