Sunday, February 8, 2009

Ponzi Scheme

Bernard Madoff has put Ponzi schemes in news. I thought I'd do a little investigation into what a Ponzi scheme was, so I turned to Google who directed me to Wiki. Wiki explaned the Ponzi scheme as "The idea behind a Ponzi scheme is an operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit. The system is destined to collapse because the earnings, if any, are less than the payments."

Then it occured to me that I had read of a very similar system the other night when I was educating myself about FDR...Someone please explain to me the difference in a Ponzi scheme and Social Security as it currently exists. All I can come up with is that the government runs it and can prevent investors from making a run and go into debt when there are more taking benefits than paying in...

From my SS research:

Since the inception of Social Security, the government had administrated it as a pay-as-you-go program, paying benefits out of current receipts rather than building up a capital fund for each contributor. However, in the mid-1970s, expenditures for Social Security benefits began to exceed tax payments coming into the trust funds. This occurred because a serious recession reduced employment and trust-fund revenues while inflation simultaneously created a need to increase benefits. Public concern developed over the possibility that the Social Security system might become bankrupt over time. Since the funds had been accumulating for more than 35 years, they had a reserve of more than $40 billion in 1976, so the system was in no immediate danger. Nevertheless, experts warned that in the long term the reserve would eventually become depleted.

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