Ponzi schemes ...

[Blarch]

Whats the difference between SS and what Madoff did ?

For that matter, whats the difference between a bank and what Madoff did ?

A Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. The term, "Ponzi scheme," is used primarily in the United States, while other English-speaking countries do not distinguish colloquially between this scheme and other pyramid schemes http://en.wikipedia.org/wiki/Ponzi_scheme

[Recursion]

1. SS requires continual economic growth

As long as the GDP keeps growing (from one generation to the next) it's feasible. Ultimately, though, the answer to your question is "nothing: it's a Ponzi scheme".

[alcibiades_mystery]

2. Social Security is a completely transparent social program

What Madoff did was tell people he was doing A with their money while he actually did B.

Second, social security is sustainable because it bases its 'new investors' on birth rates, not 'persuasion.' Theoretically, such a structure has no temporal limit, because it mirrors the very structure of human societies: the young and able care (in part) for the aging. A Ponzi scheme fails because you eventually run out of new investors.

[Blarch]

4. I disagree.

SS was made to help support Americans when they get older ...it IS NOT a candy store our Gov. can go to anytime they want a couple hundred billion dollars.

When they took my money they surely didn't tell me Bush was going to use it in Iraq.

The Gov. told us they were doing A with our money while they actually did B

[polichick]

3. My question re the Madoff thing is WHERE DID THE MONEY GO?

[Blarch]

5. He blew it.

Kinda like the way Bush blew the SS surpluses in Iraq and such.

It's the same thing.

[polichick]

6. On what though - that's a lot of cash to blow.

[Uben]

9. My guess is....

...he probably did have most of it invested.....badly. He could have lost over half of it in bad investments. I lost half my money in investments that paid very well until the bottom dropped out. I had the money to lose, or I would not have had it in the market.
But, it was MY money, not someone else's! I licked my wounds and moved on. So, I suspect Madoff did the same, as well as siphoning off what he needed to support his lavish lifestyle. There has to be some more stashed around the world, and they'll find some of it.

[Blarch]

10. But...

This is EXACTLY what the banks were doing.

...he probably did have most of it invested.....badly. He could have lost over half of it in bad investments.

Where is the crime ? ...the only difference is he wasn't backed by the FDIC

[jmowreader]

15. I don't think so...

Forensic Accountant (whatever that is) Harry Markopolis sent, in November 2005, this document to the Securities and Exchange Commission:

http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf

Its title is "The World's Largest Hedge Fund is a Fraud."

I am going to pull a few choice quotes out of it:

"I have also spoken to the heads of various Wall Street equity derivative trading desks and every single one of the senior managers I spoke with told me that Bernie Madoff was a fraud. Of course, no one wants to take undue career risk by sticking their head up and saying the emperor isn't wearing any clothes but..."

"There are 2 possible scenarios that involve fraud by Madoff Securities:

1. Scenario # 1 (Unlikely): I am submitting this case under Section 21A(e) of the 1934 Act in the event that the broker-dealer and ECN depicted is actually providing the stated returns to investors but is earning those returns by front-running customer order flow. Front-running qualifies as insider trading since it relies on material, non-public information that is acted upon for the benefit of one party to the detriment of another party. Section 21A(e) of the 1934 Act allows the SEC to pay up to 10% of the total fines levied for insider-trading. We have obtained approval from the SEC's Office of General Counsel, the Chairman's Office, and the bounty program administrator that the SEC is willing and able to pay Section 21A(e) rewards. This case should qualify if insider trading is involved.

2. Scenario #2 (Highly likely): Madoff Securities is the world's largest Ponzi Scheme. In this case there is no SEC reward payment due the whistle-blower so basically I'm turning this case in because it's the right thing to do. Far better that the SEC is proactive in shutting down a Ponzi Scheme of this size rather than reactive."

Markopolis turned this in to the SEC in 2005--the first year of Bush the Younger's second term. The SEC he chose is the one that regulates the stock market. For all the good it did him, he would have been better off sending it to the one that regulates football.

On edit: added one opening parenthesis.

[lonestarnot]

8. Did he start a war? Where?

:evilgrin:

[malaise]

7. If SS were a ponzi scheme

what are insurance companies. I wish someone would ask the Rethug hacks pushing this line.

[Blarch]

11. SS IS a Ponzi scheme.

It's not an opinion.

[Bigmack]

12. NOT a Ponzi scheme....

SS is most definitely NOT a ponzi scheme, and any comparison between the two simply gives aid and comfort to the same privatizing/wheeling-and-dealing assholes who got this country so deep into the shit.

Why is it that some people will never be happy until any remnant of a social safety net is eliminated?

"So why is Social Security not a Ponzi scheme? Well, first of all it does not make wild claims about making money fast. It also does not claim to be investing your money so it is not actually fraudulent. It is also based on taxes so it is not a voluntary scheme like the original. Finally, when a person dies then the payout stops under Social Security so it is possible that some people who contribute never see a single penny returned. The Social Security Administration actually calls the program a "pay-as-you-go insurance system" and claims that it is sustainable as long as the population demographics of retirees and working people stay stable.

Regardless of the semantics, in the near future there will be many more retirees than working folks so the demographics shift will make Social Security pay out more than it takes in. According to the 2008 Social Security Administration report the program could cover 75 percent of scheduled benefits until 2082 after the current surplus exhausts in 2041."

http://www.wisebread.com/is-social-securit...

[Blarch]

14. From the SEC website...

But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money http://investor.gov/answers/pyramid.htm

This is SS defined.

[exboyfil]

16. I am of two minds on this point - it is a Ponzi but with a social purpose

The CBO report showed depletion of the S.S. Trust fund in 2042 (I bet the date has shifted forward now). HannahBell in another posting thinks that S.S. is actually sustainable at even less than our current contribution rate even without the Trust Fund build up. I don't buy that.

What I think will actually happen is that a 8%/8% (instead of a 6%/6%) rate of contributions will be needed in the future to keep the program going like it is currently.

That contribution rate has grown from from 3%/3% to the current 6%/6% since its inception. This higher rate allows the build up of the "Trust Fund".

I think 8%/8% is too much to burden our children with, so I like the idea of helping out now for the future. I just think that the "Trust Fund" is a bad idea, and we will see how bad it is when S.S. starts withdrawing in 2018 (or earlier after this recession).

Current S.S. retirees in general no way contributed sufficiently to justify what they are drawing out now. On the other hand I am not prepared to stick grandma on an iceberg. Is anyone else willing to do that?

[Hannah Bell]

24. What's the basis for your belief? Right now, 187 billion of the general budget

(9%) is funded with excess SS collections & interest from the TF. That means the SS tax could currently be reduced to the same tune.

Right now, SS rates are scheduled to remain at current %s for 75 years into the future, based on actuarial assumptions.

But you "think" they'll increase to 8%.

Maybe, but what's the evidence for your belief?


You "think" retirees in no way contributed sufficiently to justify what they're drawing. Well, that pretty much depends on the data you include in your calculations. In terms of the pool - yes, they did.

[exboyfil]

27. My 8%/8% number came from the CBO report

If S.S. is funded in perpetuity at the current withholding rates, then why is is scheduled to start drawing down the "Trust Fund" in 2018? Maybe this number is incorrect(see the CBO report at http://www.gao.gov/new.items/d031038t.pdf)? What studies show a different result? The 2018 date is close enough that realistic projections can give us some idea of what is happening. The CBO report was done in 2003, and the assumptions made in the report did not include the most recent economic recession.

I am basing the 8%/8% from what I have seen in the study. Maybe it is 7%/7% - maybe it is higher than 8%/8%. I am not an actuary so it is a "belief" in that sense. After 2042 the CBO report shows depletion of the "Trust Fund" and the beginning of a choice - either increasing of the withholding rate or a reduction of benefits.

Well the initial retirees contributed 2% of income as opposed to to the 12.4% seems to indicate an immediate problem with the fairness of the funding formula. Even discounting the "Trust Fund" build up accounting (making the current rate closer to 9%) that is still significantly higher than the 2% paid when the system first started out.

I would like someone to calculate the benefit of a maximum earner from 1937-1972 when that earner retired at 65 and how much an inflation adjusted annuity would have been for that individual in 1972 when they retired. Remember this is a maximum earner so this would be the best case for that generation paying into S.S. The minimum earner is heavily subsidized under the current formula by those earning $50-$107K. S.S. taxes were 1%/1% from 1937-1949.

That is not to say that I want to change where we are now. I just wonder if S.S. would still have been sold back in the 1930s if folks were told your kids/grandkids will be paying 6.2%/6.2% into this system in 60 years. I don't want my kids/grandkids paying 10%/10%.

If Obama does anything to S.S., then I would like to see him apply the withholding across all income with no maximum limit. For those making over $107K that income should be able to participate at the 15% level for benefits (just like the folks income between $50-$107K). We might want to credit the value of this amount back immediately to avoid huge liabilities in the future. I don't see a reason for a notch between $107K to $200K as has been proposed. Right now S.S. works as a regressive tax for the transition at $107K.

Obama should then reduce the percentage withholding for everyone with these added funds. If pay as you go can be set at this new level going forward without continuing to build a massive "Trust Fund" (ie slush fund) and not increasing withholdings or reducing benefits, then I am all for it.

[exboyfil]

13. This is what was said about S.S. at its founding

http://www.ssa.gov/history/miles.html

Excerpts from Speech
by Vincent M. Miles
at Governors' Conference,
St. Louis, Missouri,
November 16, 1936

Vincent Miles was on original Board of Social Security


"Under the provisions of the act for old-age benefits, qualified workers will receive retirement benefits, as a matter of right, at the age of 65. No means test will be required. The old-age provisions are best understood if we compare them to insurance. They apply to wage and salary earners who are now young or middle-aged--men and women who work in industry, in business offices, in commercial enterprises of all kinds--about 26 million workers in all. This part of the Social Security Act provides, for these men and women, an income for life after age 65 when they are no longer at work. This income will be paid to them by the United States Government in monthly checks--like the installments on annuities from an insurance company. Or a payment will be made to the worker's family if he dies. Whatever happens, the worker or his family gets back more money than he pays in."

1. The worker or his family gets back more money than he pays in. Well not any longer.
2. No means testing. Well not any longer since benefits are taxed.
3. Age of 65. Well no longer it is 67.

These are just a few examples of how S.S. changed from what was represented to what it actually became.

S.S. is like a Ponzi scheme because the original investors were lied too (see above). S.S. is like a Ponzi scheme in that the first in the door derived the most benefit from the scheme by using dollars from later participants. S.S. is like a Ponzi scheme because the so called $2.2T "Trust Fund" is really a slush fund (in a $11T debt and $1T deficits it can't be anything else). All budget deficit numbers should be reported without using S.S. at the very least. I like to say the $2.2T went up in smoke and mirrors ($1T for Iraq and $1.2T for TARP and AIG - note these estimates are probably low). Last year S.S. collected $600B and distributed $400B. You can say the other $200B went to AIG and some of Paulson's other friends.

Actually S.S. is a good program that finds a source of funds to provide a guaranteed minimum income for seniors. The biggest problem that I have with S.S. is that those making $50,000-$107,000 are carrying the brunt of the subsidization of the program. I think the payroll tax should be applied to all income, but those individuals get to participate at the 15% rate like those making $50,000-$107,000.

The "Trust Fund" is a problem, and I am open to suggestions on how to fix the situation.

[Blarch]

17. If it walks like a duck.

As far as the trust fund. How about a lock box ?

[exboyfil]

19. The single biggest reason I didn't vote for him

I just wish he had won Florida. No I did not vote for the other major party candidate either.

[.... callchet ....]

18. SS

No comment.

[leftofthedial]

20. capitalism is a pyramid scheme.

ponzi schemes are like when tumors get tumors of their own. capitalism is the original tumor; the ponzi scheme is another tumor feeding off the first one.

The cancer of capitalism will brook no competition from rogue capitalists.

If madoff had somehow become personally more powerful than the sum of all the institutions he destroyed, harmed or threatened, he would have supplanted our current capitalist cancer with his own.

[Occam Bandage]

21. Social security is indefinitely sustainable with a steady population of retirees and workers.

Ponzi schemes require exponential growth in new participants to remain stable, and thus will necessarily collapse under their own weight.

[Hannah Bell]

26. Yes, & it's even sustainable with MORE retirees than workers, so long

as the new workers can 1) produce more than preceding generations, & 2) get that additional value creation as income.

What tends to happen, though, is that the value of the additional production goes to the owners.

[exboyfil]

28. Hard to have more workers when you are not having more babies

We have decided that immigration is a solution to the lowered birth rates.

An interesting comment that I will be hearing from a 40 something in 20 years who came to this country in his 20s will be the following:

Why am I paying x% in S.S. to fund these old folks when my dad in my village back home has nothing?

[.... callchet ....]

22. Madoff

Do you think that what Madoff did could start a war ?

[Fire1]

23. Definitely, NOT a ponzi b/c there are people who have...........

paid into this program all of their working lives and don't collect nearly what they put in.

[Hannah Bell]

25. "pays returns to investors out of the money paid by subsequent investors rather than from profit."

Social Security:

Gen A works, producing goods, services, knowledge & infrastructure. The value of its work is taxed to provide SS to preceding generations.

Gen B works, producing more goods, services, etc. It is able to produce more than Gen B in fewer hours, thanks to the goods, services, infrastructure & knowledge Gen A created.

This is the "profit".

Gen B is taxed to provide SS to Gen A.

The money being taxed comes from productive labor.



Ponzi scheme:

Investor B gives money to MONEY MANAGER (MM) under the assumption that Z will put it into a profit-making venture.

Instead, MM takes part of the money for himself, & gives part of it to earlier Investor A.

Then he looks for new Investor C to get even more money for himself, & pay Investor B.

NO PRODUCTIVE ACTIVITY OCCURS during the transfers, and the MM deceives the investors.




SS isn't a pyramid scheme unless you believe life itself is a pyramid scheme. It works just the same. Each generation's labor supports its old & young, & hopefully each generation's labor increases the wealth & leisure of the next.

However, when a small fraction of each generation diverts most of the wealth to itself, all bets are off.

That's the real "pyramid scheme," & its the folks at the top of THAT pyramid who are telling you "there's not enough wealth for Social Security!!!!"

Because they want more, & want everyone else to have less.

Don't do their dirty work by spreading their propaganda.


Investor

[Romulox]

30. Your analogy fails because any increase in productivity is incidental to Social Security

A Ponzi will always work if those at the base are paying more in than those at the top. But it is a mistake to attribute increase productivity to an aspect of Social Security itself, and it is a blunderous mistake to count on never-ending exponential productivity growth to keep the Social Security Pyramid stable.

"SS isn't a pyramid scheme unless you believe life itself is a pyramid scheme. It works just the same. Each generation's labor supports its old & young, & hopefully each generation's labor increases the wealth & leisure of the next."

Neither Social Security nor the "American way of life" are sustainable beyond the Baby Boomer generation. So yes, the entire "American Way of Life" is a Ponzi scheme. Haven't you noticed that the children of boomers "enjoy" a lower standard of living than their parents??? :hi:

[Romulox]

29. Social Security is indeed a Ponzi scheme. The Boomer cohort is simply too politically powerful

to be defeated, so they will be allowed to bankrupt Social Security and the country with their no-means test "entitlements".