Charles Ponzi is credited as the inventor of what has become known as the Ponzi Scheme, though the mechanics of this type of scam had been used for decades before Chuck started his based on selling the arbitrage of international reply coupons for postage stamps to investors in 1920. A Ponzi scheme is a fraudulent investment operation that rewards early investors by paying returns, not from any actual profit earned by the organization, but from money paid by later investors. These returns are often very high, or very consistent, both of which are desirous traits to investors for various reasons.
Ponzi schemes work primarily by utilizing a “confidence trick”: playing on the unsuspecting investor’s lack of knowledge and winning his or her confidence. Such was the case with former NASDAQ Chairman Bernie Madoff, who created an elaborate Ponzi scheme of his own by offering shares in an investment vehicle that purchased blue-chip stocks and then placed options contracts on them, sometimes called a split-strike conversion. Typically, a position in Madoff’s investment was made up of 30–35 S&P 100 stocks, most correlated to that index, combined with the sale of out-of-the-money calls on the index and the purchase of out-of-the-money puts on the S&P 100. The sale of the calls was designed to increase the rate of return, while allowing upward movement of the stock portfolio to the strike price of the calls. The puts, funded in large part by the sales of the calls, supposed limited the portfolio’s downside. Confused yet? You aren’t alone. Both Ponzi and Madoff played thousands of people for fools by winning their confidence and selling them a bill of goods.
Presidential candidate Rick Perry and the Social Security Ponzi Scheme
Mr Perry has alleged that Social Security, as it now exists, is a Ponzi scheme. His rationale is that since the earliest investors will be paid by later investors, it qualifies as a Ponzi scheme. On the face of it, he’s right. When Social Security was first concocted, the average life expectance was only 65 — meaning half of the population wouldn’t live long enough to collect and the politicians knew it. Also, Social Security had 41.9 workers per beneficiary in 1945 — today there are only 1.75 workers per Social Security beneficiary … and that number is steadily declining.
Mr. Perry, and millions of young Americans, are rightfully worried. Social Security is heading down a path that will eventually have one worker paying the benefits of one recipient. THEN what happens? One worker paying the benefits of two, three, or more beneficiaries? That isn’t sustainable and every single Presidential candidate knows it.
Why Social Security IS NOT a Ponzi Scheme
One simple reason: Social Security isn’t optional. Investing in a Ponzi scheme IS. You don’t HAVE to invest your hard earned money with Chuck or Bernie, but not so with Social Security. You and I have no choice but to sink our hard earned dollars … to the tune of 15.6% of our income before taxes, including the employer “contribution” … into the Social Security debacle, only to see those funds wasted on everything from $600 hammers to $600,000 vacations to $600 million pet projects for legislators.
Had the Social Security “trust fund” remain untouched, there might be hope. But for you and me and millions of younger workers, there’s simply no way it can be maintained in its present form.
Hopefully, the Rick Perry/Social Security dust-up will bring the program’s problems to the forefront and something positive will come of it.
What do you think? Do you believe Social Security in its current form will be there for you when you get ready to retire?