The recent revelations that a man named Bernard Madoff bilked investors out of a reported $50 billion is causing everyone to again talk about Ponzi schemes.
A Ponzi scheme is like a chain letter. Named after early 20th century swindler Charles Ponzi, initial investors are promised large returns, which they actually receive, but only because the swindler is using the funds contributed by later investors. Eventually, when there aren’t enough new investors to keep the scheme afloat, or when someone blows the whistle and everyone tries to get their money out, the scheme collapses.
Some in the media are calling the Madoff situation the largest Ponzi scheme in history. Even if investors end up losing $50 billion, which may be a high estimate, Madoff’s scheme pales in comparison to what is arguably a much larger Ponzi scheme.
The U.S. Social Security System works much like the classic Ponzi scheme; with one big difference. It has the power to force participants to keep contributing. Back in 1950 when there were 16 workers paying in for each retiree taking payments out, the system appeared to work reasonably well. Early beneficiaries did get a good return on the small amount of payroll taxes they were forced to contribute. Now, however, there are only three workers for every recipient, and before long there will only be two.
Younger workers today would be better off putting their money in a mattress, and most tell polsters that they don’t expect Social Security to be there for them by the time they retire.
The system itself states that by 2041 it will only have enough money to pay 78 percent of scheduled benefits and over the next 75 years the system will be $4.3 TRILLION short of meeting its obligations. The good news is that this Ponzi scheme doesn’t have to end in disaster for everyone involved. There are ways to transition over a long period of time to a more sustainable system where worker contributions really will earn a decent return for them when they reach retirement.
It’s probably too late for Barnard Madoff’s clients; but it’s not too late for the rest of us.
Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.