There have been recent accusations by some politicians running for president that Social Security is a "Ponzi scheme." Others say this type of talk is a politically motivated scare tactic. Let's examine the facts.
Charles Ponzi was an Italian immigrant who bilked millions of dollars out of thousands of hopeful investors in the 1920s, in what has since become known as a Ponzi scheme. Essentially, he took money from investors and instead of investing it wisely, or holding it in trust, he spent it. He then paid back old investors with money he took from new investors. Eventually, when he couldn't get enough new investors, the scheme collapsed and all investors lost all of their money.
Since then, the process of taking money from investors or contributors and promising a return on that investment, and then spending the money and relying on contributions from new investors to pay back old investors has been branded a Ponzi scheme. It is illegal. People like Bernie Madoff go to jail for running a Ponzi scheme.
Social Security was originally set up in the 1930s, and workers contributed to the Social Security trust fund. The money was held in trust by the United States government so that the workers could be paid back on their contributions when they retired. But over the decades a funny thing happened to the Social Security trust fund. The politicians in Washington started raiding it and eventually they spent it all. Now, Social Security payments made to retirees are simply paid with the contributions of current workers.
Since that is usually not enough, the government simply prints more money to cover the difference. This process of simply printing more money to make up for the deficit in the "trust fund" was a method of repayment that was not available to Mr. Ponzi or Mr. Madoff, so they wound up in jail.
But as we all know, the politicians in Washington do not have to follow the same rules and laws that they make for the rest of us. So they continue to spend all of the Social Security contributions that they take in. And unlike Ponzi investors, American workers do not have the choice of declining to participate in the venture even if they have some doubts about the viability of the investment.
So then, by definition, it really appears that Social Security is a type of Ponzi scheme. And Mr. Ponzi would be jealous since participation by every wage earner is mandatory.
Iver Mindel, CockeysvilleCopyright © 2014, The Baltimore Sun