No, Mr Perry, Social Security IS NOT A Ponzi Scheme. Here’s Why.

by Ron Haynes

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?

About the author

Ron Haynes has written 1001 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 4 comments }

Evan

Reasoning that it is mandatory vs discretionary is almost as ridiculous as the statement the SSA put out on it (directly from their site):

In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called “pay-as-you-go” system. Some private pension systems, as well as Social Security, have used this design. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

Yeah huge difference LOL

Ron

A Ponzi scheme relies on the voluntary contributions of suckers! Just TRY not paying Social Security.

AG

I think your argument is very weak. I understand that you are saying Social Security will not go away because it is a “legal” function of the government and those that don’t abide will be punished. But you define a Ponzi scheme as an “investment operation that rewards early investors by paying returns, not from any actual profit earned by the organization, but by money paid from later investors”. That is a definition for Social Security, therefore Social Security IS a ponzi scheme, only it’s legal.

If, similarly, stealing, defined as taking someone else’s possession without their permission, had been legalized by the government, and I stole my neighbors car…just because it would be LEGAL would not mean it would not be stealing or that it would be right/just.

This is not an argument to abolish SS (I think Perry is simply trying to garner attention and play politics). It serves a purpose, although somewhat inefficiently much like any government program. The promised entitlements need to be revisited and adjusted approximately every 5 years to adjust for increases in life expectancy, economic conditions, and changes in society. Blindly continuing a program designed in the 1930s because that’s how it’s always been is a recipe for failure. But I think your post actually proves that SS IS a ponzi scheme.

Ron

How do you figure? ALL Ponzi schemes are optional. You don’t have to participate. Social Security is extortion. Pay, or go to jail. Social Security morphed into a pay-as-you-go plan but regardless, it isn’t an option and that’s a key feature of a Ponzi scheme. I don’t think Perry was paying politics necessarily (though all politicians do to some degree), I think he was expressing his true thoughts.

Either way, we have to reform the program. Like I (and Rick Perry) said, it isn’t sustainable in its current form.

http://en.wikipedia.org/wiki/Ponzi_scheme

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