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

Tyler Durden's picture

Authored by Simon Black via,

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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Arnold's picture

Enron, Solyndra, GM Bondholders, Tesla......

roddy6667's picture

Nobody makes 7%. In the 30 year period from 1985  to 2015 the market was up over 10%, but the average investor recieved only 3.6%. Pension fund managers don't do any better than managed fund operators. They get beat by Index funds year after year. It's a huge scam.

pawn's picture

Rock-paper-scissors is a hand game usually played between two people, in which each player simultaneously forms one of three shapes with an outstretched hand. These shapes are "rock", 

Posa's picture

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

Yeah. Yeah... and what happens when the next crash comes and your SEP investments are wiped out?

roddy6667's picture

Rental properties are good for retirement, but they are work, not like owning a piece of paper. If you owned anything from a 2 family to a 10 unit building and operated it conservatively, it would definitely take care of you in your retirement. Even if house prices crash 50%, the rents on a paid-for building will keep coming in.

Farmer Joe in Brooklyn's picture

A lot of investors are financing purchases and using CURRENT rent rates as their income assumption going forward.

If (or rather when) the real crashes again, the rents will also come down, leaving many of these people cash flow negative.

Gonna be interesting when the tide goes out this next time....

Arrow4Truth's picture

It was referring to Self-directed IRA's, not SEP's. I rolled a 401K into a Self-directed vehicle and purchased a rental property along with PM's. 

moonmac's picture

The first people to get paid never paid a dime into the system(Social Security) = Ponzi Scheme

Nobodys Home's picture

Yes they did. But back then the .gov wasn't steaiing it (borrowing it) and replacing it with worthless treasuries.

American Snipper's picture

They should go all in for the Bitcoin Hail Mary...

Arrow4Truth's picture

But don't expect the immaculate reception.

moonmac's picture
I've had 10 jobs over 30 years and I never once heard the word "pension" or saw it written anywhere. I guess it's because I've always worked in the real world? ‎
indygo55's picture

Yup a lot of them worked and "paid in", which was a pay-cut to contribute. Now, with the currency devalued by 50% or so the purchasing power is lost and yuo've been getting fucked all along. 

Nobodys Home's picture

I "paid in" 7% every paycheck whether I wanted to or not.
When I quit after 4 years i got back all I put in...14K after taxes.
Better that than a bail in.
I got it back! Amaaaazing!

indygo55's picture

Yup a lot of them worked and "paid in", which was a pay-cut to contribute. Now, with the currency devalued by 50% or so the purchasing power is lost and yuo've been getting fucked all along. 

pitz's picture

If the pension funds can't be solvent in some of the best financial conditions ever for investment funds, particularly inflated asset rates and low interest rates, they have absolutely and utterly no chance with higher rates and lower asset prices.  

Nobodys Home's picture

I'm waiting for lower asset prices. I won't care about the rates.

TabakLover's picture

SS has, and would work fine......except it was  stolen from.

Nobodys Home's picture

IT Will Work...Until it doesn't!

G-R-U-N-T's picture

"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."

LMAO! Sorry, but ANY type of government, (to include municipalities) bond is the last buy I would make! 


Nobodys Home's picture

No shit! I'd rather buy bonds in Dog The Bounty Hunter.

GoldenDonuts's picture

A few people own more than 90% of bitcoin could that be a bigger pongo than Madoff?

idontcare's picture

PBGC.  Essentially, pension funds fail, tax dollars bail them out.

hootowl's picture

What tax dollars?  Are the Tribal enforcement thugs, The IRS, going to expand their malevolent sphere of terror and start inflicting more illegal income taxes on the Chinese, Russians, Koreans, Canadians, Vietnamese, Filipinos, Indians, Pakistanis, Russians, Japanese, cartoon characters, and dead cats, etc., etc., etc.?


There are, as yet, millions of Black, Brown, White, undead goyim American/British/Canadian/Australian cannon fodder, to send over there (everywhere/anywhere) to end the resistance The Bankster Tribe might encounter trying to expand their pernicious confiscation of the assets of the poor people of the world, to keep the Western Ponzi scams afloat.

fireant's picture

Hello Treasury, this is Jimmah....Roll off more of them 20's!"

moorewasthebestbond's picture

Chris Christie used to work as Madoff's "securities industry" lobbyist/PR flack.


I don't know who will be the face of a scam 100x larger.

Team_Huli's picture

Ok, then...  what did Madoff do that was illegal?

planbdeveloper's picture

You want to preserve your wealth, own gold. You want to get the safest investment on the planet? Invest in an IUL. Get out of 401k and IRA scams that Wallstreet and the government are screwing you over on with fees and taxes!

Land Snark's picture

I would think a fixed index annuity would be the better bet, no?

Arnold's picture

As long as the issuing insurance company stays solvent.
You often have no access to your principal, and pay high fees.

We have a couple, distributions as death benefits, and that works out okay, some control of distribution that is taxed as ordinary income. This was found money and a bonus.

The biggest problem with Annuities, in my mind, is the fine print.
You or I may read the contract,but you have to buy it to know what is in it.

GreatUncle's picture

Priceless this part ... consider the government has a failed ponzi and will have sucked in all the wealth it can to kick the can would the following still exist is seriously questionable.

"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."

They will rob that to try and keep theirs going now if you manage to hide it so they cannot see it, you have a chance and it is called "treasure trove" if somebody finds it in the future. Since the banks now hold your money in electronic form it is theirs now not yours and they will take that also because it can be easily seen and not money under the matress somewhere.

Any promises otherwise can be considered ... THE LIE

Darth Rayne's picture

I refuse to believe that bank credit is money.
I simply do not believe that fiat currency is a store of value.

I do not believe that society is how mankind should organise itself.
No institution on this planet outranks me.

I don't need a plan b as I have chosen to live in and be part of a civilisation. I know this sounds odd. Living it is beyond bizarre, yet I am.

Anyway, best of luck to you.

SunRise's picture

"No institution on this planet outranks me."  How True!  There's no "God-House" on earth to go to to have The Judge rule on who's values are right; therefore, my values and your values are sacred - inviolable, with one exception:  My values must stop at your nose.  The sole purpose of government has to be to force people to deal voluntarily and honestly with each other or not at all.

Atlas Crapped's picture

Wanna see something REALLY scary?

It's the Ponzi scheme called "money".

J J Pettigrew's picture

So the more the Fed punishes SOME with ultra low rates, and benefit OTHERS benefit from those low rates...

the more the FED interferes with the REAL market.... get the point.

Once 7% was considered a fair return....but as Hayek said, Central Planners INTENTIONALLY help some and INTENTIONALLY hurt others....and as Newton said, for every ACTION, there is an equal and opposite REACTION.

Bemused Observer's picture

Current workers are not supposed to be funding retirees. All those retirees paid into that system, for many, many decades...millions and millions of them. The market has been on a tear for the past decade, so where is all that money now? It was invested, right? Market is at record highs...where is it?

The current workers should not have to be doing more than subsidizing the increased amount the Boomers are costing, not the whole fucking thing! THIS SHOULD NOT BE A PROBLEM, if that money was there. But it isn't, because it was STOLEN. And now the thieves are warning you that you are broke...

Stoonod Nicknud's picture

I have been in a local union here since 1986. I got a letter in the mail and it stated that since 2011 (Thanks Obabma), the "Pension Protection Act" of 2011 gives them the ability to cut the folks getting benefits anytime the fund is considered troubled. If the fund by some act of magic, gets back to full-funded status, once you are cut, you stay cut. Biggest bunch of crooks you've ever seen.

Money_for_Nothing's picture

SS benefits are being reduced every day. COLA, Medicare premiums and co-insurance do the heavy lifting. After much wailing and gnashing of teeth something will be worked out. In one sense FDR and LBJ got Trump elected. MAGA vs Great Society & New Deal. "Happy Days are Here Again".

Cassandra.Hermes's picture

Lol pension funds are designed to have similarities with the Ponzi schemes, the people who are working are paying for the people who are retired, the difference is that retired supposed to be 1/5 of the working, when ratio change we have two options cut the pension or increase the contribution. Either way it is not a Ponzi scheme, because pensioners cannot "jump on the bank", they have to reach retirement age. So you know how many people will start drawing money in advance you can plan 10-15 years ahead.

Not if_ But When's picture

An excellent article and I agree with just about every post.  The whole financial system is one big ponzi.  The biggest driver by far being the Fed.  BUT, my pension earned a 13.5% return on investment for the fiscal year ended 6/30/17.  Our pension system has been very proactive addressing required investments weighed against other investments.  Also much changeover in those handling things.  At a public meeting there was discussion at great length concerning the merits (at least in the last few years) of simply investing a substantial portion in low cost index funds.  I was impressed by the rational thinking presented.   Maybe there is hope if you bounce the worthless, connected fuckheads who syphon the investment funds to their financial world buddies.    CPL593H

Deja Doh's picture

Black is an idiot.  Imagine if we had no military (It's Veterans Day), no police, no firemen, no public works.  The idea of pensions is to keep competent people doing their job in a professional manner, not walking away when the job gets tough or trying to undermine their place of work.  Without the pension, there would be no one in their right mind to put up with the public and all their BS, like the comments of Mr. Black.

Politicians fuck all this up.  They act on behalf of their paymasters and do their bidding.  Invest (or divest) in instruments (like US Bonds) and either make or fail to make the investment goals. The crazies on the right hate government (unless it helps them), and the lunatic fringe on the left want government up in your nose (unless it's too much for them).  With interest rates still near record lows, the investment options for government pensions will have trouble meeting 7%+ annual returns.  But they also hold almost half the national debt of the federal government (SSA, state and local government).  

The main reason why Black is a fool is that Ponzi didn't have the power to tax to make up the difference.

Honest Sam's picture

Aside from the the fact that most people get very stale in their jobs as they age, get bored, and do not stay on top of innovation and efficiency changes, your take on pensions is only partly correct. 

However, the main problem with your post is the last sentence.

While the power to tax is certainly a tyrannical, despotic and ultimately corrupt one, an even more pernicious, and way beyond corrupt one is the Omnipotent FED with the power to Digitally (Crypto can never replace this power) add a trillion, a quadrillion, etc. dollars to a few Jewish bnakers' accounts with no accountability. Just open up the Iphone, access Lord Blankfein's christmas club account, and press some number on the numerical keypad, and then add 9, 12 or 15 zeros and Viola! he's set for 10 generations, and NEVER has to pay it back.  

J Yell and her predecessors, and her successors can, with no voting required, do what only central banks have the power to do: create what you and I have to work for 9-10 hours a day.  AND it's not even a Ponzi scheme.  It's legal. 

And you can't get rid of them other than by assassination. And I don't recall that ever happening. 







ExcapedPOI's picture

I am actually willing to try your experiment.  Imagine if we had no military..., no police, no firemen, no public worksI am quite confident that if the government got out of the way things would be rough, but much better.