The pyramid scheme is the most enduring of thousands of tricks, buncos, fiddles and stings that con artists throughout history have used to relieve suckers of their cash. The two undisputed masters of the pyramid scheme are Charles Ponzi and Franklin D. Roosevelt. For his accomplishments the intellectual left has canonized FDR. Ponzi is immortalized in the American vernacular.
Charles Ponzi was a charming, dapper Italian immigrant who, in the summer of 1920, pulled in a million dollars a week with his “postal reply coupon” investment scheme. Promising a 50% return on your money in 90 days, he paid out in just 45. Word spread like an internet virus. New investors flocked to his offices at locations from Maine to New Jersey. At every office cash overflowed from desks, cabinets and closets like champagne surging out of a starlet’s bathtub. Ponzi could hardly haul it away fast enough.
Imaginary “postal reply coupons” were the investment vehicle in Ponzi’s con. In reality Ponzi was using the same business model as Social Security. He was simply paying early investors with money he took in from later ones. A diagram of the scheme has a pyramid shape. Early buyers occupy the top with the swindler at the peak. New investors form a widening base from which money flows up. The game goes on as long as the base grows. Ponzi became so famous that today we call the many variations on his swindle “Ponzi schemes.”
Such schemes are illegal because they are flimsy webs of alluring lies. The painted ladies, Greed and Gullibility, wave fetchingly from across the impassable River of Easy Money. We plunge in, eyes blazing, blood roaring hot in our ears, heedless of our good loafers. Avarice reduces our intelligence to that of little yellow crayons.
Grifters and politicians, each for their own reasons, eagerly pimp for the girls. “Keep smiling, ladies,” they say. “Here come the suckers with their wallets,” or their votes.
Franklin D. Roosevelt, President of the United States from 1932 until his death in 1945, started the vast chain letter we now call Social Security.
Because it is a Ponzi scheme, Social Security is unstable. Politicians keep the dodge going by forcing new suckers in at gunpoint. Congress has “rescued” the program more than 30 times with tax hikes. Congress has also quietly exempted its own members from participating.
Because it is a Ponzi scheme, Social Security is dishonest. Sold as an insurance program, it has never been anything like one. The courts have agreed. It is simply a tax that delivers money from the young to the old. Indeed, any insurance company that operated like Social Security would be shut down for fraud, its directors jailed.
As in all Ponzi schemes, while the game is going there is a large vocal group of winners who cheer loudly to keep the chain unbroken. There are still plenty of current and potential Social Security recipients who are big winners. They are also chronic voters. For that reason and because the longer a person pays in, the less inclined he becomes to examine the morality of the scheme, powerful incentives have fostered mass delusions of legitimacy.
A key feature of the delusion is the famous “Trust Fund.” Thanks to a massive tax hike in the 80’s Social Security collections currently exceed claims. They have for a long time. They will for a while longer. The truth, however, is consistent with the fraud. The trust fund is a convenient, hardly ever-questioned deception.
Diligent “Trustees” are supposed to be frugally squirreling away the current surplus to cover future obligations. To believe that we must ignore a basic truth of political economy: Politicians don’t invest tax money, they spend it. The government spends the Social Security surplus and puts IOU’s (government bonds) in the trust fund.
For you or me, a sack of U.S. Government bonds is a valuable asset. Bonds pay interest. You can sell them for cash if you want. Grade “triple A” U.S. Government bonds would shine penny-bright on the “Asset” side of your balance sheet.
Government bonds in the Social Security Administration’s “trust fund,” however, live on both sides of the same balance sheet. The asset equals the liability. Net value is zero. The Social Security surplus is like the surplus you would have if you blew your savings on whisky and women and then wrote yourself an IOU for the full amount. You can call your IOU a trust fund if it makes you feel better, but if you want to buy anything you have to go back to work. Uncle Sam gets money from the same place you do, from your earnings.
Even those who believe in the “trust fund” like The Tin Man believes in The Wizard, agree the system is doomed. The only real debate is when the collapse will happen. No one doubts that eventually a few generations will get suckered. The only question seems to be whether those people are alive yet and do they vote. Once again the system needs to be saved.
My question is, “Why do we want to preserve such a massive flim-flam?” No one ever suggested saving Charles Ponzi’s postal reply coupon plan. It was a crooked con from the start. So is Social Security.
The best proposals for reform involve some form of privatization. Good idea. No one invests more carefully than a person using his own money. Indeed, the only way to keep politicians from squandering every cent we have is to choke off the flow of money from those who earn it to those who want to buy votes with it.
The trouble with privatization proposals originating in Washington is that they all involve wing-tipped lifers at the SSA swimming with schools of Wall Street sharks for an extended, all-expense-paid pool party at New York’s biggest casino, the stock market.
Social Security should be ended, not saved, completely privatized, for all the same reasons we would end any other criminal enterprise and make its victims whole. To do it properly the government’s role must be reduced to that of neutral regulator of private business. Those who have contributed and who now depend on the program must be fairly compensated.
Failing that, an eventual slow collapse would be far better than any rescue effort that has the smallest chance of triggering a calamitous bust, as every current proposal does. Infesting the henhouse with poultry-slaying, egg-swilling weasels from Wall Street and Washington would give us our best shot at a quick, total annihilation of Social Security and an excellent chance to find new meaning in the words “financial ruin.”
Ponzi’s scheme wasn’t worth saving. Neither is Roosevelt’s.