Social Security and Other Ponzi Schemes

This was published as "Ponzi Was a Piker" in The Freeman of April, 1956.

By Dean Clarence E. Manion

Dr. Manion, formerly Dean of the Law School of Notre Dame, now [1956] practices law in South Bend, Indiana.

Latecomers to this troubled world will not remember Charles Ponzi, who stole (among other things) a great portion of the nation’s headlines back in 1920.

Ponzi claimed he could double anybody’s money in 90 days. Furthermore, he apparently did so. Thousands of his customers received this rich pay-off and told a hundred thousand others about their good fortune. Millions upon millions of dollars poured in upon Ponzi from eager investors during the first six months of 1920. The fabulous returns came back as promised, often ahead of schedule.

Then in August of 1920, the federal authorities moved in on this financial wizard. They closed his Boston bank and thus cut off his cash. The next day Ponzi was arrested for using the mails to defraud. He stoutly maintained that he had paid everybody; that if left alone he would continue to do so.

But the federal government wouldn’t leave Ponzi alone. It cut off his intake and outgo. Ponzi was through. Three months later he pleaded guilty. After serving eleven years of his long sentence, he was deported to his native Italy.

Ironically, Ponzi was hardly out of the country before the same federal government that had imprisoned him for fraud proceeded to adopt the Ponzi “get rich easy” scheme as its very own. Ponzi had represented his financial jackpot as a “securities exchange.” The federal government proceeded to call it “Social Security.”

The federal government was able to add some important features to this bizarre shell-game that were unavailable to Ponzi. First of all, the federal government cannot be prosecuted for fraud. But more important than that is the exclusive governmental feature of compulsory participation.

Ponzi had to induce his customers to come in voluntarily; whereas, the government now [1956] forces 65 million workers to “invest” six billion dollars a year in its glorified version of the Ponzi scheme.

Ponzi paid back at the annual rate of sixteen to one. The federal government does even better. Some of its very lucky participants are now drawing back at the rate of $100 for every dollar invested.

How is this miracle worked? Here is what the Court said in the Ponzi bankruptcy cases: “Ponzi’s scheme was the old fraud of paying the early comers out of the contributions of later comers.” (In re Ponzi 280 Fed. Rep. 193.) “That Mr. Ponzi took advantage of a weakness and willingness of the community to be victimized is apparent . . . . So long as the current of money continued to flow in, he could pay the first investors with receipts from the latter. It was another instance of robbing Peter to pay Paul, of which the past affords examples.” (In re Ponzi 268 Fed. 997.)

The Court did not know that the future government Social Security scheme was to provide the most striking example of all. The Chief Actuary of the Social Security system now says of it: “The system is not fully funded in the sense that all benefit rights earned to date could be met by the existing assets if the program were to be liquidated, but the system is more or less self-supporting on the assumption that it continues indefinitely into the future with the compulsory coverage that exists by legislation.”

In other words, the official assumption is that there will always be more Peters to be robbed than there are Pauls presently to be paid. In fact, the susceptible Peters will be so numerous and will be robbed at such high rates of return that the Pauls can all be paid, with billions left over each year for the Israelis, the Egyptians, the British, and the French. This is now the official theory of the same government that put Charles Ponzi in jail for fraud. []

Reprinted, by permission, from the Manion Forum of Opinion Broadcast, February 5, 1956.

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Security of Self

"The only security any person can have lies within himself. Unless he is free to act as an individual, free to be productive in his own behalf, free to determine what part of that production he will consume now and what part he will save, and free to protect his savings, there is no chance that he can find security anywhere."

Paul L. Poirot, The Pension Idea