But the similarities between what Madoff and Social Security have done are substantial. As pointed out by Cliff Mason, like Madoff, Social Security:

  • Depends on new investors to pay the investment returns of older investors.
  • Led investors to believe the system was working perfectly, when the opposite was true.
  • Installed a system where investment returns are, by and large, off the books.
  • Saw its foundation begin to crumble when the amount of old investors vastly exceeded the number of new investors.

I don’t think that the government intentionally set out to exploit Americans through Social Security. A lot has changed since it was enacted under Franklin Delano Roosevelt back in 1935 as part of his “New Deal”. Back then, the average life span was only 67 years-old, so when contributors reached 65-years-old, the age when they could begin receiving benefits, most only cashed government checks for a few years.

That’s not so today, as Americans are living longer and are cashing Social Security checks more often and in greater numbers than FDR might have imagined. We could fix Social Security by implementing a “means-testing” policy where people, mostly rich people, who didn’t need the money would leave it in the Social Security fund for the less affluent. And we could delay the age at which Americans can collect Social Security – perhaps to age 70 or so. Sure, these moves wouldn’t eliminate the Ponzi aspect to Social Security, but they’d do a world of good.

Even so, an investment “fund” like Social Security that cannot survive if investors want their money back is a foreign and dangerous concept to a traditional Wall Street guy like me. In my experience, if an investor wanted out of my fund, he could sell and get out. 

Ponzi schemes aren’t built to accommodate people who want their money back – they’re built to take advantage of people who want their money back.

Way back when, Ponzi’s investors learned that lesson. Only time will tell what kind of lesson Social Security contributors will learn.

At the rate we’re going, it could be a painful one.