Bernard Madoff, who stands accused of bilking sophisticated investors out of $50 billion, is reported to have told two of his executives that his business was "a giant Ponzi scheme."
Perpetrators of Ponzi schemes lead clients to believe their money is invested and that their profits are the fruits of the money manager's savvy. But in fact, the "profits" are merely revenue provided by the next group of dupes. Eventually, when no more new dupes can be found, the scheme crashes.
Political leaders say Madoff's alleged crimes show what's wrong with the country. President-elect Obama said the "massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball." Senator Majority Leader Harry Reid added, "[R]egulators have been asleep at the wheel."
Politicians go on and on about Wall Street "greed" and "irresponsibility."
But Madoff's scam was small compared to Ponzi schemes the government itself runs: Social Security and Medicare.
By now we all know the government does not invest our payroll taxes and pay our benefits with the profits our money earns. In the beginning, writes economic historian Charlotte Twight in "Dependent on D.C.", Americans were told Social Security was an insurance program. But the government was unable to sustain that bald lie.
In reality, our money, rather than being invested and kept in an actual "trust fund," is immediately given to current retirees in Social Security benefits or to their healthcare providers in Medicare benefits. The government's promise to pay for your retirement pension and medical care is just a promise. And a lie.
In theory, the promise could be kept by raising taxes on future workers, but there won't be enough of them. Changing demographics are destroying the programs. A large working class can support a relatively small retired class, especially when life expectancy is 61 years and benefits don't begin until 65. That's how things were in the early years of Social Security. But when life expectancy grows to 80 and a large generational group -- the baby boomers -- retires expecting to be supported by a far smaller working class, that's trouble.