We were talking to a neighbor recently who became upset when we called Social Security a Ponzi scheme. We were puzzled. We thought we were stating a truism. Look at this definition by one of our favorite definitional (new word alert!) websites Investopedia.
Thanks to The New York Divide, a news aggregator which had a long list of headlines about items explaining the connection between SS and Ponzi schemes, for the illustration.
Ponzi Scheme: What does it mean?
A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.
Before we get to our analysis, let’s parse this definition. Did you notice there is no actual person or perpetrator in any of these sentences? The subjects are the scheme or scam itself. The scheme does it all. It promises, generates, yields and collapses. To whom is it done? Investors.
Okay, let’s take out the insulting adjective “fraudulent” and ask how is this different from Social Security. Our neighbor just mumbled angrily. Not surprising. Many of our friends are not accustomed to defining their terms or questioning their “self-evident” truths.
Turns out she thought calling SS a Ponzi scheme meant the *recipients,* i.e. the “investors” were the fraudsters. Conservatives who use this notion for describing SS mean the *schemers,* i.e. the govt/politicians.
But don’t the recipients expect to get “high rates of return with little risk to” themselves? That is either an impossibility or theft. Maybe she suspected the truth and didn’t like it.
Investment lesson: you can’t invest well until you can think clearly. Clear thinking is not as easy as it sounds!