being madoffed by the feds.

Wikipedia tells us that “a Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit.”

Bernie Madoff is charged with operating the largest private Ponzi scheme in history by following that recipe to the tune of $50 billion.  He’ll doubtlessly be tried, convicted, and jailed for the rest of his life.  (Just to clarify: I’m absolutely in favor of locking him up, throwing away the key, and liquidating all his assets to the last penny so the cheated investors can get at least some of their money back.)

However, I have to note with no small amount of amusement that Madoff is getting nailed to the wall for doing something the United States government has been doing for over half a century now.  I’m talking about the Social Security program, of course, and I know there’ll be some protesting and wringing of hands over me labeling it as a Ponzi scheme, but that’s exactly what it is.

Social Security operated from the start by taking the money of later depositors to pay out the early depositors.  That’s how it still operates: the payouts to SS recipients in the 2008 tax year were funded with the SS taxes from U.S. incomes  collected in 2008.  There is no magic “trust fund”, where everyone’s SS contributions are held in a lockbox–there’s only a big-ass filing cabinet at the SS Administration that’s chock full not of cash, but of I.O.U.s from the Federal government.  There’s no cash in that filing cabinet because the Fed has diligently siphoned off the SS surplus every year, to use for other purposes.  The SS revenues still exceed the SS payouts, which will be the case until roughly the middle of the coming decade, when the bulk of Baby Boomers retires en masse.  At that point, the SS administration will need to start to call in all those I.O.U.s in the trust fund from the General Fund.  At some point in the late 2030s, even the I.O.U.s will run out, and Social Security will exhaust its claims on the general tax revenue.

Why is it that we chuck people like Madoff into prison (and rightly so), but the people who keep making us invest at gunpoint in that huge Ponzi scheme called “Social Security” not only get off the hook, but are lauded as socially progressive?  When you look at the claim of Social Security on the General Fund in the near future, SS makes Madoff look like a huckster cheating people out of dollar bills with quick rounds of three-card Monte on a Manhattan sidewalk.

Why, then, does this scheme continue to propagate?  For the same reason that Madoff propagated his: because the people who keep it running count on the fact that they’ll be dead and gone before the whole thing blows up in everyone’s face.  Actually, since we’re talking Congress here, there are two options: the people who keep it running are either counting on being dead when that particular fiscal house of cards comes crashing down, or they’re really bad at elementary math.  They are aided by the beneficiaries who have been forced to pay into that scheme all their lives, and who are now determined to get “their money” back out of the system (see also “Screw you, Sonny, I’ve got mine.”)

Anyone with the ability to work a calculator can add up a few figures and realize that Social Security is not fiscally sustainable, and that the whole thing is a huge Ponzi scheme where participation is mandated by the government.  Anyone who can see the numbers and still insists that “Social Security is just fine” either slept through eight-grade math, or doesn’t give a shit about our kids or grandkids being left without a chair when the music stops in a few decades.

11 thoughts on “being madoffed by the feds.

  1. The Bad Yogi says:

    Don’t disagree with you that much, but I lump most insurance schemes into the same box. Ditto reverse mortgages and MMF/multi-level marketing.

    Any thoughts?

  2. […] Quote of the Day – Ponzi Edition Anyone with the ability to work a calculator can add up a few figures and realize that Social Security is not fiscally sustainable, and that the whole thing is a huge Ponzi scheme where participation is mandated by the government.  Anyone who can see the numbers and still insists that “Social Security is just fine” either slept through eight-grade math, or doesn’t give a s*** about our kids or grandkids being left without a chair when the music stops in a few decades. – Marko […]

  3. emdfl says:

    I figured this out back when I was sixteen and found out that you don’t get credited for any “contributions” that you make before you reach age 21.

  4. truth is, our kids and grandkids have no right to expect a seat to be available for them when the music stops, and neither do all the folks who are milking the system at this very moment.

    a favorite refrain of those taking heaping helpings for themselves right now is that it is their money, and if all the adjunct moneysucking offshoots of the primary fund were choked off then the fund would be liquid and secure.

    that is of course bullshit, and as one who is deadcenter of the babyboom demographic, i know that the “contributions” that i have made are a drop in the bucket compared to what i am theoretically expected to draw if i live to a ripe old age. and the contributions made by those who are drawing now pale in comparison to mine.

    so it’s not so much a ponzi scheme (which generally draws in new investors who are duped into believing that their investment is a legitimate one), as it is a weekly lottery with a guaranteed deferred payoff that is far in excess of the cost of their tickets. it’s a big fat elephant in the room that no one wants to mention as long as they themselves don’t get stepped on, and who can blame them? the parents of the boomers got and are getting free money; many boomers expect the same, and they’ll get it up to a point. and then that elephant is gonna go berserk, stomping everyone still in the room and wrecking the room itself, just to be sure no one else will be coming in there for their payoff…they’ll just be expected to keep “contributing” to those who are already on the dole. and that’s what ss is, like it or not, it’s a dole. and like all doles and other manifestations of a socialist system, it is unsustainable.

    there is a solution, and a simple one at that. just total up every dime that every worker ever conributed, compute interest at a passbook rate, and pay it directly back to the uh, contributor. and those who are receiving it now get what remains of their own money with interst in a lump sum. those that have already received an excess, well, no penalty but not another dime. and that fica deduction from every worker’s paycheck stops dead, right now. those kids and grandkids can sock away for their own retirement, and if they don’t, they’ll have nobody to blame but themselves.

    yep, it’s simple. but in a society that has become addicted to “free” money and with great expectations that the bringer of light is bringing also a perpetual free money machine, what are the chances? not so good, i’d say.

    and the most interesting aspect? those who deride and denigrate all of the welfare and entitlement programs which are commonly called such, will bristle and shout down and threaten great bodily harm to any who suggest that social security is the greatest welfare and entitlement program of all…and should be shut down immediately and completely. fat chance.

    jtc

  5. re: Maddoff

    There’s a whole bunch of people that helped him along with his scheme. They ought to fry right along side of him.

    There’s plenty of regulators that must have not been preforming due diligence too. Why the hell should we be paying salaries for government oversight of these artificial, blessed by the government entities if they can’t actually watch over them?

    re: The Ponzi-like scheme

    Oh, I’ll expect to get paid all right, I just hope it’s in a form I can use somehow….

    http://www.fes.de/archiv/_weimar/fb000751.htm

  6. Sam Hill says:

    Anyone remember when President Bush put forth the idea of personal control over a portion of one’s SS deductions?
    The Hue & Cry was akin to the cries for help when the Titanic sank. Mostly Democrats as I recall.
    Why not kill the system in its present form and establish Personal Savings Accounts (Non Taxable). Starts on the day you are born, take the funds out when you hit X age. Might want to also get rid of 401k’s so that money does not get sucked off ala Enron or whoever.
    Personal control is far better than State control in most aspects of life — most especially when the State takes your money without any safeguards.

  7. prophet says:

    Years ago I read about a way you could stop paying SS, if you revoked your “right” to collect when you got older. For a young guy like me, that sounds pretty good.

    Any idea if that’s possible? Urban myth?

  8. LittleRed1 says:

    I attended a college graduation where the speaker was someone with the Social Security admin who had gotten an honorary doctorate (not in econ, either). She got a round of cheers from the graduates when she announced that Social Security would be fully funded in 2010. Not that any of the class of 95 would be retiring in 2010, mind.

  9. Why not kill the system in its present form and establish Personal Savings Accounts (Non Taxable). Starts on the day you are born, take the funds out when you hit X age.

    It’s called an “IRA.” It’s one of the instruments that those of us with the ability to do math use to save for retirement, knowing that “social security” won’t be there.

  10. Sam Hill says:

    Concur for those eligible to open Roth IRAs — best option now available.
    Challenge is to limit the appetite and access of Congress to your money. Current Social Security program has no such safeguard. Another solution is to balance your IRA with an annuity. Hard part there is to find a trustworthy financial institution.

  11. Any idea if that’s possible? Urban myth?

    Ya wanna join the Amish?

    http://www.amishnews.com/amisharticles/amishss.htm

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