Another Peek at Ponzi

When I first started this blog in 2010, I did a lengthy review of why I thought the social security system was not a Ponzi scheme.

 

It may boil down to an historical argument: that is, which came first, paygo or Ponzi, as well as, from whence did Charles Ponzi get his idea to begin with? I did not cover that part of it at the time, but since then I have come across some new information, and I felt an update was needed.

The history of pensions, particularly public sector pensions, cannot be easily separated from the history of pension finance. The creation of a pension plan coincides with the simultaneous creation of pension liabilities, and the parameters of the plan establish the size and the timing of those liabilities. U.S. Army pensions have always been funded on a "pay-as-you-go" basis from the general revenues of the U.S. Treasury. Thus army pensions have always been simply one more liability of the federal government.

In the United States, pensions have been around since the civil war; in fact, from a world-wide historical perspective, they go all the way back to the Romans, where they started in terms of funding out of the "general treasury"--in other words, they were pay-go from the start. The Ponzi scheme came along in response to Charles Ponzi who glorified it in the 1920's, and he got his idea for his scheme not from working for a pension system, but from a bank:  

In 1907, Ponzi moved to Montreal and became an assistant teller in the newly opened Banco Zarossi, a bank started by Luigi "Louis" Zarossi to service the influx of Italian immigrants arriving in the city. Zarossi paid 6% interest on bank deposits – double the going rate at the time – and was growing rapidly as a result. Ponzi eventually rose to bank manager. However, he found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank eventually failed and Zarossi fled to Mexico with a large portion of the bank's money.

It may be okay to refer to social security as a Ponzi in the same way many refer to the stock market as a casino; a pejorative: defined as "having a disparaging, belittling or derogatory effect or force." Certainly a Ponzi scheme, being an illegal swindle, is a negative, disparaging way to describe the part of social security that works as "pay-go." Or the stock market "casino", with even television announcers and internet articles regularly referring to investments as "bets." But we know realistically that the stock market is not a casino as much as we know that social security is not a Ponzi scheme. They just seem that way because certain aspects mimic fraudulent activities  (as we might even call insurance a "protection racket").

And of course, Ponzi can be re-applied as a pejorative in the same way towards those things "celebrated" by the right to those things "celebrated" by the left, such as climate change. Things go better with tu quoque?