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.