The OG of Ponzi Schemes Carlo Ponzi

Greetings from Ponzistan

I am not a lawyer, but I believe that I had a defense strategy for Scott Rothstein who was recently sentenced to 50 years in federal prison. Rothstein pled guilty and admitted that he took people’s money in order to spend it on himself. He also used later investors’ money to pay back earlier investors. People who invested with Rothstein were victims of a classic pyramid or Ponzi scheme. Pyramid schemes are illegal because they are unsustainable.

Charles Ponzi was an Italian immigrant whose name has become synonymous with this sort of venture. He ran one of the larger schemes of this sort back in the 1920s. I can’t help but wonder if the Franklin Roosevelt administration learned from him and applied his tactics when they proposed social security some fifteen years later. The United States is looking more like a country that should be called Ponzistan.

If I had been Rothstein’s lawyer I would have cynically asserted that all Rothstein did was to run a government program without proper authority. If one looks at government programs from social security to medicare they all look like classic pyramid schemes. Essentially they take money from some to pay for benefits to others, and as long as the numbers make sense such a scheme or plan can go on indefinitely.

The idea behind social security was that when you are a young worker you contribute a certain amount to the fund and when you are older you can collect your benefits which is paid by younger workers who in turn will collect their benefit upon reaching retirement age which can be as low as 62 for some.

Of course the comparison to a Ponzi scheme breaks down because everyone knows what social security is about unlike those people who were tricked into thinking that Rothstein was honest and the investments would pay off. In other ways, what the government does is worse because no one is forced into an investment with a Rothstein but with social security you have no choice. You cannot opt out.

Social security resembles a Ponzi scheme because the numbers do not make sense anymore. When I was growing up, a person who lived into his or her 60s and 70s was considered old, but today this is not the case. In 1950, the estimated life span of an individual was 68.2 years. This means that a typical retired person did not live long enough to collect that much from social security. People are living much longer now and collect greater benefits for a longer time. However, as more people retire this can cause more job openings for younger workers.

We have an enormous number of people from the huge baby boom generation ready to retire and this will cause the government to do one of the following things. Here are a number of choices.

The first would be to reduce benefits to the boomer generation. This is unlikely due to their voting power and sense of entitlement. People feel that they paid into the system for years and are entitled to what they have been promised no matter how unsound the numbers actually are.

The second, which is probably more likely is to raise the amount of income that is subject to the payroll tax to an even higher level. Right now approximately $107,000 a person’s income will be taxed at a rate of 15.3% One half is paid by the employee and one half is paid by the employer. This is called the Federal Insurance Contributions Act better known to all as FICA.

A third possibility is to raise the percentage of the FICA tax from its present level of 15.3% to an even greater number. One reason not to do this is that generally higher taxes reduce the ability of private enterprises to hire more employees. On the other hand, more people retiring does create more job opportunities for young workers.

The fourth and very likely option is that the federal government has a power that other Ponzi schemers do not have. This is the legal power to print and borrow money with the full faith and credit of the United States. Doing this would increase the already huge national debt. However, the present lower interest rates means that the government can borrow more money than before. More money circulating in the society can cause inflation and this would have to calmed down by the Federal Reserve raising interest rates to curb the inflation. This usually causes unemployment to increase as the cost of obtaining capital for businesses and individuals rise and businesses can contract by reducing spending which would include not hiring new people. This could lead to less hiring as more people are retiring and the society will not be able to pay the benefits.

That is just the picture for social security. The worst part of this is that the liability posed by medicare expenses that the retiring generation will require dwarfs the problem seen in social security. How all of this is going to be paid for is the question that no one seems to have a satisfactory answer for. Poor Ponzi, if only he had run for office, he would have been a natural.