This morning I heard on the radio that Bernie Madoff pled guilty to his enormous "ponzi scheme" in which he ripped off investors and lost about 64 billion dollars. The life savings of plenty of people were lost forever.
But what is a ponzi scheme? Simply put it is a promise from a con artist. The con man coaxes people to "invest" their money in his plan. He eventually has a large number of people paying into his scheme, whatever it is, and he is constantly paying out to the investors what others have paid in. Problem is, he has nothing in reserve to guarantee the investors payments. He is always (barely) one step ahead of the investors by paying out what another group has payed in to his scheme. If anyone in this scheme fails to make a payment into the plan, the whole thing collapses like the proverbial house of cards.
Madoff's scheme collapsed. One man on the radio said, "Madoff showed no remorse. He's not sorry about what he did. He's sorry he got caught." A lady said, "We weren't looking for returns. We were just looking for safety."
I thought, "What's the difference between Madoff and the Federal Government's promise of Social Security? Isn't that just a ponzi scheme that hasn't collapsed--yet?" The truth is that the payments going out are covered only by the money coming in (barely). For now. There is no reserve of cash for Social Security. And liberal and conservative projections are that the whole thing will run out of money in about 20 years. It will come. Is any prominent politician today sounding the alarm bells about this Government sponsored ponzi scheme? Maybe there are some--but I haven't heard them lately. Madoff's paying for his crime. Who will pay for the government's ponzi scheme?
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I like the analogy of the Ponzi scheme with the Social Security system. My question is: what re the alternatives? We have seen 401K's and IRA take a nosedive in America (and historically other pension plans have gone under leaving people with nothing).
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