An article in this weekend’s edition of The Wall Street Journal defines a Ponzi scheme as “a fraud in which invested money is pocketed by the schemer, and investors who wish to redeem their money are actually paid out of the proceeds from new investors.” The article, which was written by Stephen Greenspan, an emeritus professor of educational psychology at the University of Connecticut, further explains Ponzi schemes as follows: As long as new investments are expanding at a healthy rate, the schemer is able to keep the fraud going. Once investments begin to contract, as through a run on the company, the house of cards quickly collapses.”
Of course, the most recent example of a Ponzi scheme involves Bernard Madoff, a highly regarded money manager. Madoff collected billions of dollars from investors because he regularly reported impressive returns to them even during down markets. It turns out that Madoff was not earning the returns he claimed. Instead, he was running a Ponzi scheme. The scheme collapsed when he was unable to attract sufficient amounts from new investors to pay the old investors who wanted to withdraw money from what they thought were their accounts. Those who trusted Madoff with their money may have lost as much as $50 billion.
As I see it, and as the political cartoons shown above demonstrate, our Social Security and Medicare systems bear a strong resemblance to Ponzi schemes. The money today’s workers pay into the Social Security System is not set aside by the government to pay future retirement benefits to them. Instead, today’s workers pay Social Security taxes, and the money is used to pay retirement benefits to those who have already retired. The government is currently collecting more in Social Security taxes than it is paying out to current Social Security beneficiaries. What does it do with the excess? It spends on other programs, of course.
Our Medicare system operates on a similar basis. Under our Medicare system, people who are still working are paying for the health care benefits to which today’s elderly are entitled. The system is based on the scheme that future workers will pay the amounts due to today’s workers.
Like all Ponzi schemes, there will be a day of reckoning for our Social Security and Medicare systems. The average person’s life expectancy is increasing, and so is the country’s median age. The ratio of current workers to retirees has changed dramatically since the Social Security and Medicare systems were created. In the future, the amounts being collected from current workers will not be adequate to pay the benefits that have been promised to retirees. Instead of addressing this problem, which is becoming bigger with each passing year, our politicians are dreaming up new programs and benefits to offer to the voters who helped elect them.
Bernard Madoff was probably hoping he would outlive his Ponzi scheme. Most of our political leaders today are doing the same thing. They are only worried about winning the next election, and they are assuming they will be retired or dead before the Social Security and Medicare systems collapse.
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