Ponzi Schemes and Social Security
Earlier, I wrote about the Madoff ponzi scheme and submitted the question of whether it was rare. In order to avoid some nasty discourse, I chose to pull the article. As I was thinking about the prevalence of ponzi schemes, the most obvious instance of taking money from new investors to pay off older investors is our social security system. It’s the ultimate example of a ponzi scheme, and as with all ponzi schemes, it’s completely unsustainable and will result in millions of people losing their “investments.”
The Madoff Ponzi Scheme will go down in history as THE largest case of consumer fraud in American history. Hypothetically, a portfolio would yield a 5% return on investment. In order to bolster the yield to 10%, Madoff would take funds from new investors and transfer funds to older investors. In an intricate web of bureaucracy, the left hand never knew what the right hand was doing (purportedly).
Now take a look at Social Security. Social security was passed “To provide for the general welfare by establishing a system of federal old-age benefits and by enabling the several states to make more adequate provision…” It made perfect sense in the 1930s. When the law was passed, it was designed to offer assistance to a small percentage of the workforce. Today, the scope of social security has dramatically expanded to cover 9 out of 10 jobs. It was never the legislature’s intent to have social security encompass all jobs.
In the 1960s, the number of workers paying into the system was 6.1 per retiree. So for every retiree drawing a social security check, the cost was spread amongst six workers. That’s not so bad. But in 2007, the number dropped to 3.3 workers per retiree. In 2040, the number is projected to decline to 2.1. If you’re under the age of 60, these statistics should be troublesome.
The Fed Chairman, Ben Bernanke said in 2006, “Reform of our unsustainable entitlement programs should be a priority.” Ponzi schemes work fine so long as there are recruits cycling through the system. Bernie Madoff never would have been caught and Spielberg never would have lost his shirt if Madoff was able to bring in new investors. However, as with all ponzi schemes dependent on new investors to sustain older investors, they eventually collapse.
In this article, the writer argues that social security is NOT like a ponzi scheme. The author states, “In this context, it would be most accurate to describe Social Security as a transfer payment–transferring income from the generation of workers to the generation of retirees–with the promise that when current workers retiree, there will be another generation of workers behind them who will be the source of their Social Security retirement payments.” Sense anything wrong with this argument? The Madoff ponzi scheme could also be categorized as a “transfer payment” system where the current generation pays into the system “with the promise” that there will be other generations behind them. Does it make it legal? Social security is based on the lie that there will always be a “next” generation to pay into the system. But what if the “next” generation is much smaller than the one before? Would you consider this a fraudulent misrepsentation? I believe it’s hypocritcal for the government to crack down down on the Madoff scheme while at the same time adminster the largest ponzi scheme in the history of the world.
Tags: ponzi, social security
January 4th, 2009 at 8:00 pm
Another important factor is the life expectancy of those who initially received the payments compared to today’s life expectancy.
Regarding the Social Security Ponzi Scheme, YOU’RE the lawyer, what are YOU going to do about it? After all, Bush tried to make reforms several years ago, and all of your lawyer buddies in Congress were too short sighted to pay attention.
January 4th, 2009 at 10:04 pm
Tex, good point. During my third year in law school, I wrote an article for the law review about the importance of privatizing social security. It was never published …go figure. Since older people vote, it’s hard to mess with social security. People in Congress are so open minded sometimes, their brains fall out. It’s important to be pragmatic at times, but not at the expense of your principles.
January 4th, 2009 at 11:00 pm
It seems to me it would be wise to begin to take money out of a Ponzi scheme as soon as possible, and as quickly as possible. At age 62 and onward to age 70, working people as well as retired people might do well to take their money back and look for ways to suppress current income. Waiting may get more dollars, but they might also be worth a lot less, or the Ponzi scheme may have collapsed.
January 5th, 2009 at 9:58 am
Kevin,
I honestly believe the people in your profession (legal) have done a great disservice to this country, by monopolizing and making Congress their career. What are YOU going to do about it? I am in favor of term limits, which I believe would largely solve the above and other issues (such as lobbyist power, complex side deals among individuals and political parties, too much power in too few hands, etc.). If these were people in my profession, I would speak up load and clear.
Tim,
You can’t take your money out of the Social Security Ponzi scheme, by law your employer is required to take a percentage out of your paycheck.
I don’t understand your age 62 to 70 or other comments, please explain.
January 5th, 2009 at 11:26 am
Tex, don’t hate the player, hate the game. It’s not just lawyers that have hurt democracy. As long as there will be politicians, there will be lobbyists paying for legislation. That’s the cancer. As voters, we need to remove the incentives for congress to pander to lobbyists. So what am I going to do about it? I’m going to write about it, maybe get more active in state government. I don’t know, what do you think?
January 5th, 2009 at 1:59 pm
I don’t hate the player. Lawyers are very useful when you need one, but when they are entirely disproportionate makeup of our government, action needs to be taken. I’m not saying it’s ONLY the lawyers that are the problem, but it is MOSTLY caused by them. Lobbyists will also always be around, and we WANT them around, but they don’t have to be as influential as they are currently, and they WOULDN’T be if there were term limits.
I have no other idea how, as a voter, to remove the incentives for Congress to pander to, or be pandered by, lobbyists.
Are you also in favor of term limits? Many state/local governments have them, the federal executive branch has them, why not Congress? We know the answer: The ones that have to take action won’t do it on their own, and will use every tactic known to the legal profession to prevent/stall such an effort. The only ones, in my view, that can make this change happen, is people from inside the legal profession.