Max Keiser is right! Social Security is a Ponzi scheme. Contrast it with a pension fund which takes in money, invests that money and then pays out from its earnings from the investment as well as principal. At least that's how it's supposed to work. By contrast, social security takes in FICA taxes which are separately taxed from income or anything else, spends the money as if it were general fund money and pays out to social security recipients essentially from the same general fund. So it's actually worse than a Ponzi scheme. At least in a Ponzi scheme the payouts are from the incoming monies that are kept separate from other accounts. They aren't used for something else and then the money for payouts found elsewhere as well.
Now even a lot of pension funds are Ponzi schemes and worse. Take CalPERS, for example, the world's largest pension fund. They take in money from public sources and then leverage it, borrowing more money and then invest it. If they lose money on the investment, they still have to pay back all the money they borrowed and they can tax California cities, towns and schools to do it!. This is worse than a Ponzi scheme too unless Mr. Ponzi leveraged the money he took in from investors.
At the height of the property bubble, California's giant pension fund, Calpers, made a fateful decision: It aggressively poured money into real estate. As a result, today it's one of the biggest owners of undeveloped residential land in America.
Partly because of these investments, California Public Employees' Retirement System is struggling to avoid one of its worst annual declines since its 1932 inception. Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year.
Calpers is now warning California's cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees.
Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed.
Now concerning Mr. Madoff, I can't believe that he didn't invest at least some of the money investors parked with him in which case he was no diffrent from any other hedge fund manager that lost money and collapsed due to bad investments. In which case what's the difference between Mr. Madoff and any other bad hedge fund manager or even the managers of CalPERS?
I don't expect the Federal government to get into the business of investing the social security money it takes in in order to multiply the money necessary to pay recipients, but at least they could recreate an honest system. And, at least, they should accumulate interest on that money. An honest system would be one in which the money they take in as social security taxes would be kept in a separate account and be sufficient to pay social security recipients as projected over the next 50 years, for example. That would mean no commingling with the general fund. And it would mean eliminating the cap on social security taxes so that the rich paid FICA taxes on their entire income and not just the first $100,000. or so. In addition social security should be means tested. Warren Buffet and Bill Gates don't need to receive it. One step in the right direction is that they are already starting to means test Medicare taxes i.e. rich retirees now pay in more monthly in return for their Medicare benefits. It's no big secret what it would take to make social security both honest and solvent. Instead Republicans want to get rid of it altogether so they try to convince the populace that it's untenable and in danger of collapse. Unless it's changed by an act of political will, it will collapse. The Republicans will be happy to see that. The Democrats have to step up to the plate and make the necessary changes to prevent that. Hopefully, Obama will.
So let's not be too hard on Mr. Madoff. What's the difference between a failed, overleveraged hedge fund manager and a proprietor of a Ponzi scheme? At least Mr. Ponzi didn't leverage his intake.
Also posted as a comment on Robert Reich's blog.