While developed by a man named Charles Ponzi, the idea of a pyramid scheme has never been employed on such a large scale as that used by our very own government. That system is known as Social Security (SS)!
A Ponzi scheme is a fraudulent investment operation that pays returns to different investors from their own money or money paid by SUBSEQUENT investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from NEW investors to keep the scheme going.
The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases. While the system eventually will collapse under its own weight, the example of Bernard Madoff illustrates the ability of a Ponzi scheme to delude both individual and institutional investors, as well as securities authorities for long periods. Madoff's variant of the Ponzi Scheme stands as the largest financial investor fraud in history committed by a single person. Prosecutors estimate losses at Madoff's hand totalling $64.8 billion.
Social Security is nothing more than a Ponzi scheme on a massive scale. In its case, it only functions as long as young payees exceed older retirees by a large fraction. When it was created, there were 16 contributors to every taker. Now, that ratio is closer to 2 to 1.
The system is also known as an "inter-generational transfer" - a fancy way of legalizing the theft from young people by old people. Not that old people are thieves, most don't understand the system because the government has repeatedly lied about SS's mechanics. We have been told that a "trust fund" exists. This fund is supposedly related to the amount that all of us contributors put into the system during our working lifetime. That's NOT true.
In reality, SS is no different than that practiced by Bernie Madoff. New "contributors" are needed to fund older beneficiaries. When the system was initiated, the beneficiaries hadn't paid a dime. Over time, as benefits were raised to curry favor among older voters, who represent a powerful voting block, younger people have been saddled with greater taxes.
But the greater taxes that show up on a "contributor's" W-2 is only HALF of what that person is responsible for. In order to disguise the sheer onerousness of the tax, the government has split the "take" between the employee and the employer. An employer must look at the TOTAL costs of adding a body. If an employer figures that adding a new body will cost the company $100,000, the amount of "contribution" mandated for the hiring company to make must be factored into the decision. So, the employer contribution is, in reality, borne by the employee his or her self!
The fraud further continues as it applies to the "budget deficit". SS is only considered in the budget deficit calculation on a "cash" basis, meaning that if more is paid in than is taken out, the cash "surplus" is used to offset the rest of the deficit. For ANY other corporation, the accounting rules would be different. The company would be required to report as a liability the ENTIRE amount of pension it is likely to incur over the employees' lifetime. If that same requirement were applied to Uncle Sam, the National Debt would explode by DOUBLE or TRIPLE its current amount!
Until recently, the SS System was "cash flow positive". However, as pointed out in an article by Allan Sloan of Fortune, that may no longer be true (http://finance.yahoo.com/focus-retirement/article/108747/next-in-line-for-a-bailout-social-security?mod=fidelity-readytoretire).
The SS time bomb has been ignored by lawmakers for years. Now, among all the other problems plaguing our financial system, SS has crept up without much scrutiny and notice.
Tomorrow, in "Social In-Security: The Solution", I'll give it a real Marko's Take-type swipe at steps we need to execute immediately to fix the problem.
If you LOVE SS and want to get your two cents in, you know what to do... TAKE ME ON!