Madoff, private investment accounts and the world’s biggest Ponzi scheme
By now, we all know about Bernard Madoff (pronounced “made off,” as in “he made off with our life savings”), the Wall Street financial advisors to the rich and famous who confessed that his business was ‘all one great big lie’ (for instance, see this article in The Independent). “The investment returns were fake, and he had been paying old clients with money from new ones. In its conception, the scam is a classic.” This classic scam is known as a Ponzi scheme, named for Charles Ponzi who bilked many out of their savings with his pyramid scheme in the early part of the 20th century. A pyramid scheme is one where initial investors earn high returns, but those returns are all financed by the investments of those buy into the fund later, kind of like what we know of as ‘network marketing.’ As mentioned in this article on Ponzi schemes, “For this scheme to work, there needs to be an ever increasing number of investors.” The number of investors will not continue to increase, so the fund collapses, as investors cannot continue to receive payments.
People are outraged that Madoff, who once called for a higher level of ethics on Wall Street, has been so unethical as to defraud so many out of their millions. Some have pointed out that this is exactly why we cannot let people invest their own social security funds. However, Social Security, the biggest of all retirement funds, is financed in exactly the same way as Madoff’s Ponzi scheme, with people who are retired now being paid from the payroll taxes of those who are working. However, with the baby boomers beginning to retire and with far smaller age cohorts working to support them, there will need to be more and more workers paying into the system, but it cannot continue, as the boomers had far smaller families and our population growth has slowed.
So, many of our politicians who have pooh-poohed Bush’s proposal for people to have some control over part of their social security accounts are now learning the wrong lessons from the Bernie Madoff. The lesson should not be that people cannot be trusted with their own funds, but rather they should not trust the Bernie Madoffs of the world with their retirement, nor anyone in Congress, because Congress has given us the biggest of all Ponzi schemes, Social Security, a Ponzi scheme that dwarfs Madoff’s.
Perhaps we should try to be wiser than Twain’s cat. Mark Twain remarked once: “We should be careful to get out of an experience only the wisdom that was in it—and stop there, lest we be like the cat that sits on a hot stove lid. She will never sit down on a hot stove lid again—and that is well, but also she will never sit on down on a cold one anymore.” The lesson from Madoff is not that private individuals might try to rob you of your retirement funds, but that we know for sure that our funds in the governmentally run Social Security Ponzi scheme are not safe, and they might also be at risk in private accounts if you are not sure how the funds are really being invested, but at least with private accounts you have a chance.
MC