Friday, September 9, 2011

5 Ponzi Scheme Definitions that Fit Social Security Pretty Well

Washington Post fact-checker Glenn Kessler, who seems like a fair minded guy, looked at last night’s debate and concluded that Social Security does not fit the definition of a Ponzi scheme:

Perhaps the governor does not know the dictionary definition of a Ponzi scheme. Here’s what Merriam-Webster says: “An investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.”

I agree that part about encouraging bigger risks doesn’t really fit, but it turns out that’s not the only possible definition of a Ponzi scheme. In fact, it’s nearly the only one I’ve seen that adds that latter part. Merriam Webster also has a listing for “pyramid scheme“:

a dishonest and usually illegal business in which many people are persuaded to invest their money and the money of later investors is used to pay the people who invested first —called also (US) Ponzi scheme

Turns out that definition fits pretty well and is considered a synonym. Here’s another definition from the Free Dictionary:

A fraud disguised as an investment opportunity, in which initial investors and the perpetrators of the fraud are paid out of funds raised from later investors, and the later investors lose all funds invested.

That fits nicely. How about this one from Cambridge Dictionaries:

a way of deceiving investors (= people giving money to acompany hoping to get more back) in which money that a company receives from new customers is not invested to their advantage, but is used instead to pay debts owed to existing customers

Sort of like loaning all of Social Security’s income to the Treasury to pay the government’s bills. Here’s Oxford Dictionaries:

a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

Finally, I think this one from the American Bar Association is my favorite:

A Ponzi scheme is a type of securities fraud where the promoter makes some sort of false or misleading statement about an investment (often including a guaranteed high rate of return) and pays off older investors with newer investor’s monies. Eventually, when the promoter can’t find any new investors, the scheme collapses.

Sort of like Social Security which has gone from 16 people paying in for every person drawing benefits to 3 to 1 today. Come to think of it, maybe the ABA should look at Social Security. I think the next generation has a ginormous class action lawsuit in its future.

Looks to me like Glenn Kessler just happened to pick the one definition that fit Social Security least well and then graded Rick Perry by that standard. Had he picked any of these other definitions (or several more I didn’t include), the similarity between the scam and the program would have been a lot harder to wave off.

The real difference between the two is intent. Ponzi schemers mean to rip people off and progressive social engineers mean to help them. I think that will come as cold comfort to my generation in about 20 years, assuming Medicare doesn’t swallow us whole first. There’s no doubt we won’t get as good a deal as the “early investors” and our children less than that. It’s a Ponzi scheme, just one that takes generations to fail.

John on September 8, 2011 at 2:19 am

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