Your Questions About Stock Market Is A Ponzi Scheme

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Donald asks…

If Allowed, would you “Opt-Out” of Social Security & MediCare?

And do you think it’s acceptable that money is taken from people who have NO desire to participate in these programs? Save your “You do realize that what you’re paying now is funding the current retirees” bullshit. I don’t care, I want to keep my money.

Justin answers:

The “You do realize that what you’re paying now is funding the current retirees” BS is exactly why it is so difficult to reverse course on this. The government mishandled the funds, turning this into one giant Ponzi scheme. Read the details about what Bernie Madoff did with his clients, and then try to find something – ANYTHING different about how Social Security is run.

I wish I had had the opportunity to opt out of Social Security when I was younger. As it stand, I have put thousands and thousands of dollars into that program; I would have done better at a bank or with an insurance company annuity.

George W. Bush offered a very small opt-out option – 1% – and he was excoriated for proposing a “Risky Scheme”. If, 30 years ago, I could have taken 1% of the 7% the government took from me and invested it in a blue-chip stock mutual fund every month, my account would be yielding more now than the social security statements show I’ll get when I retire.

It’s not about “The Love Of Money” as Railroad Dave puts it – it’s about fiscal responsibility. The US Government does not know the meaning of the word.

EDIT: This is mostly directed to “Just A Grandma”. I think you are making some broad assumptions in support of your argument which are patently wrong. Your first assumption is that the government is fiscally responsible and that Social Security is solvent and trustworthy. The second assumption is that all IRAs lost 40% of their value. IRAs that were invested in stocks or other high-risk instruments did lose value, but you can put your money in bank accounts, CDs, Treasuries and low-risk AAA bond funds to minimize or eliminate risk altogether.

Here are some numbers. Social Security takes 7% of our salaries, and takes and additional 6% from our employers on our behalf. For a person earning $35,000 per year, that is $4550 of investment money he does not get to use.

If a person works from age 25 to 65, and invests $4550 per year in an account earning just 5%, at age 65 he will have accumulated almost $600,000. He can purchase a life annuity that will yield a GUARANTEED $3600 for the rest of his life – that’s an annual income of $43,000, or a raise of $8,000 over our initial assumption.

If this person were to earn 7% on his money, his annuity purchase would be over a million dollars – which, at even 4% would yield him $40,000 and he wouldn’t even have to touch the principal.

Don’t forget – even though bank interest rates are low now, they weren’t always. In the 1970’s and 1980’s, CD rates were in double digits. So were tax-free municipal bonds and GNMA securities. Even if a small portion of these dollars were invested in stocks – in 1970 when I was 25 the Dow Jones average was about 750 – now it is hovering around 10,000. In the history of the stock market, there has never been a ten-year period that the market has had a negative return.

By taking the money AWAY from the government and investing in bank instruments, insurance company instruments, even government instruments and corporate instruments, you are supporting the economic health of this country.

Annuities are offered by insurance companies, which are heavily regulated by the government. Actuaries evaluate their cash reserves much more strictly than the government regulates themselves. If Social Security fell under the same scrutiny as these companies, they would be forced out of business.

An IRA or a 401-K is not an investment – it is a tax law. It simply means that Americans can shelter some of their money from taxation and invest it as they like.

It would be very easy for the government to outline certain guaranteed vehicles for investment that can be used for retirement – to disallow the benefits for high-risk investment below a certain threshold.

Unfortunately, they will not or can not do this now. We have to wean ourselves slowly off Social Security over one or two generations so we don’t screw the people that are dependent on it now – but our government won’t because it doesn’t want to let go of the money.

Thomas asks…

Can You Explain What A “Boiler Room Scheme” Is?

I’m unfamiliar with “stock talk”.. what exactly is the Boiler Room scheme?

Justin answers:

This usually refers to a Direct Marketing company that resorts to cold calling or direct contract not only from phone, but internet ads, flyers, etc.
Sometimes is has been shown to be nothing more than scams. They get a sales person to convince you to buy into a product, a venture or on-going “scheme”, then use the money to invest or expand operations. Sometimes you find a pyramid scheme under this type of venture, or Ponzi scheme, but there are reputable companies as well.
You just have to do investigation into the company in question, which can be hard since this is the type of scheme used by start up business’s and they have no real history to investigate.

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