The ill-fated scheme of Bernard Madoff struck most people (excluding, of course, those taken in by it) as a pretty outrageous swindle of investors. The essence of the manipulation, as I understand it, was to take money from people who were promised a return at some future date, financed by subsequent investors to whom the same promises were made. It "worked" so long as there was a steady stream of suckers or no one grew suspicious when the promised gains never materialized.
In the meantime, Bernie, as he was called, "made off" with lots of money until the house of cards came tumbling down, supported as it was by an endless series of unfulfilled promises. This has been called a Ponzi scheme for it fits the model.
Here's how Wikipedia describes a Ponzi scheme: "A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going."
Last summer presidential aspirant Gov. Rick Perry of Texas described the Social Security program as a Ponzi scheme, which drew an angry reaction. The Los Angeles Times explained in a lengthy editorial how Perry was wrong. But its explanation of how the retirement works convinced me that Perry was right.
For the fundamental facts are that people live, on the average, about 20 years longer than when the entitlement program was enacted in 1934; there are, as a consequence, far more retirees than ever, especially with the addition of the Baby Boom generation after World War II; and the ratio of persons paying into the system has shrunk from 14-1 in the 1950s to barely 3-1 today.
The selling point for Social Security was that persons from whom a contribution was extracted from their paycheck were paying for their own benefits. That's why it was described as an insurance program, safer than risking one's money in a risky stock market. Indeed, the existence of the Social Security Trust Fund showed that the money was safe and would be there when needed in the guaranteed worry-free future.
Besides the unpleasant demographic facts above, during the presidency of Lyndon Johnson, Congress formed the bad habit of "borrowing" from the Trust Fund to cover recurring federal budget deficits. Vice President Al Gore in 2000 sought to reassure Americans by describing that Fund as a "lockbox" safe from rifling, even illustrating his point with a drawing of a box with his hands.
So what have we got? A financial scheme that promises payoffs to increasing numbers of people that depends on payments from a larger but limited number of future contributors who themselves depend upon that same system to provide for them, too. Not surprisingly, the actuaries of the Social Security fund have warned (as has the Congressional Budget Office) that the system is unsustainable and predicts a crisis within a decade. In fact, right now Social Security is paying out more than it is taking in.
Imagine that! A federal program that does not pay for itself. But wait, that seems to be the fundamental problem of the whole federal government. It has run annual deficits for all but a few years of the past 60 or so, and has set records for profligacy in the Obama Administration that dwarf all those of the past. We're spending $3.6 trillion this year and running short by $1.5 trillion.
Bernie Madoff is no doubt a swindler, but he is not alone. Obama got Congress to spend vast sums for bailouts of public employees and favored corporations and demands that that never-ending and accelerating cycle be financed with higher taxes. He likes to talk about taxing the rich (defined as anyone making more than $200,000 a year), but even he must understand that we all we pay for this in the form of higher prices on the goods marketed by those "rich" people.
Robbing Peter to pay Paul works only as long as Peter has money. We are rapidly reaching the point of diminishing returns.
ABOUT THE WRITER
Richard Reeb taught political science, philosophy and journalism at Barstow College from 1970 to 2003. He is the author of " Taking Journalism Seriously: 'Objectivity' as a Partisan Cause" (University Press of America, 1999). He can be contacted at email@example.com.