Bernard Madoff, former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, was arrested and charged with securities fraud in what federal prosecutors called a “Ponzi scheme” that involved losses of more than $50 billion. Some of the world’s richest people were duped by Madoff. He was turned in by his two sons. Since the arrests and investigations, Madoff’s 46-year-old son, Mark, committed suicide.
A Ponzi scheme is an investment program that promises to pay unusually high returns to investors after a specified period of time. A pyramid scheme is similar in that the person running the program pays off the early investors from money paid by later investors who were told that they too can get rich. The early investors, who are often unaware of the fraud, are used as testimonials for how well the program works. So much money is promised to investors that there is no possible way to get enough later investors to meet the investment promises. The Ponzi scheme is named after Charles Ponzi (1882–1949) who was involved in a multi-million dollar fraud scheme where nearly 40,000 people invested about $15 million. This was a lot of many in the 1920s.
The Federal government is quick to shut down these schemes and arrest the perpetrators, but they turn a blind eye to their own Ponzi and Pyramid schemes because it can print money without any legal ramifications. Ben Bernanke, when he was head of the Federal Reserve, said that a liquidity crisis that might lead to deflation could be averted by dropping money from a helicopter. Counterfeiting is illegal, but it’s an everyday occurrence in Washington.
Soon after Charles Ponzi was arrested for his pyramid scheme, Congress legalized one of its own — the Social Security System. When Social Security was implemented, the maximum amount any one person paid into the system was $60 per year — a total of two percent from employee and employer of a maximum $3000 per year. Today, the percentage is around 14% on up to $106,000 per year. This compulsory “contribution,” as in the “employer’s contribution portion of Social Security,” is the largest legalized pyramid scheme in history.
The Social Security Administration estimates that those born in 1877 (and retiring in 1942) got an average of 36.5 percent real rate of return on their Social Security contributions, while those born in 1950 (me) will receive on average a 2.2 percent return. Those born in 1975 will get a return of less than 2 percent. It’s even worse for future workers. The government should have seen this coming when Ida Fuller received her first Social Security check:
Ida Fuller was the living (and dying) example of the built-in flaw of the Social Security program [beside the fact that government has no business forcing people to save]. Ida Fuller received her very first Social Security check, issued by the United States, on January 31, 1940. Thirty-four years and $20,000 in retirement benefits later, she died at the age of 100. Her total “contribution” to the program: $22. Her first check, $22.54, matched her total “investment” in the program.1
In 1935, there were 45 people paying into SS for every one person receiving benefits. Today, that ratio is about three to one.2 By the year 2030 the ratio will be less than 2 to 1. Is it any wonder the SS has been described as the “world biggest chain letter”?
“The World’s Biggest Chain Letter—Unless You’re the Government”: Social Security is a pay-as-you-go retirement program. Those paying in now are paying those receiving benefits now. Social Security works like a chain letter. Some people have described SS as a “Ponzi scheme,” named after Charles Ponzi, a con artist who bilked people of a lot of money. How did he do it? He would tell people that he would pay them a huge return on their investment within a few months. Then he would take their money and pay off the previous investors. It worked great for the first ones to (unknowingly) get in on the scheme. Ponzi then used his early “investors” as testimonials to attract new “investors.” After a time, the number of investors ran out, and so did Ponzi with their money. Ponzi had worked the “pyramid scheme”: the people at the top (those who get in early) receive the benefits that are being paid in from those at the bottom (those getting in late). The following appeared in Parade Magazine (March 28, 1976): “Social Security is a wonderful plan. People say it’s going bankrupt. Don’t believe them. It works. I know. My uncle reached 65 and he sent in the appropriate forms. In a week he received a wonderful letter: “Dear Mr. Gold. Welcome to the Social Security System. Attached is a list of ten names. Just send $100 to each name on the list and retype up a new list with your name at the bottom. But remember, don’t break the chain!’”3
If a private insurance company operated this way, the directors would be arrested, tried, and sent to prison for a long time.
In 1981, employees of Galveston County, Texas, chose to leave SS for a private alternative. At first, not everyone was in favor of the innovative idea. The unions (naturally) opposed it. Employees deposited approximately the same amount of money in private accounts as they would have had to “contribute” (the government’s word) to SS. To date, the funds have achieved a higher annual rate of return. Many of these retirees are millionaires today, living off the interest and free to pass on their estate to their children. This can never happen under Social Security.
Consider this scenario: A man and his wife have paid into SS since the first day they went to work — forty-five years of SS payments. They both reach retirement age on the same day. On the way to the mail box at their local post office to pick up their first checks, they are killed by a drunk driver. Their estate gets nothing. The money is lost.
Charles Ponzi is alive and well and living in Washington, D.C.
- Gary North, Government By Emergency (Ft. Worth, TX: American Bureau of Economic Research, 1983), 8. [↩]
- James M. Pethokoukis, “Boomer Burden,” U.S. News & World Report (January 17, 2005), 46. [↩]
- Quoted in North, Government by Emergency, 4-5. [↩]