No Loss for Words

Bernie Madoff was in the news the other day.  According to the news story, people were feeling sorry for Bernie because he had to keep the secret to himself that he was defrauding all those investors, rather than sharing the crime with others who might have blown the whistle on him.  How could anyone feel sorry for Bernie Madoff under any circumstances?

The story reminded me how much Bernie’s Ponzi scheme  resembles Social Security and government pension systems.  Each of them requires that someone else participate down the line to provide the revenue to pay earlier “investors”. 

Ponzis are illegal because they are not involved in a legitimate investment activity to produce the revenue to pay investors.  Don’t get me started on what the definition of “legitimate investment activity” might be.  That will be a discussion for another day.

So Why do Ponzi schemes collapse?

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue.  Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

The system is destined to collapse because the earnings, if any, are less than the payments to investors.

Does any of that sound like the problems we face with defective retirement pension systems? 

Bernie’s investors never cared what he was putting their capital into as long as they received their promised return.  Some of them probably suspected that it wasn’t legit but since they were getting paid better returns they kept quiet.

At a time when population was growing and the economy was expanding, revenue was also growing so why would the government want to get off the gravy train either? 

At one time the Social Security system had an actual trust fund with money in it.  Technically the Social Security Trust Fund still exists, but there is no money in it; just IOU’s.  If all the payments deposited in the fund had been invested over the years and the principal had compounded with interest, the system might not be facing insolvency.  My memory thinks President Lynden Johnson and the Democratic Congress raided the SS Trust Fund in about 1967 to pay for the Viet Nam War.  They discussed the implications at the time, but hey, they left an IOU!

They all knew from that time on the system was destined to collapse, but they also knew it wouldn’t happen on their watch so it was easy to rationalize.  Why would any other government entity think it was not okay to steal from future generations when the Federal Government endorsed the plan when they converted from a Trust Fund Endowment to a Government Sponsored Ponzi Scheme?

It will be painful to get back on the right track, but the sacrifices we all have to make will be worth the effort.  None of the alternatives offer an easy fix.

Rules for Pension Systems should require that each City, County, State or other government agency make contributions to “pension reserves” in addition to current pay out requirements to fully fund the pension system and LOAN the money in the Reserve Funds back for Public Works projects at market rate interest.  The key has to be growth in the investment value of the funds.  Forcing elected officials to recognize the impacts of labor contracts by budgeting for them today might be a good tool to keep them in the black.

Justice for Bernie Madoff will be spending the rest of his life in prison.  How do we get justice for the American people?