In 1920, Italian immigrant, Charles Ponzi, developed a scheme which promised high-yield returns on the arbitrage and trade of international postal reply coupons. It sounds like a fancy scheme even today and it fooled many investors at the time. Ponzi, however, was not actually making such investments. He was taking money from new investors, drawn by the promise of high returns, to pay off past investors. A brilliant little scheme except for the fact that it is essentially stealing and fraudulent. This basic framework is now called a Ponzi scheme, and former NASDAQ chairman, Bernard Madoff, has been implicated in what may be the biggest Ponzi scheme of all time.
But, is Madoff’s scheme really the biggest of all-time? It is currently estimated that his scheme is in the neighborhood of $50 billion. The U.S. Social Security program is far bigger and, in this writer’s opinion, meets the definition of a Ponzi scheme.
The Social Security program is a pay-as-you-go program in that current “contributions” (lawful stealing) pay for current “benefits” (paltry returns for your stolen money). There is so much about the program to disagree with, but, no matter one’s viewpoints on government welfare, one must admit that it is a Ponzi scheme. You invest in the fund with the promise of future returns, but, in fact, there is no investment made by the administrator. The only source of funds for the returns is new investment.
It could be argued that this is not such a scheme since the details of the program are disclosed. But, this writer disagrees with that argument. Indeed, that is what makes this program more nefarious. It is a fully disclosed Ponzi scheme where participation is forced by law.
We are currently in the boom cycle of the scheme as new investment outpaces the payment to previous investors. In other words, more taxes are collected from current workers than are paid out as welfare to beneficiaries. But, like all Ponzi schemes, this will come to an end. The welfare for beneficiaries will exceed contributions sometime in the next 10-20 years as baby boomers retire. Over $2 trillion ($6 trillion in net present value) have already been spent by the government which, by all rights, belong to those future retirees. Instead, the government will either need to a) tax us more, b) reduce the benefits for retirees, or c) go even deeper into debt delaying the inevitability and depth of options a) and/or b).
Further reading on America’s economy-
Madoff as Metaphor by Lew Rockwell
Government and Fraud by Dr. Ron Paul