The current debate about whether Social Security is a Ponzi Scheme or a venerable government program seems tailor-made for television news bites and newspaper headlines, but distracts from the reality that the program is in trouble. 

We all know that Republican Presidential Candidate Rick Perry dove head first into the issue during a recent debate, and the media have kept his statement alive as it sells papers and commercials.  However, I am less certain that the average citizen really understands what is happening to this program that was started by President Franklin Roosevelt.

Let’s face it, this program was never intended to be a savings and investment program – if that were the case, it has been a true failure.  The purpose of the program was to be a wealth transfer that keeps the elderly and infirmed out of abject poverty – and at that it has been a success.

The program was started as a way for provide for the elderly whose savings had been destroyed by the Great Depression.  The program was predicated on our country having a large number of young people who were working to support a small number of old people.  The cost was nominal in the beginning but by the mid-80’s, we had come to recognize that the original 16 workers to support each retiree had dwindled significantly.  We are currently at the roughly three workers to each retiree level, and that number is falling fast as it is anticipated to be two-to-one by the time I retire.

For those first workers who received Social Security checks, the ones whose savings were decimated by the Great Depression, they benefited greatly from this wealth transfer program:  the very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, yet Mrs. Fuller collected $20,993 in benefits over her retirement years (from Michael Tanner of the Cato Institute).

For those two workers paying for my Social Security benefits in 15 or so years, there will only be one reality:  they will be paying more than you and I are paying in Social Security taxes with expectations of lower future benefits than anyone receiving checks today.  If Social Security was a savings and investment program, today's young would be a lot better off (conceptually - naturally it would depend upon what the investments were comprised of and how it operated in practice).  But clearly, the current situation is a bad deal for today's 30 year-olds who will be in their prime earning years when I retire but having a very large chunk withheld to cover my benefit payments.

Again from Michael Tanner:  Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase and its really just the beginning of what's needed.

Obviously, the problem of decreasing numbers of younger workers and an increasing population of elderly benefit recipients should come as no shock.  In fact, the data is easily available at the US Census Bureau.  

Here is a population pyramid of the United States from the US Census Bureau:

Compare that to the population pyramid of India:

You can see that their pyramid provides a much better age distribution to support a program like Social Security with the large number of young people paying taxes to support ever-decreasing numbers of old people.  This pyramid was much like that of the United States in the 1930’s.

I like to look at these pyramids in my normal work life managing people’s money.  Countries that have pyramids like the one from India provide an excellent macro backdrop for growth and economic momentum when you see the levels of poverty diminishing and a middle class forming.  In investing, you can analogize the current economic state of countries like this to post-WWII Europe and America – with the developing middle class, increasing standards of living, economic growth for generations ahead of them.  These are the areas of the world where we will see capital flow in the coming decades and away from economies that have decreasing economic growth rates due in part to demographic issues.

These pyramids also makes it easy to see why we have problems in United States with our legacy entitlements, and that those problems need to be addressed now.  Is there the political will to do it in Washington?  Not a chance – in the President’s speech today, he specifically took Social Security reform off the table and in the Republican Debates, the candidates stated that no changes would be made to the Medicare Drug Program.  No one is serious about fixing the problem because it might cost them an election (sorry for the cynicism, but there does not seem to be any serious consideration of the future past the 2012 election at this time).

Obviously, the math to keep this program alive will work only if taxes go up and benefits go down.  The negative impact will be less to the tax payer and to the benefit recipient the sooner our politicians and the media leave the rhetoric behind and focus on the reality that there just are not enough young Americans to pay for the current and soon-to-be recipients whose lifetimes are extending each year. 

The current unfunded liability for Social Security is $20 Trillion (again from the Michael Tanner article) and for Medicare it’s even more.  There is still time to fix this problem, but our leaders in Washington ignoring it until after the next election is not a viable strategy, particularly since there is always an election right around the corner and our demographics are not improving anytime soon.