The Fed's 'Ponzi' scheme
By Beth Cody, Writers’ Group member
Iowa City Press-Citizen
Wednesday, January 14, 2009

We’ve been reading a lot lately about the Bernard Madoff investment fraud and “Ponzi” schemes.

Unlike legitimate investment funds, Ponzi schemes have no underlying investments in return-bearing assets. Instead, “returns” paid to investors come from money paid in by new investors.

The scheme works as long as investors continue to invest. But eventually, participants lose confidence in the scheme, try to withdraw their funds, and the whole racket comes crashing down.

The Madoff fraud has been termed the largest Ponzi scheme to date, allegedly involving $50 billion in losses.

But there is actually a much longer-running Ponzi scheme that dwarfs the Madoff one. This one is not illegal, however, because it is run by our government.

I am referring to the Social Security scheme perpetrated by the federal government on the American people for over 70 years.

This swindle, like most government programs, was started in order to help people. But like most government programs, it is so inflexible and corrupt that it hurts more than it helps, and will likely bankrupt our country to boot.

Like a Ponzi scheme, the federal government does not invest our payments in any return-bearing assets – in fact, it doesn’t even save the money. Instead, it spends it on pork and simultaneously promises future “returns”.

And Ponzi-like, what they take from your paycheck now is given to retirees now.

But unlike illegal Ponzi schemes, the government is not worried about investors losing confidence. We are compelled to continue paying in, and can only withdraw our “investments” on their schedule.

As in a Ponzi, the payouts are unsustainable. Calculations made in the 1930s are no longer valid: Retirees live a lot longer, and the outsized Baby Boom generation has confounded the worker-retiree ratio. (In the 1930s, there were 16.5 workers for each retiree. Now there are 3.3, and by 2040 there will be only 2 workers supporting each retiree.)

Payouts will be larger than pay-ins by 2017, only 8 years from now. Although the so-called “trust fund” contains enough IOUs to cover payouts until 2041, what is government going to pay back those IOUs with?

With additional debt owned mostly by foreigners and inflationary paper money printed by the Federal Reserve.

This will eventually result in a loss of confidence, not just in the Ponzi scheme, but in our entire monetary system. Foreign investors will dump dollars, likely leading to hyperinflation and a total collapse of our economy.

There is talk of making benefit cuts or tax increases to “balance” the scheme, but these would have to be unacceptably large to make any meaningful difference.

So what can be done to avoid the inevitable disaster? You guessed it: chuck the whole scheme.

Government could sell land and assets to buy private annuities for older people who have spent their lives paying into the system. The annuities would take over monthly payments and, unlike government, could be sued for not honoring contracts.

Younger and future workers would know that they must save for retirement themselves, and they would be the real beneficiaries. Private investment would yield them higher retirement income, according to Cato Institute studies. And they would not be crushed by unsustainable government debt.

Also, unlike under the Ponzi scheme in which payouts stop when we die, retirement nest eggs would pass to our children.

The nest eggs would most help poor people and minorities, who are worst-off under Social Security because they start working earlier and don’t live as long after retirement. Inherited savings would help break the cycle of poverty.

Some people think that (other) people are too stupid to invest their own money, or that investments are too “risky”. And it is true, there would be people who would refuse to plan for the future, and some who would invest poorly. They would need to work longer and rely on family and charities.

But is it better to bankrupt the whole country with promises that can’t be kept? That’s less “risky”?

If nearly everyone invested for retirement, our whole country would be much richer, meaning everyone could save more, and give more to charities that would help the poor, including the elderly poor.

Let’s arrest this government Ponzi scheme. We must consider our children as well as our parents.