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Soical Security v. Bernie Madoff
Posted by: Dr. Paul Price (IP Logged)
Date: April 8, 2010 06:50AM

Why did Bernie Madoff go to prison? He talked people into investing with him but he didn't invest their money. As time rolled on he simply took the money from the new investors to pay off the old investors.

Eventually there were too many old investors and not enough money from new investors coming in to keep the payments going. Now Madoff is one of the most

Madoff did to his investors what the government has been doing to us for over 60 years with Social Security. There is no meaningful difference between the two schemes… except that one was operated by a private individual who is now in jail, and the other is operated by politicians who enjoy perks, privileges and status in spite of their actions.

Here's a side-by-side comparison:

Took money from investors with the promise that the money would be invested and made available to them later.
Takes money from wage earners with the promise that the money will be invested in a "Trust Fund" and made available later.
Instead of investing the money Madoff spent it on nice homes and yachts.
Instead of depositing money in a Trust Fund the politicians use it for general spending and vote buying.
When withdrawals were requested Madoff simply used funds from newer investors to pay back the older investors.
When benefits come due, politicians pay them with money taken from younger and newer wage earners.
When Madoff's scheme was discovered all hell broke loose.
When Social Security runs out of money our 'leaders' simply force taxpayers to send them more.
Bernie Madoff is in jail.
Politicians remain in Washington.


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Re: Soical Security v. Bernie Mado...
Posted by: expectingrain (IP Logged)
Date: April 8, 2010 01:24PM

This would be a great post for a political website. It has absolutely no value here. How does this make anyone even 1% better at value investing? Keep this drivel on political websites. Would you like it if I started putting post after post about sports? Politics is Off Topic and a gigantic waste of space here.

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Rating: 2.8/5 (9 votes)

Re: Soical Security v. Bernie Mado...
Posted by: yswolinsky (IP Logged)
Date: April 9, 2010 08:08AM

It has large ramifications for the health of our economy therefore it is relevant. Not every article has to be about value investing. If the topic is related to economics which this article is then there is nothing wrong posting.

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Rating: 3.9/5 (7 votes)

Re: Soical Security v. Bernie Mado...
Posted by: LwC (IP Logged)
Date: April 9, 2010 05:29PM

Mr. Wolinsky: IMO the criticism above about Dr. Price's penchant for posting politically oriented material in this forum is well founded. Apparently the political issue of the true nature of SS has its roots at the very beginning and the politics have not changed since. While I agree with your assertion that the burden of SS and other entitlement programs could, or even will, have a dramatic effect on taxes and interest rates in the future and therefore affect the investment landscape in ways that are difficult to predict today, I don't see how knee-jerk political commentary (or BS) adds anything to value investment discussion in this forum.

I know that you have been offended by some remarks that have been posted in these forums in the past. Please consider that this is an open forum and some of the readers are offended by Dr. Price's partisan rants. Even though there have been numerous requests by some readers that Dr. Price refrain from that behavior in these forums, he ignores them. IMO he shows a lack of respect for those of us who are participants in these forums for the subject matter: value investing. The rest of us manage to keep our political discussions in the numerous internet forums that are available for that purpose. Why not Dr. Price?

In case you are interested I have excerpted the following:


"Criticism of Social Security as a pyramid or Ponzi scheme

Libertarians commonly criticize Social Security's pay-as-you-go funding as being closer to an illegal Ponzi scheme — where investors are paid off out of the funds collected from more investors, instead of out of profits from business activity — than it is to a trust fund.[94] Michael Kinsley has also described Social Security in this way.[2] William G. Shipman of the Cato Institute argues:

In common usage a trust fund is an estate of money and securities held in trust for its beneficiaries. The Social Security Trust Fund is quite different. It is an accounting of the difference between tax and benefit flows. When taxes exceed benefits, the federal government lends itself the excess in return for an interest-paying bond, an IOU that it issues to itself. The government then spends its new funds on unrelated projects such as bridge repairs, defense, or food stamps. The funds are not invested for the benefit of present or future retirees.[95]

This criticism is not new. In his 1936 presidential campaign, Republican Alf Landon called the trust fund "a cruel hoax". The Republican platform that year stated, "The so-called reserve fund estimated at forty-seven billion dollars for old age insurance is no reserve at all, because the fund will contain nothing but the Government's promise to pay, while the taxes collected in the guise of premiums will be wasted by the Government in reckless and extravagant political schemes." [8] Defenders of pay-as-you-go respond that the system is a Ponzi scheme only if the United States intends to repudiate its debts. On the occasions when the Social Security Administration has needed to redeem some of those securities, they have always been honored. Although Social Security benefits to future retirees do not represent debt in the legal sense (Fleming v. Nestor, 1960), the treasuries held by the trust fund do.

The Social Security Administration responds to the criticism as follows:

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go insurance programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system, and so it is not a pyramid or Ponzi scheme.

If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs, and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes or any other fraudulent form of financing; it is simply the nature of pay-as-you-go systems.[96]"

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Re: Social Security v. Bernie Mado...
Posted by: Dr. Paul Price (IP Logged)
Date: April 9, 2010 08:25PM

When Social Security was sgtarted there were about 16 active workers payinh in for every retiree.

It is projected to fall to 2:1 within the next 10 years. That is not a "cyclical" trend but a recipe for fiscal disaster that is entirely predictable.

The argument in the segment above is as spurious as Comrade Obama's claim that he can add 32 million people to the health care system while he reduces the deficit.

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Rating: 5.0/5 (3 votes)

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