Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
Click here to enter my free $250 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is October 31st, 2011.
The following is a guest post from YFS from YourFinancesSimplified.com. Enjoy!
Most recently, Rick Perry, the governor of Texas claimed that this is indeed the case at the Republican Debate. Is there some grain of truth to this controversial claim, or was Perry simply gunning for attention by being controversial? We’ll try to obtain an answer to this question in today’s post.
What is a Ponzi Scheme?
Often, the later investors never actually receive money; they simply receive payment records that detail how much they are supposedly earning. Eventually, these schemes always collapse because eventually, investors pull out or the amount needed to pay earlier investors is higher than the amounts being newly invested. Sometimes, the person or group in charge of the scheme simply disappears with all the money.
Perry’s Claim of Social Security Being a Ponzi Scheme
Perry is relating the government to the person in charge of the scheme who is simply going to “take the money and run,” like Bernie Madoff.
Social Security is a pay-as-you-go system. You pay money now to get money later. The fact that Ponzi schemes and pay-as-you-go programs (like Social Security) both utilize money from later participants to pay the benefits to earlier participants is the reason why many people compare Social Security to a Ponzi scheme. But, that is where the similarity ends.
The State of Social Security
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- Thanks so much for sharing this guest post, YFS! I’m always happy to have a fellow Yakezie participant do a guest post, especially one on a topic as important as Social Security!
- Personally, I think that calling Social Security a full-blow Ponzi scheme is not quite fair and a little bit of stretch. After all, Ponzi schemes are illegal (fraud) and Social Security is not, as you mentioned above.
- However, I won’t deny that Social Security does have some of the same characteristics, or flavor if you will, of a Ponzi scheme/pyramid scam.
- It would actually be quite interesting to hear some of the considerations and debates in Congress when Social Security was just being formed. I wonder if they really knew what they were getting in to committing for years to come to a huge government program like this.
- Regardless of what we label Social Security, the fact of the matter is that the United States government and people are stuck with it, as many people rely on this today for supplemented living (a few of my relatives in fact).
- As such, the more important questions I ask are 1) how can we improve Social Security, if at all? and 2) will it be around when future generations (mine, for example) retire? Or, will the funds be totally depleted? Let’s take a look at these questions one at a time.
- Regarding ways to improve Social Security, I have not analyzed this nor do I know enough about the workings of the program to offer suggestions. However, I did read a post this past summer from Ashley @ Money Talks that discussed an interesting idea of privatizing Social Security. It’s quite an idea, and definitely worth the read!
- Regarding the second question about whether or not Social Security will still be around when future generations retire, I believe that it will be in some limited form. However, I would strongly encourage against depending on Social Security money for retirement living needs. Instead, invest regularly in a Roth IRA and 401k.
- Another common question that I wonder is this – Are the ever-popular “network marketing” (often called Multi-Level Marketing, or MLM) programs Ponzi schemes and/or pyramid scams?
- Some of these common programs include Empowerism, 4Life, Avon, and Amway.
- Truthfully, it’s somewhat of a legal masterpiece the way these opportunities are set up. The way it works is listed below:
- The business offers products for sale (makeup, skin cream, vitamins, etc).
- The company does not have to pay any full time sales reps, but instead offers the product sales “business opportunity” to individuals looking to earn a part time salary.
- However, on top of selling the normal company products, the part-time sales people can recruit others to work in their “network” or “team.” The existing sales person earns money whenever new people enter in to their network. So, new money is funding the people already in the organization, similar to a Ponzi scheme.
- To me, the way these programs are set up seems a little “hairy.” However, they have time and time again been proven 100% legal by the court system, since the sales reps also offer real products for sale.
- What’s my problem with this, though? The problem I have is that in my experience (I’ve tried Empowerism and 4Life back when I was younger and nieve) and from what I’ve heard from others who have used network marketing, it’s nearly impossible to sell the actual products through these programs. Instead, most people make money on the programs through promoting the business opportunity.
- So, I ask you all – do you think network marketing programs are pyramid scams? I’ll let you make up your own minds.
***Photo courtesy of http://www.flickr.com/photos/fdecomite/3865787618/