Social Security, Bernard Madoff and Charles Ponzi

Fri, 01/02/2009 - 12:12pm | posted by Jason Pye

In a letter to The New York Times, Don Boudreaux compares the Ponzi scheme of Bernard Madoff to Social Security:

Like many people, Ben Stein was assured that Bernard Madoff “never lost money” (“They Told Me That Madoff Never Lost Money,” Dec. 28). Unlike many people, Ben Stein wisely understood this assurance to be nonsense. Americans should apply Mr. Stein’s wisdom to the greatest Ponzi scheme going: Social Security. Many pols and pundits assure us that this program is a great financial deal for ordinary Americans.
But in principle Social Security is identical to Mr. Madoff’s fraudulent scheme: rather than generate wealth through productive investments, both schemes transfer wealth from newer ‘investors’ to older ‘investors.’ As long as a sufficient number of newer ‘investors’ keep coming aboard – either by being duped a la Mr. Madoff or by being coerced a la Social Security – such schemes appear brilliant. This appearance, however, is a dangerous apparition.

I’ve said something similar to co-workers or friends who have talked about Madoff. I haven’t defended him, just simply said, “How is what he’s doing different from what the government has done with Social Security.” Most people agree with that. Social Security is a Ponzi scheme, as Cato explains:

To keep paying a profit to previous investors, Ponzi had to continue to find more and more new investors. Eventually, he couldn’t expand the number of new investors fast enough and the system collapsed. Because he never made any real investments, he had no funds to pay back the newer investors. They lost all the money they “invested” with Ponzi.

[…]

Just like Ponzi’s plan, Social Security does not make any real investments — it just takes money from later “investors,” or taxpayers, to pay benefits to earlier, now retired, taxpayers. Like Ponzi, Social Security will not be able to recruit new “investors” fast enough to continue paying promised benefits to previous investors. Because each year there are fewer young workers relative to the number of retirees, Social Security will eventually collapse, just like Ponzi’s scheme.

The 2008 Financial Report of the United States Government, just recently released by the United States Treasury, shows that the unfunded liabilities of Social Security now total $17 trillion (p. 16 of the report). The Government Accountability Office only confirms what we already know (p. 7), adding that the “the Social Security and Medicare programs are not sustainable under current financing arrangements.”

It’s a train wreck waiting to happen.

United Liberty