Of Course It’s A Ponzi Scheme. (EP.190)

Social Security

Introduction

Social Security is a Ponzi scheme. But then again, so is much of our government. 

That is the subject of today’s 10-minute episode. 

Continuing

When I was a Freshman in college, a Sophomore came to me asking me to sign a chain letter. My first thought was, “Wow. A Sophomore is talking to me.” My second was, “What’s a chain letter?” I asked the question out loud, and his response was that it was a quick way for me to make $5. I was to give him $5, then get two others to give me $5 each, with me making a quick five spot. It was official in the sense that there was a chart, starting with him, of course, at the top, with two names under him, two names under each of those names, and so on. The chart made a perfect pyramid. 

I gave him the $5, and never got a dime from anyone else. I paid for a lesson that I thought I would never need to apply again, but here we are.

That’s exactly how a Ponzi scheme works. Oh, Charles Ponzi did not work out of a college dorm, and he nailed people for millions at a time, but the principle is no different. Just as in a chain letter, early investors get their money out with a substantial profit. But those profits do not come from any profitable or productive activity; both the return of the original investment and the profits come from money paid in by later investors. Wealth is not created, it is simply transferred from later investors to earlier investors. And it is clear this house of cards must collapse in on itself. 

That’s exactly how the Social Security pay-as-you-go system works. In your 401(k) plan, you pay in advance over time to accumulate funds to spend later in life. Properly funded public and corporate pension plans work that way as well. Social Security does not. 

Today’s Key Point: Social Security is a pay-as-you-go system, and pay-as-you-go is the very definition of a Ponzi scheme. The difference between a Ponzi scheme and Social Security is that Ponzi schemes are illegal, and Social Security is mandatory. Given that Ponzi operated privately in the 1920’s, illegally, and without the participation mandate required by Social Security and still made huge amounts of money, perhaps someone like Ponzi, e.g., Bernie Madoff, should be considered for the position of US Commissioner of Social Security.  

Making Social Security mandatory, an advantage that neither Messrs. Ponzi nor Madoff enjoyed with their schemes, delays but does not eliminate the possibility of collapse. When a Ponzi scheme runs out of new participants to support the earlier ones, it must collapse. In 1940 there were 160 participants for everyone receiving benefits; today there are about 3. The Treasury steps in with borrowed money to keep paying the beneficiaries. Social Security is a needed program, and can be fixed. A sliding scale for the retirement age is the best fix, but we have addressed that in earlier episodes, so we’ll move on with today’s topic. 

Medicare and Medicaid are both pay-as-you-go programs, and, by definition, Ponzi schemes. As with Social Security, government endeavors to turn illegal and damaging into legal and virtuous by making things mandatory.

But let’s look at less obvious areas, remembering the definition of a Ponzi scheme being pay-as-you-go, as opposed to saving and investing for the future. What other areas of government are pay-as-you-go Ponzi schemes? Or we can turn the question around and ask if there are any government programs that are not pay-as-you go.

Let me give you an example from right here in Colorado dealing with neglected infrastructure. And I am guessing that you have examples from your geography as well. Highway I-25 is the main North/South Corridor running the length of Colorado on the Eastern side of the Rockies, the Front Range as it is called here. It runs from New Mexico to Wyoming, but we will keep this discussion limited to this area. The two most populous cities in Colorado are Denver and Colorado Springs, with rapidly growing Castle Rock in between. For all of the heavily trafficked parts of I-25, it is a 6-lane road. With the exception–the curious exception–of an 18 mile stretch from Monument, about 10 miles North of Colorado Springs, and Castle Rock, where it narrows down to 4 lanes, causing multiple, daily traffic jams. After a lot of hand wringing, the powers-that-be have finally, after decades of dithering, started what is called “The Gap Project” to correct that obvious planning failure. But there does not seem to be enough money to complete the project without making the additional lane a toll road. Something about not having enough money to maintain the additional roadway after it has been constructed without the money from tolls.  

Infrastructure planning, including roads, is another pay-as-you-go Ponzi scheme. Politicians do not have the courage, and most voters do not have the vision, to pay in advance for things that will clearly be needed. So we do viciously expensive and highly inconvenient upgrades and fixes instead of having the work done completely and efficiently the first time. And we all know that by the time the 3rd lanes in this Gap are in place, the conversation about a 4th lane in each direction will begin. And that 4th lane will cost dramatically more in terms of dollars and inconvenience than if it was done now. Or at least if the underlying roadbed work was done now. And just like a Ponzi scheme, later participants will pay dearly for the benefits that earlier participants enjoyed.

Earlier I placed the blame on both politicians and voters. Politicians are more than willing to kick multiple cans down the road in order to keep being reelected. Social Security and infrastructure are just two of those cans. And when–not if–things implode later on, when the can has been kicked as far as it will go, not a one of them will take responsibility. There will be endless political blaming and finger-pointing until the issue is forgotten, and the politicians involved are safely cocooned in their lavish pension and benefit plans. And Ponzi and Maddorf went to jail. 

We voters need to know that if we want better candidates and better office holders, we need to be better voters. Not just more voters and more voting and in get-out-the-vote campaigns, but better voters. If we vote for Ponzi schemes, if we vote for the political equivalent of Charles Ponzi and Bernie Madoff, well, then we got what we voted for. Please see the link for more. 

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Will Luden, coming to you from 7,200’ in Colorado Springs.

Will Luden
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