Evening, folks!
Yesterday afternoon, the online gambling community took a huge blow when the Department of Justice (DOJ) filed charges against the owners of three of the largest online poker sites (PokerStars, Full Tilt Poker, and Absolute Poker) and their banking associates. In the brief, the Manhattan U.S. Attorney asserted that these individuals "concocted an elaborate criminal fraud scheme"; the DOJ is seeking $3 billion in penalties (see: http://sports.espn.go.com/espn/poker/news/story?id=6362238).
I honestly can't say who is right here (I keep reading conflicting reports on the legality of online money games), but that's not really what I want to discuss. This story got me thinking about huge money-making schemes, so naturally, I thought about Bernie Madoff's huge Ponzi scheme. Of course, that made me think of the largest Ponzi scheme in the world: our very own government's Social Security program.
Yes, people. Social Security, as it is now constructed, is a Ponzi scheme. Before I provide evidence supporting this claim, let's look at the Securities and Exchange Commission's definition of a Ponzi scheme:
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. http://www.sec.gov/answers/ponzi.htm
To clarify this definition, let's look at a real-life example of a Ponzi scheme (this is also from the SEC's website):
These schemes are named after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. Ponzi initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors.
(I made the last phrase bold for emphasis).
Does everyone understand what is happening here? Essentially a Ponzi schemer takes money from initial investors; then, this schemer will find a second group of investors, and use their investment money to pay off the first group of investors. After that, the schemer will find a third group of investors and use their money to pay off the second group of investors, and so on and so forth. This cycle will continue until the schemer runs out of investors or when several groups of investors withdraw money at the same time.
Now that we know what a Ponzi scheme is, we have to ask this question: does Social Security fit into the Ponzi scheme category? It fits pretty snuggly, in fact. Social Security is dependent on new investors (younger, working people) paying into the system in order to pay off earlier investors (older, retired people).
Sounds familiar, right? It better. To me, it sounds exactly like the "payment of purported returns to existing investors from funds contributed by new investors" part of the SEC's definition of Ponzi scheme.
In essence, the only real differences between Social Security and Bernie Madoff's scheme are that the US government has declared Social Security to be legal, and, Social Security is way, way bigger than Madoff's scam (as you will see).
Anyways, like all Ponzi schemes, Social Security is going to collapse. As I mentioned in an earlier post (see: http://eaynuf.blogspot.com/2011/04/young-and-screwed-americas-youths.html), Social Security will be bankrupt by 2039 (at the latest). This will happen because of numerous factors: first the government spent money from the Social Security trust funds (much like Madoff did with his investors' funds). Second, there will be millions of people drawing checks from Social Security concurrently (remember that several investors withdrawing funding at the same time is a devastating flaw in all Ponzi schemes). Finally, there will not be enough new people paying into Social Security to keep it going (the second deadly blow to Ponzi schemes).
All in all, this makes Social Security the largest (yet legal) Ponzi scheme in the world. Over the next 28 years, our government's massive scam will cost us trillions of dollars (I am estimating somewhere in the $30 trillion range. According to the CBO, Social Security will make up around 5% of GDP until it tanks in 2039. Assuming the US's real GDP increases at about 3% annually, the total number of dollars spent on Social Security between now and 2039 is about $32 trillion).
And remember, young people, that Social Security will collapse before we get any payments back. Just like the last investors in Bernie Madoff's Ponzi scheme, we will lose all the money we ever put into the program. It hurts to think about that, doesn't it?
BB
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