Originally Published: January 11, 2009 10:17 p.m.
All the recent articles about Madoff and Ponzi schemes got me wondering about exactly what a Ponzi scheme is. The common element is an upside down financial pyramid where the early participants receive high returns from money received from the later participants. Eventually, usually in a fairly short time, no more new participants leads to the whole thing collapsing.
Based on this definition, it seems Congress created the world's greatest Ponzi scheme in the mid 1930s with the federal Social Security program. For years the early retirees have been getting money from the younger working generation and the politicians in Washington, who gave the "trust" fund IOUs spent any surplus.
In a few years we reach the point where the new participants can no longer support the earlier participants and the government must pay the IOUs from general tax revenues.
The only reason the scheme is still going on is that the exponential compounding of the "investment" returns to the early participants has been slow, not rapid, and the payout has been in depreciated dollars which, only in the past 20 or so years, have been indexed in any fashion to inflation. Just think what a dollar would buy in 1939 compared to 2009.
Like all Ponzi schemes, this one eventually will collapse. I can only hope I will no longer be around when that day arrives.
David W. Hannum