Ponzi scheme

Judge says media stories are just “fish and chip paper tomorrow”

Far be it for me to argue with an eminent Justice of the Court of Appeal about the media.

NBR reports:

The Ross Asset Management investor who was told media stories are just “fish and chip paper tomorrow” has lost an appeal to keep his name secret as liquidators seek to claw back $954,000 from him.

In March, the first of three test claims against Ross Asset Management investors, who collectively withdrew $3.8 million in fictitious profits before the Ponzi scheme’s collapse, was heard in the High Court at Wellington.

The person who obtained a $500,000 bank loan to invest in Ross Asset Management received interim name suppression but this was set to be revisited once the case was resolved.

In April, Justice Alan MacKenzie refused an application by the investor for permanent name suppression.

This was challenged in the Court of Appeal earlier this month, but today the appeal was dismissed, Fairfax Media reports.

The investor’s name will, however, remain suppressed until the delivery of the substantive clawback judgment from the High Court.

Read more »

Bet he was registered (AKA: what’s the point of teacher registration?)

One of the major benefits of teacher registration is that it assures quality.  It keeps out pedophiles, rapists, thieves and other vermin.

Except it never has.

A teacher who was jailed after losing about $1.5 million of investors’ money in a failed Ponzi scheme has been censured and deregistered by the Teachers Disciplinary Tribunal.

Rene Alan Chalmers was sentenced in Auckland District Court in January last year to serve four years and three months in prison after pleading guilty to 14 charges of theft by a person in a special relationship, dishonestly using a document and making false statements to investors.

In a recently released decision, the tribunal said Chalmers’ offending was “dishonesty at the highest level”.  “In our view, we would not be discharging our responsibilities to the public and the profession were we to allow this teacher to retain his registration.” Read more »

Dodgy Ponzi scheme ratbag was a rooter too

It seems that Bernie Madoff wasn’t just screwing his clients, he was screwing the crew as well. And it appears he wasn’t fussy either.

Bernie had billions and this was one of his roots?

Bernie had billions and this was one of his roots?

When he wasn’t screwing everyone, he was screwing everyone.

Unbridled sex fueled the Madoff machine – and the Ponzi scheme king got himself tangled up in a love triangle, according to bombshell papers filed late Thursday.   Read more »

110 Years

The Telegraph

Makes you wonder if we need someone to introduce proper laws here so scumbags like the Bridgecorp directors die in jail like Stanford will.

Allen Stanford, the Texan financier, has been sentenced to 110 years in prison for orchestrating a $7bn (£4.6bn) Ponzi scheme.

District Judge David Hittner handed the sentence to the 62-year old in a Houston court on Thursday after hearing more than two hours of arguments from government prosecutors and lawyers for Stanford.

US authorities had sought a 230 year sentence for a man they described as “a ruthless predator responsible for one of the most egregious frauds in history.” Stanford used the hearing to argue that “Stanford was a real brick-and-mortar global financial empire,” that only crumbled after the government accused the company of being a Ponzi scheme in 2009.

The sentence leaves Stanford facing the rest of his life behind bars and caps a startling fall from grace for a man who was judged to be worth more than $2bn in 2008.

Is welfare a Ponzi scheme? Ctd

via Andrew Sullivan

Look at this graph which shows lifetime contributions compared with benefits. There is a full report that backs up the graph (pdf), explaining why welfare and superannuation is broke and will continue to be broke.

I’d love to have a similar comparison done here. I suspect the graphs would be worse.

As the discussion of needed reforms proceeds, a common demand will be that future retirees get back what they have paid into the systems. But reducing these complex discussions to a debate over “money’s worth” ignores the grim reality of the programs’ finances today, as well as the fact that these programs have always transferred money between individuals – both within, and more importantly, across generations. Our work has shown that current and near-term retirees can expect to receive benefits well above their contributions, financed by current and future workers who have little hope of realizing the same level of return on their taxes due to the economic and demographic forces that are working against them.

Is welfare a Ponzi scheme, Ctd?

An economist comments about the Ponzi-like tendencies of welfare and in particular superannuation:

AEI economist Andrew Biggs (formerly principal deputy commissioner of Social Security) writes in the American.com (emphasis added):

“What makes the Social Security/Ponzi references so common is the similarity in the way they are financed. In both cases, early participants receive payments, not from interest on their own investments, but directly from inflows from later participants. If you were describing the mechanics of how Social Security’s financing works, it wouldn’t be illogical to refer to a Ponzi scheme.

And, also like a Ponzi scheme, Social Security paid early participants incredible returns on their money, because they contributed to the system for only a few years but received a full retirement’s worth of benefits. A person who retired in 1950 received around a 20 percent annual return on the taxes he paid (which happens to be exactly the same return that Madoff promised to his investors). Put another way, that person received around 12 times more in benefits than he’d paid in taxes. That helps explain why Social Security became so popular: it was simply an incredibly good deal.

Similarly, like a Ponzi scheme, there really isn’t any actual investment going on with Social Security. While the trust fund has a $2.5 trillion balance it can call on to pay benefits, this fund won’t be of any help to the taxpayer. When Social Security goes to redeem bonds in the trust fund, the Treasury must raise taxes, cut other programs, or borrow the money—exactly the same steps as if there weren’t a trust fund at all. The trust fund records how much we have borrowed from Social Security but, as the Congressional Budget Office points out, “trust fund balances convey little information about the extent to which the federal government has prepared for future financial burdens.” While legally important, the CBO says, the trust fund has “little economic meaning.”

The biggest difference may be that Social Security can go on forever while a Ponzi scheme can’t, but that’s mostly because Social Security can force you to participate. If Madoff could find enough people willing to accept a 2 percent return rather than a 20 percent return, his plan could keep going indefinitely. With Social Security participation mandated, the program can go on forever, so as long as Congress makes the changes necessary to keep the system from going broke.

Is welfare a Ponzi scheme? Ctd

In my continuing series we look at the evidence that welfare may well be a Ponzi scheme.

Social Security, on the other hand, forces people to invest in it through a mandatory payroll tax. A small portion of that money is used to buy special-issue Treasury bonds that the government will eventually have to repay, but the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those “early investors” who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.

As with Ponzi’s scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.

As with Ponzi’s scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today’s young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.

Eventually the pyramid crumbles.

The premise is entirely similar here.

Of course, Social Security and Ponzi schemes are not perfectly analogous. Ponzi, after all, had to rely on what people were willing to voluntarily invest with him. Once he couldn’t convince enough new investors to join his scheme, it collapsed. Social Security, on the other hand, can rely on the power of the government to tax. As the shrinking number of workers paying into the system makes it harder to continue to sustain benefits, the government can just force young people to pay even more into the system.

In fact, Social Security taxes have been raised some 40 times since the program began. The initial Social Security tax was 2 percent (split between the employer and employee), capped at $3,000 of earnings. That made for a maximum tax of $60. Today, the tax is 12.4 percent, capped at $106,800, for a maximum tax of $13,234. Even adjusting for inflation, that represents more than an 800 percent increase.

Just recently we had evidence that superannuation in New Zealand is unsustainable. The evidence is building, substantially that Social Security, or Superannuation as we call it here is a giant Ponzi scheme that is unsustainable with out drastic action.

Is welfare a Ponzi scheme? Ctd

I have blogged previously about Welfare essentially being a ponzi scheme. There are more and more people discussing this, both left and right. Don Boudreaux looks at some measurements for determining whether or not welfare is a Ponzi scheme:

What is that essence?  I submit the essence of a Ponzi scheme is

(1) its promise that contributions today to the scheme’s manager will pay off handsomely (that is, better than alternative investments) in the future to each contributor;

(2) that current contributions to the scheme are not invested but are spent – in particular, are spent to make good on promises made in the past to previous contributors who now expect their stream of pay-offs;

(3) that the manager of the scheme maintains his ability to pay the promised streams of pay-offs only by getting other contributors into the scheme, but

(4) the manager doesn’t let on to contributors (and would-be contributors) that the funds for paying off the promises come not from any profitable, productive investment of contributed funds – nor from any actuarially justified program for reallocating risks across persons or across time – but come, instead, simply from the hope that future contributors can be corralled into the system;

(5) that if future contributors do not arrive in sufficient numbers, the scheme has too little money on hand to pay off all promises;

(6) that the manager of the scheme, in short, successfully persuades his or her targets that the scheme is financially something that it really is not.

Note that I do not list “pyramiding” – a “pyramid scheme” – as being among the essential qualities of a Ponzi scheme.

On these points, Social Security strikes me (again, as it has struck even some of its illustrious champions) of having a great deal of Ponzi-ness about it.

It seems to me also that welfare, in particular superannuation is clearly a Ponzi scheme. Discuss.

Super is a Ponzi scheme, ctd

A while back I linked to an article about social security acting and behaving as a giant Ponzi scheme. It was a US article but the same goes for our super scheme which is based on a Pay as you Go model. Farrar has picked up on David Chaston’s article on the same topic.

Basically, someone who finished high school with the School Certificate qualification in 1962 will be aged 65 in 2011, and eligible for NZ Super.

Statistics NZ has relevant data of earnings and taxes from 1962 and we can use that data to track the earnings in that working life – and from that data determine the taxes paid over that period.

Essentially, our statistically average person will have earned about NZ$1.4 million and paid about NZ$342,000 in tax, taking home a pay packet of a little over NZ$1 million over those 50 years.

Converting these raw earnings and taxes to 2011 dollars, they earned NZ$2.7 million, paid NZ$620,000 in taxes, and had take-home pay of a bit more than NZ$2 million.

However, for the next 20 years of retirement, they will claim in 2011 dollars NZ Super to the value of NZ$544,000 – or almost 88% of all the taxes they have ever paid.

If they live for 30 years in retirement, they will claim almost a third more than they paid in a lifetime of taxes. They ‘break-even’ after 22+ years.

Both David’s. Chaston and Farrar also miss the point that though the oldies have sucked up all the taxes they ever paid in super payments to themselves, they also used that taxation to pay for schools, road, hospitals, middle class welfare and a host of other unnecessary electoral bribes along the way. This means that their superannuation was never funded, never will be funded and relies on an ever increasing pool of workers being fed in at the bottom to prop up the takers at the top. This is classi Ponzi scheme characteristics that eventually collapses in on itself.

When we talk about welfare reform we really need to look at the single biggest group of beneficiaries, pensioners. They claim they have paid their taxes and now should live their remaining lives at the expense of the taxpayer when the reality is they had the best this country had to offer, paid bugger all for it, and are expecting the rest of us to pay for their ever increasing length of retirement.

The pity is that there are venal and corrupt politicians who periodically come along and promise the greedy old people even more “entitlements” in order to secure electoral sinecure.


Is Welfare a Ponzi scheme?

via Andrew Sullivan

Texas Governor Rick Perry is an aspiring presidential nominee and he has been suggesting that welfare, or social security as the American’s call it is in fact a Ponzi scheme. Since welfare is what the country is talking about then this discussion via Andrew Sullivan is extremely pertinent.

Reacting to Perry’s repeated claims, Zaid Jilani consults the dictionary:

A Ponzi scheme is an economic arrangement where the money paid into the system by later entrants is paid right back out as benefits to earlier entrants. None of these social insurance programs that Perry mentioned fit this definition. They benefit those who pay into them with guaranteed benefits.

Daniel Indiviglio perks up:

Wait — what? Social Security fits that precise definition.

It was created during the Great Depression by President Franklin D. Roosevelt. Retirees began receiving benefits immediately, without having paid into the program themselves. Those benefits were paid by taxing current workers. So, in fact, Social Security is technically identical to the definition of a Ponzi scheme that Jilani provides.

But what about those “guaranteed benefits”? Don’t those make a difference? Well, let’s think about this. Imagine if an investment advisor came to you and said:

“Hi there! I want to sell you a retirement vehicle for which you will be provided a guaranteed benefit of x dollars per year after the age of 65. But the money you contribute will be paid to current beneficiaries, while your money will be paid by future beneficiaries. If there’s ever a shortfall, we’ll just borrow money from China in order to keep the guaranteed benefits coming — or force future contributors to provide more money. Alternatively, we might increase the age at which you’ll receive benefits. And we might even think about means testing your benefit.”

All of those supposed “guaranteed benefits” sure come with a lot of caveats, don’t they? Is it even fair to call those benefits guaranteed? For all we know, the U.S. could continue to run into deficit problems for the next few decades and could feel compelled to do away with Social Security altogether.