Boy! I really riled the feathers of a Nobel Prize winner recently when I suggested that the U.S. Social Security system resembles a Ponzi scheme. Let me give you the background: Since I work with many American olim when I help them put together financial plans and handle their U.S. brokerage accounts, I know that they anticipate receiving both American Social Security as well as Israeli pensions. But under the terms of the “Windfall Elimination Provision” (WEP), they may receive less Social Security than they thought. Will the WEP reduction affect readers of this column? That was the question I wanted to discuss with Nobel laureate Professor Peter Diamond on my radio show.
Will there be any money left?
When I asked Professor Diamond if the WEP system was fair, he redirected the discussion and posed the question: “Is it sustainable and what will the future look like?” Professor Diamond explained that the government needs to deal with issues such as unemployment and Social Security now – before the expected future crisis kicks in, affecting millions of taxpayers.
I mentioned that receiving a smaller amount of money than you expected, based on what you paid into the system, seemed unfair, but Professor Diamond disagreed. He explained that the American Social Security’s benefit formula is very different from parallel systems in other countries: “The formula is progressive with the goal of giving a larger replacement rate to people who have had lifelong low earnings. … The formula is directed to benefit those people who are needy.” Essentially, the Windfall Elimination Provision is based on the assumption that a high earner would get a larger pension from his job and doesn’t need Social Security to reach a basic minimum living standard… unlike a lower earner, who may not receive such a large work pension, if any at all.
A Ponzi Scheme?
When I commented that Social Security seems like a Ponzi scheme, because folks put in, hoping that their retirement will be funded by the next working generation, the discussion became even more lively. Professor Diamond didn’t agree at all, stating that it makes his blood boil when people compare the government pension to a Ponzi scheme, and he gave some very interesting explanations.
To learn more about the WEP and its relevance to you, and why Professor Diamond supports it, download the interview or register for a free webinar on WEP.
(The opinions expressed on the Goldstein on Gelt show are those of the guest, and not necessarily my opinion or the opinion of Portfolio Resources Groups, Inc.)
Douglas Goldstein, CFP®, is an investment advisor and author of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published August 25, 2014.