The Great Ponzi

By: Brooks A. Mick

The news is full of the term “Ponzi Scheme” in the past weeks as the Madoff investment plans collapse. Charles Ponzi conned hundreds of investors out of millions of dollars in 1921 by promising 40% return on investment in only 90 days, taking some of the money invested and paying off a few early investors, and thus similar frauds are termed “Ponzi Schemes.”

Bernard Madoff was much more modest in his promises to Steven Spielberg, Mort Zuckerman, several banks, and other wealthy investors, guaranteeing only 11% returns per year. Nevertheless, by taking money from later investors to pay off earlier and luckier clients and by sending out statements showing steady growth of investments, he convinced many smart and wealthy people that he was an investment genius and raked in a claimed 50 billion dollars. But when more people than expected actually wanted to cash out their investments, it became apparent that the money wasn’t there. The claim is put forth by various media outlets that this 50 billion fraud case is quite possibly the largest on record.

I submit that Bernard Madoff’s Ponzi fraud is nowhere near that perpetrated by our congressmen in the case of Social Security. Since Lyndon Johnson took the Social Security money out of its trust fund and put it into general revenue, and since our esteemed congress has been spending that money to buy votes since 1965, the money to pay off retirees will not come from their invested moneys but from the paychecks of current workers. This is classic Ponzi Scheme financing.

Even worse, many of our state governments have adopted the same mentality regarding pension funds, taking money that should be invested to pay retirees and squandering it on pet projects, and thus state coffers are also empty when it comes time to pay out these retirement benefits. Thus we have a double governmental whammy, an impending insufficiency of funds in Social Security and in pension funds for state workers.

The City of Galveston, on the other hand, spotted a loophole in the Social Security laws back in the 1970s and the city employees opted out, instead investing their money, and those employees retired with over three times the retirement income than they could get from Social Security.

In order to pay future Social Security benefits, the federal government will have to change the rules regarding retirement ages and taxation on current and future workers. In order to pay state pension benefits, states are planning to raise taxes. Interesting to note is that the states with the biggest budget deficits already have the highest taxes and are run by liberal Democrats. It is clear that a government cannot tax its citizens into prosperity. Will Obama finally recognize this and abandon his plans to boost capital gains and corporate taxes? Will reality trump Marxist ideology? Time will tell.

Meanwhile, when you hear the talking heads blather about the biggest financial fraud in history, just remind yourself that the biggest Ponzi scheme of all is our government. Compared to Social Security, Bernard Madoff is a piker.

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