The Real Ponzi Schemes

by John W. Wallace

posted 01/15/09

Most Americans are aware of the fraud case involving Bernard Madoff, a Wall Stret financial advisor who is accused of swindling investors out of an estimated $50 billion in what is commonly called a "Ponzi Scheme." Named after one of America's greatest swindlers, Charles Ponzi, a "Ponzi Scheme" is a financial ruse that, for a time, appears to generate great returns from an investment when in fact it produces nothing. As the scheme continues to grow and attract new investors, it can appear to be very financially successful and those investors who get in and out early, oftentimes make a lot of money. Eventually, however, when no new victim investors can be found to put new money into the program, the scheme crashes and everyone who is still in it loses everything, as did most of Bernard Madoff's investors.

Since this ponzi scheme made the news, American political leaders have pointed to the Madoff case as an example of what's wrong with our country's financial regulatory and oversight system. The politicians, the press and the investors want Madoff prosecuted and sent to jail for his crimes. Members of congress, both Republicans and Democrats, are outraged and are calling for more oversight of the financial industry. They want to know "who dropped the ball?" and how could such a massive fraud occur under the watchful eyes of federal government regulators?

Unfortunately, for decades many of these same political leaders and members of congress have been ignoring the two biggest "Ponzi Schemes" of all time. Schemes that make the Madoff scheme look like child's play. The two "Ponzi Schemes" that pose the most danger to the American people are the government's Social Security and Medicare programs. Congress has been routinely using the excess social security tax money that is collected to fund other programs to a point where the Social Security Trust Fund now consists of nothing more than a box of IOU's and the unfunded Medicare costs continue to grow dramatically every year.

When the mandatory Social Security system was set up in 1935, there were 45-50 workers paying into the system for each retiree. Now there are only 3.4 workers for each retiree and the ratio continues to shrink. If nothing is done and congress fails to take remedial action, the rapidly expanding and underfunded Social Security and Medicare systems will collapse for lack of money just like the "Ponzi Scheme" of Bernard Madoff.

Will members of congress demand that those responsible for the collapse of the Social Security and Medicare system be prosecuted and sent to jail? Will they want to know "who dropped the ball?" Of course not, because they will be the ones responsible.

Both of these programs are inter-related and any solution must include reforms to both programs. Unless congressional lawmakers act quickly to reform the Social Security and Medicare programs, our children and our grandchildren will face a future of soaring taxes, increased government spending that will strangle the economy and result in giving them lower living standards than Americans enjoy today. The longer congress waits to enact the necessary reforms, the more painful those reforms will be.

Congress must act now!