I was curious about this as I had assumed that because Madoff’s was the largest in terms of size and investor losses, it was the worst in regards to personal greed, but I was wrong. Allen Stanford stole $2B from his scheme’s fund whereas Madoff stole a paltry $250M. But in terms of size, I also learned that neither was the biggest as that currently comes in at $42.1T in unfunded liabilities!
I once read an article in Forbes about the Madoff scandal wherein they gave a pretty good idea of exactly what a Ponzi Scheme is:
“A Ponzi scheme (/ˈpɒn.zi/; also a Ponzi game) is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.”
I checked my Oxford dictionary and got pretty much the same definition:
“A form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.”
So I got to thinking, why does this sound alarmingly similar in many respects to what Social Security is as we hear all about how the younger generations are actually funding for the older generations, and the Trust will at some point run out of money?
Well I again recalled an article in Forbes in which they were responding to those that took a rather vociferous exception to the notion that Social Security is a Ponzi Scheme:
“We have today the insistence that Social Security isn’t a Ponzi Scheme because it uses the taxes being paid today to cover the benefits earned in the past, when that is in fact the very definition of a Ponzi Scheme.”
I have heard other criticisms about Social Security, such as claims that Congress illegally borrows from the Trust for other purposes or the taxes are diverted to other appropriations. I don’t know if that happens or not, but according to The Center on Budget and Policy Priorities “Although legally distinct, they are often referred to collectively as the Social Security trust fund. All of Social Security’s payroll taxes and other earmarked income are deposited in the trust funds, and all of Social Security’s benefits and administrative expenses are paid from the trust funds.”
While this does not necessarily address the claims about nefarious Congressional acts, let’s proceed on the basis that it does not happen as no proof is known. What we do know is that all money paid into the Trust is invested in US Treasury instruments, bonds and notes, because they are deemed the safest. Arguable, but such investments are susceptible to the Federal Reserve’s interest rate manipulations as we recently saw creating very poor yields, and hardly return enough together with principals to cover liabilities.
Now I’ll bet that all of you have some form of insurance for car, home, life, work, whatever, and you pay good money for that. Insurance policies are contracts, the essential terms of which are premiums now for basically benefits to cover some future, and in many cases, unknown need.
Let’s just focus on that which is known and disregard car, home, business liability and similar catastrophic insurances, which are still contracts but provide benefits for unknown problems in the future like accidents, hurricanes, etc.
Let’s focus on life, income and retirement. There are many variables to all these insurances but they have one thing in common, i.e. premiums and contributions are paid now for greater benefits in the future, with varying degrees of risks depending on the contract, and how the investments of premiums and contributions are managed.
With a whole life policy that usually means a guaranteed future return based on low-to-no risk, but likely a lower but stable return to cover death benefits and ultimate cash values. With certain types of retirement insurances, such as IRAs, 401Ks, etc. there can be higher risk as in the 2008 financial crisis that slammed those retirement accounts that invested in the type of high risk derivative stuff that such accounts should never have in their portfolio; with such investment accounts you can also elect fixed income. The point is that the terms and conditions of these various insurances are known and form a contract, paid with funds from the insured for the benefit of the insured.
Now look at Social Security Insurance; while it is an insurance policy, you can’t count on what the benefits will be as whatever benefits there may be for anyone at any time is up to the dictates of Congress, i.e. the terms and conditions of the contract will vary accordingly; please note that the Supreme Court has ruled as such when this was challenged, but I am not writing about that; simply note that there’s no way out on this because knowing that no one in their right mind would voluntarily invest their hard earned money in such a scheme, had they been aware of it, Congress made your enrollment mandatory. Now think for a minute if let’s say Prudential Insurance would offer a whole life policy in NYS with such a deal, would sane people buy such a product, and wouldn’t the NYSDFS get on their case?
How can we rely on what the future benefits will be with SSI when it’s burdened with $42.1T in unfunded liabilities? Whether you believe this will bankrupt SSI in 10, 20 or 30 years does not change the” if”, only the “when” this will happen. It was an unsustainable Ponzi scheme in 1935 and will remain so to its bitter end, and all the gimmicks, like changing the law that provided the benefits not be taxed, to now 85% taxed, or extending income limits for FICA taxes, or whatever future tweaking Congress can come up with, are all bandages on a hemorrhage.
All those younger than retirement age are essentially funding the gap for current beneficiaries, but they are likely to see less and less of those benefits themselves, if at all. We are crushing the future of our children to fund an insurance policy which is not an insurance policy at all as it actually guarantees diminishing returns. So whatever you tell your children, tell them to find some way to save for the future in the private sector and understand that the FICA taxes they are paying are just funding the biggest Ponzi scheme of all time.
One other thing, if there are any honest politicians out there in favor of ending this scheme and allowing Americans to put their money in their own retirement insurance funds versus paying FICA taxes, vote for them and you vote for our children’s future.