Charles Ponzi And Your Retirement
Who Was Charles Ponzi and What's He Got To Do With You?
Charles K. Ponzi was born in Italy in the early 1880s, and immigrated to Canada in 1903. He would later be convicted of forgery and serve time in a Canadian prison. Shortly after his release, we was caught smuggling people across the border into the U.S. That led to two years in the Atlanta Federal Prison. Apparently a lifetime con artist, Ponzi achieved his greatest notoriety in New England in 1920.
Ponzi came up with a scam that would forever bear his name. He convinced investors to give him money, with which he would by postal reply coupons.
About Postal Reply Coupons
This is very general, but should give some background. Say someone in the U.S. sent a letter to a person in Austria, and wanted that person to write back. They couldn't send a postage-paid reply envelope, because American stamps would be no good in Austria. Instead, they would purchase and send a postage reply coupon. In theory, the coupon would hold the same value in all participating countries. After World War I, though, currency values had raised the value of these coupons in some countries over their value in others. The money required to buy one coupon in one country might buy two or more coupons in another country. That gave Ponzi an idea.
The Ponzi Scheme
Charles convinced his investors that he could take advantage of the differences in value by trade these postal reply coupons like currency, promising as much as a 50% return on invbestment money. He sold people on the idea that he was purchasing the coupons, at a discount, in depressed economies and making a profit by exchanging them here. He claimed to have a network of foreign agents gathering coupons abroad to keep up with the demand. He would use money coming from investors to pay off other investors. In actuality, none of his story was true. He would pay off the earliest investors entirely out of money paid into the scheme by newer investors, then those new investors would be paid by subsequent new investors. Of course, Ponzi was the central moneymaker in the scheme. Eventually it collapsed, like all such schemes will, and Ponzi was jailed and, later, deported.
The term "Ponzi Scheme" came to refer to any simple fraud whereby initial investors are paid exceptional dividends as interest cheques from the deposits of a growing number of new investors. "Profits" to investors are not created by the success of the underlying business venture but instead are derived fraudulently from the capital contributions of other investors. A few people invest in the scheme, then as news of the offer spreads, more investors are drawn in. Usually there is no actual investment involved, contrary to your understanding, just money being shipped in from new investors to the earlier ones.
What This Has To Do With You
Read that last sentence again: "...just money being shipped in from new investors to the earlier ones." This is the reason such an idea doesn't work. Eventually, you'll have more people owed money than you have money coming in to pay them. When that happens, the scheme fails. And it always happens.
If you have taken time to read about Social Security, and to understand how it actually operates, you already know where I'm going. You see, the money that's paid out in Social Security benefits to retireees today comes from the Social Security tax paid by American workers today. The beliefis that recipients are getting their money back from their 30 or 40 years in the workplace. Sorry, but it just ain't so. The money we pay into Social Security this year goes to retirees in Social Security payments this year.
Paying off earlier investors from the deposits of new investors... this plan works only as long as there are more working Americans than there are retirees drawing benefits. Eventually, with advances in health care and longer lifespans, those numebrs do reverse. That's the situation we're going to be facing in the very near future. There will be millions of Baby Boomers reaching retirement age. They'll start to draw that money they "invested" in Social Security. There will be more retirees than workers in this country. Before long, the government will be paying out more to them than they will be collecting each week from you and me. What happens then?
Like all Ponzi Schemes (and don't kid yourself, this IS a government-run Ponzi), the plan will collapse. Either the investors (us) will realize our money isn't going to be around and we will demand change, or the game will continue until one month retirees receive Social Secutriy checks for only a portion of their benefits. Or maybe they receive no check at all.
Don't believe me? Do the research. Do the math. Look into it and see the truth for yourself. There are changes being proposed that would make the future of today's workers a little bit safer. Older generations scoff at the idea that Social Security will not be around for us "youngsters". How many of them, though, believe the money they get every month is actually what they put in? They don't realize that the money they paid into Social Security was gone almost as soon as they paid it .
Now, they're getting our money.
