So what`s a Ponzi scheme?
In a nutshell, it takes its name from Charles Ponzi, who became known for the biggest scams back in the early 1900s. Other names include a pyramid scheme.
The basic principle is fairly simple. You formulate an idea that requires people to invest money in a business opportunity. That investment is highly attractive, providing much better than average rates of return. People give you money.
When you get that money, you store it for a short while, as you continue to attract additional investors. Most of the time, the return is advertised as very short term. As additional investors pay you money, you use THAT money to quickly pay off your first investors.
As the first investors see you`re "telling the truth," more often than not, they decide to roll over the money instead of taking their profits. They continue to let you keep the money they first invested with you, and on top of that, have you keep the "interest." They figure they`ll make even MORE money, given how fast they made back their initial investment.
The bottom line is that you`re using future investor payments to pay current bills---calls on the investment.
It should. It`s exactly the same as the Social Security pension fund run by the US Government.
The money you earn today at work is taxed, using the threat of guns and jail to make sure you pay the "social security withholding tax." That money is then used to pay the SS benefits that have come due for people who already are now retired.
Obviously, if an individual were to run a scheme like this they`d end up in jail. That`s what`s likely going to happen to Mr. Madoff, and what actually happened to Charles Ponzi. So how come the US government is allowed to get away with it?
(Pause for belly laughs.)
If you think there`s a real "trust fund," loaded with lots of money that`s been put aside for retirement, think again. Like any Ponzi scheme, ALL the money that came into the fund originally was instantly paid out in benefits to people retiring back when Social Security began (c. 1933).
From that point forward, under the misnomer of "pay as you go," money from payroll taxes has been used to pay benefits. Back then, a whole lot more people were working than were retired, and most people died before age 60.
The Baby Boom generation flooded the employee rolls during the 60s, and money came pouring into the SS fund. That led to a surplus, and of course the government couldn`t wait to spend that. All surplus funds were diverted to the General Fund, meaning they could be used for whatever. In place, the government put an I.O.U. into the "fund."
With the Baby Boom generation now retiring, and many fewer workers handing over money, there`s no more surplus. But....surprise!...there`s also no money.
None of this is mysterious or unknown. It`s been well documented for decades. Nobody has touched the issue because any political opponent simply hauls out Granny or Grandpa and asks, "Would you want to see this old person starve?"
The upshot, like any Ponzi scheme and fraudulent investment enterprise is that there isn`t any such thing as "Social Security," and no such thing as a "trust fund." We`re about to learn the rotten truth, what with the economy now in dire straits.
If you believe that Social Security will provide you with some sort of retirement money, and that the Tooth Fairy will cover your needs for dentures, then that`s fine.
If, on the other hand, you tend to be more realistic, then now`s the time to examine what you`ll do for money when you`re older. One option is to never retire. Another is to compete with 18-yearolds for minimum wage jobs such as a greeter at Walmart.
A better option would be to get started with a business you can run from home, on your own, or online. It`ll take a few years to get that business into the black, but from that point onward, your main problem will be protecting it from other government cash grabs.
When a private citizen creates a pyramid scheme, they get arrested. When the government creates a pyramid scheme, they control the entire judicial and oversight process. They don`t get arrested.