Last week, we discussed Social Security, a Ponzi scheme that is inevitably approaching its default. That leads us to another point in our broader discussion of capital destruction. Let’s illustrate with an example.
The Fraudulent Promise
Suppose Eric works for wages. He is 50 years old. His house is paid off, he has no student loans, and owns his car outright. He has no debt (he is a rare type of person). His kids are out of college. He has no expenses except ordinary living costs, and no demands on his savings except his own retirement.
Oh, and one other thing. He gets a statement from Social Security telling him that they will pay him a pension when he retires in 17 years.
When faced with a choice to take a vacation or save for retirement, he wonders why he should deny himself a bit of pleasure. With retirement covered by Social Security, there’s no need to save for retirement. So each year, he visits a place on his “bucket list”, not worrying about how he will live when he is in his 70’s and 80’s.
You see the problem. Social Security cannot go on paying as it has promised to pay. Eric will not have the secure retirement that he plans to have. In future years, he will look back bitterly on the bogus account statements they sent to him. He will play over and over in his mind what he spent, thinking he should have saved more. His spending was based on a counterfeit promise, a fraud.
Capital Consumption
This is another way that the system drives people to consume their capital. Social Security may or may not be considered a debt, either legally or for accounting purposes. We will leave that debate to others. However, people certainly count their future Social Security checks as an asset. In order for that asset to be good, there must be a corresponding liability somewhere, and the party with that liability must have the means and intent to make good on their promise.
Eric is spending his income, in the belief that he has an asset that will cover him in retirement. But the asset is a fraud. It does not exist. It is merely the dishonorable promise of a Ponzi scheme.
