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Social Security and Ponzi Schemes: What’s the Difference Between Bernie Madoff and Uncle Sam?

While listening to popular radio talk host Neal Boortz, I heard a comparison that has been made many times.  Simply put, Social Security is a Ponzi scheme.  And when you look at, the that assessment is dead on.

For the uninitiated (which included me until I looked it up), the father of the Ponzi scheme is Charles Ponzi, who at the peak of his pyramid scheme in the early 1900s was bringing in $250,000 a day before his downfall. There is a good Wiki on this here, but in short, hundreds of investors paid money into his scheme, with the promise of high returns in a short amount of time. What was really happening was, Ponzi was taking the money from new investors and paying out to “older” investors. A more recent grassroots example that many may have heard of was the infamous “Friends Helping Friends” scheme (I can’t be the only one that was asked at one point to join this). Same concept–you pay in, work your way up the pyramid, and cash out. And of course, there is Bernie Madoff, who had a $50 million dollar Ponzi scheme going until he was ratted out by family.

For the plan to work, there has to be a constant influx of new people and new money. When that stops, the pyramid falls.

So, let’s compare Social Security, that bedrock of entitlement programs, with the common aspects of the Ponzi Scheme.

  • In a Ponzi scheme, new people coming into the pyramid-like scheme pay in, expecting a payout later.  With Social Security, workers pay in during their working career, expecting a payout after retirement.
  • Ponzi scheme:  the people at the top of the pyramid get their payouts using the money from the new investors at the bottom of the pyramid.  Social Security:  recipients are paid using the money paid in by current workers.
  • Ponzi scheme:  money coming in is spent immediately, not saved.   Social Security:  money coming in goes right back out.  There is no “lockbox,” and by law, surplus Social Security funds are put into the general fund to pay for other government things having nothing to do with Social Security.
  • Ponzi scheme:  rate of return may vary, but is usually very high, which is what attracts investors.  Social Security:  compared to the rate of return available on the private market, that of Social Security is a joke (for lack of a better description).
  • Ponzi scheme:  when there are not enough folks paying in, the pyramid collapses.  Social Security:  when there are not enough folks paying in (we’re getting to that point), insolvency occurs and the government goes into debt to fund it.
  • Ponzi scheme:  investors pay in voluntarily.  Social Security:  attempt to opt out, and you will get a visit from government agents with badges and guns.
  • Ponzi scheme:  people who run them are arrested and go to jail.  Social Security:  Well, you know the answer to that one.

There you have it.  Our Social Security program that everyone knows and loves is a government-endorsed Ponzi scheme.  Anyone saying otherwise just doesn’t get it.

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3 responses to “Social Security and Ponzi Schemes: What’s the Difference Between Bernie Madoff and Uncle Sam?

  1. cartiacartel September 8, 2011 at 2:23 pm

    great article. remeber bush wanted to privatize 2 %. If one made 50k in 2000 that would be 10k saved at zero percent interest. Left voted no and establishment republicans put their tails between their legs

  2. Pingback: Wait–Did Chris Matthews Say Social Security was a Ponzi Scheme? « Front and Center

  3. Bobby Handa June 27, 2012 at 2:21 pm

    The difference that you fail to realize is that Ponzi Scheme investors are never told their payments not only come from but rely on future investors.

    I have to ask, why do you not point that out? Am I correct in thinking that you did not realize this is it that you omitted this fact on purpose?

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