Ponzi schemes – in which existing investors are paid with new investors’ money – have been in the news a lot lately, with the revelation of Bernard Madoff’s fraudulent investment fund sending ripples across the world.
Writing in Time magazine’s Curious Capitalist blog, Justin Fox makes the argument that the government also operates a program that functions on a similar model: Social Security.
"Today’s taxpayers contribute money that is funneled to today’s Social Security recipients – and hope that tomorrow’s taxpayers will put in enough money to fund their retirements," he writes.
He also suggests that the idea of government finance operates on such a principle as well. When people purchase Treasury securities and municipal bonds, they assume that there will be future investors and taxpayers who will support the system, allowing them to profit.
However, Fox finally points out that there is an important difference between Social Security and Madoff’s Ponzi scheme.
The former does not make any attempt to disguise how it works, while the latter involved fraudulent activities in which investors were kept in the dark about where their money was going – or coming from.
Ponzi schemes are named for New England resident Charles Ponzi, who convinced thousands of people to invest money in postage stamp speculation in the 1920s.