The Ponzi Scheme That's Over 100x The Size Of Madoff

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

By January 1920, much of Europe was in total chaos following the end of the first World War.

Unemployment soared and steep inflation was setting in across Spain, Italy, Germany, etc.

But an Italian-American businessman who was living in Boston noticed a unique opportunity amid all of that devastation.

He realized that he could buy pre-paid international postage coupons in Europe at dirt-cheap prices, and then resell them in the United States at a hefty profit.

After pitching the idea to a few investors, he raised a total of $1,800 and formed a new company that month– the Securities Exchange Company.

Early investors were rewarded handsomely; within a month they had already received a large return on investment.

Word began to spread, and soon money came pouring in from dozens, then hundreds of other investors.

By the summer of 1920, the company’s founder was receiving more than $1 million per day from investors.

His name was Charles Ponzi. And as you could guess, it was a total scam.

Ponzi wasn’t really generating any investment returns. He was simply taking the new investors’ money to pay the old investors.

The business collapsed later that year, giving rise to the term “Ponzi Scheme”.

The most famous Ponzi Scheme in recent history was the case of Bernie Madoff, whose scam robbed investors of $65 billion.

But today there’s another major Ponzi Scheme that’s literally 100x the size of Bernie Madoff’s.

I’m talking about pension funds.

Pensions are the giant funds responsible for paying out retirement benefits to workers.

And if you think calling them a “Ponzi Scheme” is sensational, it’s not.

Pension funds (including Social Security) literally make payments to their beneficiaries with money contributed by people in the work force.

In other words, the money that people pay in to the pension fund is paid out to the people receiving benefits.

In theory this could go on indefinitely as long as

a) there’s a sufficient ratio of workers paying into the system vs. retirees receiving benefits; and

 

b) the pension funds are receiving an adequate return on investment

When one (or both) of these conditions is not being met, the pension is considered to be “underfunded,” and it starts burning through its cash balance.

Eventually it will burn through all of the fund’s assets until there’s nothing left. Poof.

Credit-rating agency Moody’s estimates state, federal and local government pensions are $7 trillion short in funding.

And corporate pension funds are underfunded by $375 billion.

One of the big drivers behind this is that investment returns are way too low.

Pension funds need to invest in safe, stable assets (like government bonds), but have to achieve yields of around 7% per year in order to stay solvent.

But today with government bonds yielding 3% or less (and in some cases bond yields are NEGATIVE), they aren’t achieving their targets.

One or two years with sub-optimal investment returns is not catastrophic.

But it’s been like this now for a decade.

And that’s just problem #1.

Problem #2 is that the ratio between workers and retirees is moving in the wrong direction.

As an example, despite all the hoop-lah about the unemployment rate falling in the Land of the Free, the number of retirees receiving Social Security is rising MUCH more rapidly.

Ten years ago in November 2007, the Bureau of Labor Statistics calculated that 146 million Americans were working.

Today that figure is 153 million, a 4.8% increase over the past decade.

Social Security, on the other hand, was paying benefits to 34.4 million Americans in November 2007, versus 44.2 million today– a 28.5% increase.

These are government statistics– and the numbers clearly show a terrible trend: there aren’t enough workers to pay for retirees.

The problems persists across state and local pensions as well.

The State of Kentucky’s Teachers’ Retirement System, for example, saw a 64% increase in retirees just in the last twelve months.

Unsurprisingly Kentucky’s retirement system is massively underfunded.

It’s so bad that Governor Matt Bevin is publicly attacking teachers who retire early (early retirement means that someone is taking benefits sooner and paying less into the pension fund).

Bottom line– this trend is real:

– Pension funds are earning a lower investment return than they require

 

– The ratio of people paying in to the fund vs. people receiving benefits is moving in the WRONG direction.

This is how Ponzi schemes invariably unravel.

Again, I’m not trying to be sensational. These are facts.

And given that just about everyone at some point probably plans on retiring, it’s important to be able to have an objective, data-driven conversation about the topic.

I know it’s uncomfortable. We want to believe so badly that the system is going to work.

I also want to be the starting Quarterback of the Dallas Cowboys. But that’s probably not going to happen either.

Retirement is a BIG component of a Plan B– which is fundamentally about taking sound, sensible steps to be in control of your own fate.

And there ARE plenty of options.

For example, you can look into a self-directed SEP IRA or Solo(k), which both allow you to contribute 10x more each year for retirement than a conventional structure.

Plus these structures allow you greater flexibility in where you can invest your retirement savings– real estate, lucrative private businesses, even cryptocurrency.

Just ONE great investment through a more flexible structure can make an enormous difference to your retirement.

And even if the Ponzi pension crisis somehow miraculously rights itself, you certainly won’t be worse off having your own independent nest egg.

It just makes sense… no matter what happens (or doesn’t happen) next.

Do you have a Plan B?

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truthalwayswinsout's picture

Yes you are absolutey right Pension funds are a Ponzi Scheme but so is the U.S. government. 

But even more alaming are the 30,000 BM bombs that are ready to go off in China.  (BM = Berni Madoff)

They are the biggest crooks, con artists and liars the world has ever seen.

Whey they collapse, they will bring down all the major banks in the world.

IH8OBAMA's picture

I thought this was going to be a story about the Bitcon.

 

tmosley's picture

That's because you are stupid on a number of different levels.

Five Star's picture

Every state's pension underfunding given real market values in terms of tax revenues. Terrifying 

http://thesoundingline.com/accounting-for-reality-pension-funds-are-in-b...

J S Bach's picture

All true.  Originally, it was considered the Social Security Trust Fund.  This would imply that the money you're forced to pay into the system is yours in some sort of savings account.  Yeah, right.  When there is ANY pool of money within eyesight of bureaucrats, they will find a devious way to get their hands on it.  So, keep forking it over, suckers.  When it's your turn to collect, it ain't gonna be there.  Socialism is nirvana.

Manthong's picture

“a) there’s a sufficient ratio of workers paying into the system vs. retirees receiving benefits; and

b) the pension funds are receiving an adequate return on investment”

 

..or unless you are in the Fed system and they can print fiat eight ways to Sunday

Stuck on Zero's picture

One of the great scams of pension funds is paying the pension fund managers on Wall Street huge sums to invest the sums whether they earn any income or not. 

eforce's picture

I'd like ZH to investigate the alledged Tether pumping of crypto-currencies, after they issue some, price mysteriously sky rockets and these Tethers (USDT) are backed by nothing and they have no contractual obligation to exchange them for USD...

HockeyFool's picture

Careful, tMosley will get his dander up and call you names, like 'stupid.'

Offthebeach's picture

Unlike mob managed union funds that are guaranteed, 100%, to lose the fund.  So, paying not to lose, isn't such a bad deal.

Anyways, we just need to push out the 30-50 years of bad pensions by placing the bonds on children a thousand years in the future.  Let them figure it out.

MANvsMACHINE's picture

"I also want to be the starting Quarterback of the Dallas Cowboys. But that’s probably not going to happen either."

Probably? While the odds of Simon becoming the quarterback of the Dallas Cowboys is small, how small is it?

I'd say that he has a better chance of becoming a Dallas Cowboys cheerleader.

natty light's picture

Not sure how much of this can continue when most of the dollar claims will be outside of US.

Not My Real Name's picture

"..or unless you are in the Fed system and they can print fiat eight ways to Sunday."

To paraphrase Greenspan, yes, the payments will always be made. What those checks will buy is another story ...

Kidbuck's picture

Those collecting now are getting less and less every year in real dollars. When the same fucking fox that determines CPI and thus COLA is in charge of paying out SS benefits, retires get fucked over anew every day.

Nostradumbass's picture

Sad but true.

Promising something for nothing or next-to-nothing will soon reveal the catastrophic effects from this silly gamble.

Public pensioners sure as hell had better have considerable wealth put aside to offset the coming losses in their promised retirement incomes...

silverserfer's picture

your mascara is running. Why are you so insecure about your "investment"?

tmosley's picture

Why are you projecting so hard?

As if I didn't know already that you are under the effects of severe cognitive dissonance.

IH8OBAMA's picture

Back at ya, numb nuts.

 

James TraffiCan't's picture

I'm putting both of you on time out! 

Beam me up!

Bay of Pigs's picture

Did you miss all the banks around the world that were insolvent in 2008-2009 and required bailouts from the FED? Around $15T as I recall

Hint: they weren’t Chinese, but I understand your concern.

Justin Case's picture

They are the biggest crooks, con artists and liars the world has ever seen.

That's not true. Those crooks are running merica right now. They is number 1. We watch in amazement that a developed country grapple with a banana republic like election process. Losers rioting in the streets, destroying private property, like a scenen out of a third world country, Africa comes to mind.

With all aspects America is the epicenter of world public and private corruption and gangsterism - a kleptocracy run by criminals complicit with corporate crooks, headquartered on Wall Street, profiting at the public’s expense.

Monied interests transformed the nation into an unprecedented money making racket, scamming ordinary people of their savings, jobs, homes and futures so privileged elites can get richer and more powerful.

From inception, the business of America has always been business - meaning license to pillage, defraud and benefit extralegally, including tax avoidance more than anywhere else worldwide, encouraging high-net-worth foreign individuals to shift funds to the US free from taxation.

Government of, by, and for its privileged few allows grand theft on an unprecedented scale. Markets are manipulated up or down for profit, scamming the unwary.

Authorities permitted the greatest ever wealth shift from ordinary people to its rich and powerful, the grandest of grand theft, facilitated by Fed controlled money, credit and debt - Wall Street owned and operated.

America’s dark legacy is largely concealed from view. Enormous wealth is hidden in tax havens or investments at home and abroad, free from taxation.

Wall Street banks and other giant US financial institutions are at the center of unprecedented criminality, aided by government co-conspirators.

How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,”wrote Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”

That money is rushing for one simple reason: dirty foreign – and local – money is welcome in the U.S., no questions asked, to be shielded by the most impenetrable tax secrecy available anywhere on the planet.

Chase and other large banks had established banks in the Caribbean for the purpose of attracting money into dollar holdings from drug dealers in order to support the dollar (by raising the demand for dollars by criminals) in order to balance or offset Washington’s foreign military outflows of dollars. If dollars flowed out of the US, but demand did not rise to absorb the larger supply of dollars, the dollar’s exchange rate would fall, thus threatenting the basis of US power. By providing offshore banks in which criminals could deposit illicit dollars, the US government supported the dollar’s exchange value.

The US balance of payments deficit, a source of pressure on the value of the US dollar, was entirely military in character. The US Treasury and State Department supported the Caribbean safe haven for illegal profits in order to offset the negative impact on the US balance of payments of US military operations abroad. In other words, if criminality can be used in support of the US dollar, the US government is all for criminality.

 

Okienomics's picture

Downvoted due to blah blah blah blah blah blah blah.

BurningBetty's picture

If you only bothered to read.

rockstone's picture

He's waiting for the cartoon version

Mazzy's picture

That's a lot of paragraphs when you could've just summed up the problem by saying "Hebrewtocracy".

Kidding, but lets face it, that's the reality of the situation we live in.  Upvote for ya Justin.  Nice post.

hola dos cola's picture

+1 for "extralegally".

Was aware of the 'sucking sound' but thought it was fear (losing it at home) driving it, not greed (making taxfree bucks). Plausible, thx.

Interesting the Caribbean thinghy. Is it really that much?

Donald J. Trump's picture

Heck, the entire global finance system is a Ponzi except the few countries we haven't liberated yet.

Arrow4Truth's picture

All the major banks in the world are in collusion with the U$ government... actually, the scam was the bankers idea.

OregonGrown's picture

When 49% of ALL union employee's, are government employee's....... IMHO.....this couldnt happen to a better bunch of folks.  Damn Do nuffins do nothin but take away from our GDP, never helps it!

 

Justin Case's picture

In 2016, there were 14.6 million members in the U.S., down from 17.7 million in 1983. The percentage of workers belonging to a union in the United States (or total labor union "density") was 10.7%, compared to 20.1% in 1983. Union membership in the private sector has fallen under 7% — levels not seen since 1932. From a global perspective, the density in 2013 was 7.7% in France, 18.1% in Germany, 27.1% in Canada, and 85.5% in Iceland, which is currently highest in the world.

Union membership had been declining in the US since 1954, and since 1967, as union membership rates decreased, middle class incomes shrank correspondingly. In 2013, the percentage of workers belonging to a union was 11.3%, compared to 20.1% in 1983. The rate for the private sector was 6.7%, and for the public sector 35.3%

In August 2016, 36 percent wanted unions to have more influence, 34 percent less influence, with 26 percent wanting the influence of labor unions to remain about the same.[

 

It's all down hill from here. Yoar fired!

BadSpybot's picture

"Union membership had been declining in the US since 1954"

That was about the same time large industrial manufacturers figured out they could move their manufactuing to places like Mexico and save big on salaries. I grew up in Schenectady, NY, original home of General Electric. There was a very strong union there, so strong, I remember the whole plant went on strike for months just because a machinist used an oil can to squirt some oil in his machine, and that was a specific union defined job. As workers were laid off over the years, Schenectady became a skeleton of a city.  Workers went from cushy union paying jobs to making half the money at grocery stores and gas stations. I think there was a time the unions helped the worker fight against the mighty industrialists but there was a turning point that was a strong factor in the decision to move all those high paying jobs far away and gone forever.

Justin Case's picture

I think there was a time the unions helped the worker fight against the mighty industrialists

True, the Gov't adopted many of the work place safety, training programs, overtime definition and pay rates, 2 fifteen minute breaks, lunch, vacation pay, mat leave, sick leave are all taken for granted. Before unions work was dangerous, filthy environment, air quality, safety, use of chemicals. Read the history of Henery Ford and his attitude to unions. People were lining up and begging to get a job there.

Today there is no shortage of pension money for the upper crust, bonuses, trips, company cars, insurance, bribery, etc. The wage gap between worker and management has never been greater than it is today at 300:1

CEO of GM base salary is $16 million/yr. That is equivilent to 274 assembly line workers, earning$20.00/hr, for 1 year. There are other perks for the CEO, like bonus, pension, car credit card for business lunches, travel and other so called business expenses like lunches, dinners, meetings in the Carribian.

They are living the dream on yoar back.

BlueGreen's picture

Everything's fine till it isn't 

FreeShitter's picture

Keep your pecker hard and your powder dry.

serotonindumptruck's picture

So does this mean hyperinflation of the money supply to pay these obligations and entitlements, which will result in a hyper-deflationary economy as a loaf of bread costs $50 or more?

RedDwarf's picture

Pension funds are a Ponzi scheme.  Payouts depend upon incoming payments, not upon savings.

The fractional reserver banking system is a Ponzi scheme.  The money to pay off principal and interest is based upon loans and inflation.

So we have a double-Ponzi.  The pension funds are a Ponzi payed out and into with Ponzi cash.

Oh, and Social Security is another massive double Ponzi.  Our whole economic system and governance is founded upon fraud.

Vlad the Inhaler's picture

Triple ponzi, because instead of allowing these things to collapse, they will be paid off with printed money.

roddy6667's picture

Kind of a giant clusterfuck, right? I never got an invitation. 

buzzsaw99's picture

the maggots answer is always to take more taxpayer money and give it to wall street asap. it's for YOUR protection, that way you're not "under funded".  this is one reason why betting against the usa stock and bond markets over the short to medium term is the height of folly.

shovelhead's picture

Oh go on...

Social Security is funded by Trillions of...wait for it...

Treasury bonds!

Lol. Ponzi indeed.

Mazzy's picture

My 62 or maybe 63 year old father wants to know why his sone in their late 20's and early 30's aren't investing in 401k or IRA plans. Match, smatch, whatever.  If I can't have access to it without extreme penalties then it simply isn't worth the hassle of HOPING that it'll be there for me down the road in any meaningful way that isn't ungodly hyperinflated.

The old man will probably "get" to retire, but he doesn't understand how I can "believe" that that shit simply isn't going to be there for me three and a half decades from now.  It won't.  But even if it does....I have plenty of better investment bets.

buzzsaw99's picture

does he tell you that real estate only goes up as well?  i'm not that much younger than him but my parents always repeated that mantra to me.  they didn't know why, only that it did, until it didn't, then they were perplexed, and quite a bit poorer.

roddy6667's picture

In the late Eighties, home prices in Connecticut plunged 50% in a few years. It took a decade for them to return to their February 1988 level. I owned one of them. As a Realtor, I sold every friend and relative a home at or near the peak, only to see them upside down in their mortgage. I can see clearly the roller coaster path of the real estate market and I now know when to buy and when not to buy.

However, I am retired and almost 70, so it is a moot point. Nobody listens to me anyway. Blah blah blah. Old people talking. Ignore him, he's trying to spoil the party. :)

http://www.mybudget360.com/the-magical-2-housing-ratio-between-median-na...

This article is a good guide to the market. That 2.2 ratio varies in different markets, but every area has its own number that is the norm.

Reversion to the mean is as sure as gravity.

Silver Savior's picture

I know it all won't be around simply because there will be a financial reset. I stopped contributing and I am positioning myself to just take what I have with penalty of early withdrawal. It will be better than having nothing. 

I figure I should put it into precious metals to preserve purchasing power while the fiat still somehow has some.

tribune's picture

the Australian property market

deev's picture

Who's running these pension schemes, and why are they only receiving 3% return on their investments?

They should easily be making the 7% required, and if they are not then those running the funds need to be made accountable for their poor decisions.

Also, what has happened to all the money the retirees put into the scheme? That is what should be paying the pension, not new money being put in by workers.

Mazzy's picture

It's all been absconded with, hence why new workers are footing the bill for those who are not longer producing.

We live in a topsy-turvey society.  Remember that someone is running the fund and that someone is making a big profit.