I’ve received a lot of feedback—maybe “blowback” is a better term—from comments I made on the Dec. 17, 2008 edition of Mad Money. On the show I compared the Bernie Madoff scam to another Ponzi scheme taking place on a much larger stage—Social Security.
It was a pretty controversial statement and it deserves some context. Before I get into all of that, let’s define a Ponzi scheme. According to the Securities and Exchange Commission, it goes something like this:
'Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons.
' Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three—hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.'Decades later, the Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.'
Remind you of anyone? Like Madoff’s investors, Social Security’s balance sheet is basically off the books, and Congress, playing the Madoff role, is using the Social Security fund as an ATM to fund pet projects, pay for earmarks, and cash in on boondoggles. And like Madoff, the last in will be among the first out of luck with Social Security. With more recipients and fewer contributors, Social Security is a Ponzi scheme that is headed for the same fate that has leveled Madoff investors. The Social Security’s own 2007 trustee’s report says that the fund could run out of money by 2042, and maybe sooner.
Here’s what I said in the show: “We know the truth about Ponzi schemes. We all know the name of the biggest Ponzi scheme in history and it’s not even illegal. In fact, it is run by the U.S. government. And the name of it – well, they call it Social Security.
“In a Ponzi scheme, investors get the returns from the money paid in by subsequent investors and eventually the whole thing falls apart. The last people to invest get hosed. In Social Security, a program I love, workers pay for the benefits of current retirees and hope someday future workers will pay for their benefits – it’s all a Ponzi scheme.”
These were not hasty comments. I’ve been doing a lot of reading up on Social Security lately, especially after the Madoff scandal hit the street, and I’m more convinced than ever that the two funds have more in common than not.
Particularly useful is Cliff Mason’s Millennial blog on CNBC.com. Full disclosure, Cliff is my nephew, but we disagree on a lot of things, just not this one. Like Cliff, I am not in favor of privatizing Social Security, nor do I think that Social Security will “go bust,” as he puts it.