You may be getting a little satiated with the term Ponzi scheme in the news lately. Yes there was a guy named Ponzi and yes he scammed some people just like Madoff, but just as I was about to flush the topic, I thought of Social Security. I promise it will be quick, let’s review one more time. (courtesy of the marketplace decoder)

Mitchell Hartman:In a Ponzi scheme, few if any assets are actually bought with your money. And there’s no real return on investment, even though the operator may send you fictitious financial statements, on fancy stationary, showing your investment account growing quarter after quarter.

Rich Dippel: Instead of investing your money, he or she takes it, and then solicits more customers. And then basically takes the new money coming in, and pays the existing investors.

Mitchell Hartman:A Ponzi scheme needs ever-more investors to pay off the earlier participants and keep things afloat. Eventually, there’s not enough new money coming in to pay back what was initially invested, or to keep delivering the huge returns that have been promised. What happens then?

Rich Dippel: Eventually it implodes or they take off to a South American country or something.

How Social Security is a little like a Ponzi Scheme:
Normally Social Security could be a positive thing, implemented to help force everyone to put a little away throughout their working years in the hopes of having a reserve source of income in retirement to augment ones personal resources, when income due to labor may be more of a challenge.

However, in less than a decade Social Security will be paying out more than it takes in each year in taxes. Since all the surplus money we collect today, and have collected in the past, goes to pay general government budgetary expenses, there is no “lockbox” of saved money to dip into.

1. Money to pay late investors comes from new investors
2. The system requires an ever increasing number of contributors at the bottom to stay afloat
3. The money is actually spent on other things and not saved or invested as promised

Since you can’t invest in social security by choice, ie. send them one lump sum as an investment, it does have it’s differences. Even though the government’s bank account sure does have a much bigger line of credit, eventually we will have to pay for all this stuff right?

[youtube=http://www.youtube.com/watch?v=-FSoXKapKQs]

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Tagged as: Money and Investing