Ponzi Scheme

Ponzi scheme - Wikipedia, the free encyclopedia
A Ponzi scheme is a fraudulent investment operation that involves promising or ... Ponzi's original scheme was in theory based on arbitraging international reply ...
en.wikipedia.org

"Ponzi" Schemes
Ponzi was deluged with funds from investors, taking in $1 million during one ... Decades later, the Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" ...
www.sec.gov

Useless Information: Charles Ponzi
Charles Ponzi promised to double your money in just 90 days. ... Ponzi's mind quickly went into overdrive and devised a clever scheme to capitalize on his idea. ...
home.nycap.rr.com

Charles Ponzi - Wikipedia, the free encyclopedia
3 The Ponzi scheme. 4 Suspicion. 5 Collapse. 6 Prison and later life. 7 ... Ponzi canvassed friends and associates to back his scheme, offering a 50% return ...
en.wikipedia.org

Ponzi scheme: Definition from Answers.com
Ponzi scheme n. An investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised
www.answers.com

Investor Alert: Ponzi Schemes
The North American Securities Administrators Association (NASAA) is the oldest ... The Ponzi scheme is a house-of-cards swindle in which high returns are paid to ...
www.nasaa.org

Ponzi Schemes and Bubble Scam Investment Frauds
Ponzi schemes fraudulent investments and Bubble scams. ... Because a ponzi scheme is technically insolvent, in the sense that its ...
www.crimes-of-persuasion.com

Warning: mkdir() [function.mkdir]: Permission denied in /home/webs/affiliatelib2/CacheManager.php on line 12

Warning: mkdir() [function.mkdir]: No such file or directory in /home/webs/affiliatelib2/CacheManager.php on line 12

Warning: fopen(/home/templatecore2cache//*cluesnet.com/c4/c45f53cbf02d2545a1a65437cd0f611c3b5b4287.tc2cache) [function.fopen]: failed to open stream: No such file or directory in /home/webs/affiliatelib2/CacheManager.php on line 130

Warning: fwrite(): supplied argument is not a valid stream resource in /home/webs/affiliatelib2/CacheManager.php on line 131

Warning: fclose(): supplied argument is not a valid stream resource in /home/webs/affiliatelib2/CacheManager.php on line 132

A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi. Schemes" , which also describes the original Ponzi scheme in detail)

Overview A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going.

The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more and more investors become involved, the likelihood of the scheme coming to the attention of authorities will continue to increase.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi was not the first to invent such a scheme, but his operation took in such a large amount of money that it was the first to become known throughout the United States. Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit lapses in judgment arising from an investor's lack of information.

Hypothetical example of Charles PonziAn advertisement is placed promising extraordinary returns on an investment – for example 20% for a 30 day contract. The precise mechanism for this incredible return can be attributed to anything that sounds good but is not specific: "global currency arbitrage", "Hedge (finance) Futures contract", "High Yield Investment Programs" or something similar.

With no proven track record for the investors, only a few investors are tempted, usually for smaller sums. Sure enough, 30 days later, the investor receives the original capital plus the 20% return. At this point, the investor will have more incentive to put in additional money, and, as word begins to spread, other investors grab the "opportunity" to participate. More and more people invest, and see their investments return the promised large returns.

The reality of the scheme is that the "return" to the initial investors is being paid out of the new, incoming investment money, not out of profits. There is no "global currency arbitrage", "hedge futures trading", or "high yield investment program" actually taking place. Instead, when investor D puts in money, that money becomes available to pay out "profits" to investors A, B, and C. When investors X, Y, and Z put in money, that money is available to pay "profits" to investors A through W.

One reason that the scheme initially works so well is that early investors – those who actually got paid the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus those running the scheme do not actually have to pay out very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping the money in what looks like a great place to get a high return.

The catch is that at some point one of three things will happen:

the promotors will vanish, taking all the investment money (less payouts) with them;

the scheme will collapse of its own weight, as investment slows and the promoters start having problems paying out the promised returns (and when they start having problems, the word spreads, and more people start asking for their money, similar to a bank run);

the scheme is exposed, because when legal authorities begin examining accounting records of the so-called enterprise, they find that much of the "assets" that should exist, do not.

What is and is not a Ponzi scheme

A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a disbelief in financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish pyramid schemes from Ponzi schemes:

:*In a Ponzi scheme, the schemer acts as a “hub” for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly (in fact, failure to recruit typically means no investment return).

:*A Ponzi scheme claims to rely on some esoteric investment approach, insider connections, etc., and often attracts well-to-do investors; pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.

:*A pyramid scheme is bound to collapse a lot faster, simply because of the demand for exponential increases in participants to sustain it. By contrast, Ponzi schemes can survive simply by getting most participants to "reinvest" their money, with a relatively small number of new participants.

A Economic bubble. A bubble relies on suspension of disbelief and an expectation of large profits, but it is not the same as a Ponzi scheme. A bubble involves ever-rising (and unsustainable) prices in an open market (be that shares of a stock, housing prices, the price of Tulip mania, or anything else). As long as buyers are willing to pay ever-increasing prices, sellers can get out with a profit. And there doesn't need to be a schemer behind a bubble. (In fact, a bubble can arise without any fraud at all - for example, housing prices in a local market that rise sharply but eventually drop sharply because of overbuilding.) Bubbles are often said to be based on Greater fool theory.

Robbing Peter to pay Paul. When debts are due and the money to pay them is lacking, whether because of bad luck or deliberate theft, debtors often make their payments by borrowing or stealing from other monies they have. It does not follow that this is a Ponzi scheme, because from the basic facts set out there is no indication that the lenders were promised unrealistically high rates of return via claims of unusual financial investments. Nor (from these basic facts) is there any indication that the borrower (banker) is progressively increasing the amount of borrowing ("investing") to cover payments to initial investors (as, again, Ponzi was not the first to do).

Notable Ponzi schemes Highest dollar schemes The eponymous scheme was orchestrated by Charles Ponzi, who went from anonymity to being a well-known Boston millionaire in six months using such a scheme in 1920. Profits were supposed to come from exchanging international postal reply coupons. He promised 50% interest (return) on investments in 45 days or “double your money” in 90 days. About 40,000 people invested about $15 million all together (roughly $150 million in 2006 dollars); in the end, only a third of that money was returned to them.

Besides the Ponzi scheme other similar historic schemes include:

Before Ponzi, in 1899 William "520 Percent" Miller opened for business as the "Franklin Syndicate" in Brooklyn, New York. Miller promised 10% a week interest and exploited some of the main themes of Ponzi schemes such as customers reinvesting the interest they made. He defrauded buyers of $1 million and was sentenced to jail for 10 years. When he was pardoned he opened a grocery store on Long Island. During the Ponzi investigation, Miller was interviewed by the Boston Post to compare his scheme to Ponzi's — the interviewer found them remarkably similar, but Ponzi's became more famous for taking in seven times as much money.Zuckoff, Mitchell. Ponzi's Scheme: The True Story of a Financial Legend. Random House: New York, 2005. (ISBN 1-4000-6039-7)

In Romania, between 1991 and 1994, the "Caritas" company of Cluj-Napoca, owned by Ioan Stoica promised eight times the money invested in six months. It attracted 400,000 deponents from all over the country who invested 1,257 billion Romanian leu (about a billion USD) before it finally went bankrupt on 14 August 1994, having a debt of 450 million USD. The owner, Ioan Stoica was sentenced in 1995 by the Cluj Courthouse to a total of seven years in prison for fraud, but he appealed and it was reduced to two years; then he went on to the High Court of Cassation and Justice and the sentence was finally reduced to one year and a half.

Between 1970 and 1984 in Portugal, a woman known as Dona Branca maintained a scheme that paid 10% monthly interest. In 1988 she was sentenced to 10 years in prison. She always claimed that she was only trying to help the poor, but in her trial it was proven that she had received the equivalent of 85 million Euro. Visão, Apanhados pelos selos, 18 May 2006. CanalSurWeb, Banqueros del pueblo, 12 May 2006

Sixteen hundred investors in Diamond Mortgage Company and A.J. Obie, two firms with the same managers, lost approximately $50,000,000 in what the Michigan Court of Appeals described as "the largest reported 'Ponzi' scheme in the history of the state." It led to the passage in 1987 of the MBLSA(Mortgage Brokers, Lenders, and Servicers Act).""People v. Greenberg,"176 Mich App 296, 299; 439 NW2nd 336(1989) cited in U.S. Supreme Court, 05-1342, Watters vs Wachovia Bank, page 6. At American Bar Association site ABAnet.com, Retrieved August 29, 2007 Keyfetz, Lisa, "The home ownership and equity protection act of 1994: extending liability for predatory subprime loans to secondary mortgage market participants." Loyola Consumer Law Review, Vol 18:2, pages 165-166. Retrieved August 29, 2007

MMM (pyramid) was a Russian company that existed in the 1990s. It involved at least two million people and collected as much as $1.5 billion. The founder was sentenced to 4.5 years in prison in 2007.

From 1993 until 1997 a church named Greater Ministries International in Tampa, Florida, headed by Gerald Payne bilked over 18,000 people out of 500 million dollars. Payne and other church elders promised the church members double their money back citing Biblical scripture. However, nearly all the money was lost and hidden away. Church leaders received prison sentences ranging from 13 to 27 years.

In autumn of 1994, the European Kings Club collapsed, causing a damage of about $1.1 billion. This scam was led by Damara Bertges and Hans Günther Spachtholz. In the Swiss cantons Canton of Uri and Canton of Glarus about every tenth adult invested into the EKC. The scam involved buying "letters" valued at 1,400 francs that entitled buyers to receive 12 monthly payments of 200 francs. The organisation was based in Gelnhausen, Germany

In May 1995, Pennsylvania's attorney general moved to freeze the assets of the Foundation for New Era Philanthropy and its chairman, John G. Bennett, Jr. The organization had raised over $500 million from 1,100 donors. Participants, including the Red Cross, had believed they were participating in a matching-gifts program through New Era but, in fact it was simply a Ponzi scheme. Losses amounted to $135 million.

In early 1996, the United States Securities and Exchange Commission filed a civil action against Bennett Funding Group, its chief financial officer, Patrick R. Bennett, and other companies Bennett controlled, in connection with a massive Ponzi scheme. The companies fraudulently raised hundreds of millions of dollars, purportedly to purchase assignments of equipment leases and promissory notes.

In 1997 the government of Albania officially endorsed a series of pyramid investment funds. When the inevitable end came, the people of Albania, who had lost $1.2 billion, took their protest to the streets in a revolt that toppled the government.

In 2000, a Ponzi scheme perpetrated by Scientology minister Reed Slatkin came unraveled when the U.S. Securities and Exchange Commission regulators became aware that Slatkin was not a licensed investment adviser. Slatkin had raised some $600 million from over 500 wealthy investors, mostly Hollywood celebrities.

In December 2005, in Los Angeles, California, Larry Toshio Osaki, who ran a gigantic Ponzi scheme and continued to offer bogus investments in accounts receivable "factoring" after being ordered to stop by a federal judge, was sentenced to 20 years in federal prison. In addition to the prison term, Judge Stephen V. Wilson ordered Osaki to pay more than $145 million in restitution to victims.

In May 2006, James Paul Lewis, Jr. was sentenced to 30 years in federal prison for running a $311 million Ponzi scheme over a 20-year time period. He operated under the name Financial Advisory Consultants from Lake Forest, California

In October 2006, in Malaysia, two prominent members of society and several others were held for running an alleged scam, known as SwissCash or Swiss Mutual Fund (1948). SwissCash offered a returns of up to 300% within a 15-month investment period. Currently, this HYIP investment is offered to citizens of Malaysia, Singapore, and Indonesia. It claimed investors’ funds were channeled to business activities ranging from oil exploration to shipping and agriculture in the Caribbean. The company claims to be operating out of New York and incorporated in Commonwealth of Dominica. The Star, Malaysia, 4 October 2006. Today, Singapore, 24 January 2007. Bank Negara, Malaysia, Malaysia, 5 September 2006.

On Friday 13 April 2007 a person named Sibt-e-Hassan Shah aka "Double Shah" was arrested by government officials in Wazirabad, a small town of Pakistan. Sibt-e-Hassan claimed to double the money within 30 days in the beginning of his scheme and later 90 days. He is suspected to have gathered very large investments (approx US$ 1 Billion) in a very short time period.

The Brothers was a large investment operation, eventually revealed to be a Ponzi scheme, in Costa Rica from the late 1980s until 2002. The fund was operated by brothers Luis Enrique and Osvaldo Villalobos. Investigators determined that the scam took in at least $400 million. Most of the clientele were American and Canadian retirees but some Costa Ricans also invested the minimum $10,000. About 6,300 individuals ultimately were involved. Interest rates were 3% per month, usually paid in cash, or 2.8% compounded. The ability to pay such high interest was attributed to Luis Enrique Villalobos’ existing agricultural aviation business, investment in unspecified European high yield funds, and loans to Coca Cola, among others. Osvaldo Villalobos’ role was primarily to move money around a large number of shell companies and then pay investors. In May 2007 Osvaldo Villalobos was sentenced to 18 years in prison for fraud and illegal banking. Luis Enrique Villalobos remains a fugitive.

On Wednesday July 4, 2007, the Bangko Sentral ng Pilipinas and the Securities and Exchange Commission (Philippines) cited FrancSwiss Financial Co. as a Ponzi scheme which targeted Overseas Filipino Workers.

On August 17, 2007, the Philippine National Bureau of Investigation filed syndicated estafa cases against 27 officers and investors of Francswiss Investment, a "Ponzi" pyramiding scam on the Internet. Charged were Michael Mansfield, chief financial officer; Kurt Sandelman, risk management team leader; Rupert Benedict Da Vinco, investment team leader; Julia Rodriguez, international banking team leader; Hector Willem Sidberg, marketing and international affairs; and Fernando Munoz, customer service leader; Roger Smith, the British chief operation officer of FS Investment in the Asia-Pacific region; Bensy Fong, the Singaporean system operation officer; Raymond Chua, Singaporean marketing officer; a certain Michelle and Mike, Filipino secretaries and collectors of money from investors; 16 investors, including arrested suspect Eleazard Castillo, 26, a native of Cabuyao, Ilocos Sur, allegedly one of the financial advisers of Francswiss Investment. 41 investors claimed they lost a total of $75,000 to the investment scheme. Francswiss deceived investors in the Philippines of P1 billion. Inquirer.net, Charges filed against 27 in alleged pyramiding scam

On June 27, 2007 former boy band mogul and notorious con artist Lou Pearlman was indicted by a grand jury on several counts of fraud which is turning out to be one of the largest United States Ponzi schemes ever to the tune of $317 million dollars. The final total may rest somewhere near $500 million dollars. Orlando Sentinel February 6, 2007 Pearlman, companies face $317 million in claims Pearlman's scam involved bilking innocent investors out of their savings with a fraudlent savings and loans program claiming it to be FDIC insured though it was not. He also conned several banks out of millions of dollars in loans for projects he never started. He then used that money to pay back certain investors and continue his ponzi scheme. His scheme may have been going on for 12 years. A trial date is set for March 3, 2008.

Other notable schemes Other notable (but lesser dollar) Ponzi schemes include:

Sarah Howe, who in 1880 opened up a "Ladies Deposit" in Boston promising eight percent interest, although she had no method of making profits. This unique scheme was billed as "for women only". Howe disappeared with the money from her scam.ibid.

The novel Chance by Joseph Conrad depicted a Ponzi scheme in 1914 before Ponzi himself had hit the scene. Conrad's scammer "de Barral" offered ten percent interest on deposits in his operation "without system, plan, foresight, or judgement".

On March 22, 2000, four people were indicted in the Northern District of Ohio, on charges including conspiracy to commit and committing mail and wire fraud. A company with which the defendants were affiliated allegedly collected more than $26 million from "investors" without selling any product or service, and paid older investors with the proceeds of the money collected from the newer investors.

In late 2003, a scheme by Bill Hickman, Sr., and his son, Bill Jr., was shut down. He had been selling unregistered securities that promised yields of up to 20 percent; more than $8 million was defrauded from dozens of residents of Pottawatomie County, Oklahoma, Oklahoma, along with investors from as far away as California. Hickman was sentenced to 160 years in state prison.

In December 2004, Mark Drucker pleaded guilty to a Ponzi scheme in which he told investors that he would use their funds to buy and sell securities through a brokerage account. He claimed that he was making significant profits on his day trades and that he had opportunities to invest in select IPOs that were likely to turn a substantial profit in a short period of time. He promised guaranteed returns of up to fifty (50%) percent in 90 days or less. In less than two years of trading, Drucker actually lost more than $850,000 in day trading and had no special access to IPOs. He paid out more than $3.6 million to investors while taking in $6.3 million.

In June 2005, in Los Angeles, California, John C. Jeffers was sentenced to 168 months (14 years) in federal prison and ordered to pay $26 million in restitution to more than 80 victims. Jeffers and his confederate John Minderhout ran what they said was a high-yield investment program they called the “Short Term Financing Transaction.” The funds were collected from investors around the world from 1996 through 2000. Some investors were told that proceeds would be used to finance humanitarian projects around the globe, such as low-cost housing for the poor in developing nations. Jeffers sent letters to some victims that falsely claimed the program had been licensed by the Federal Reserve and the program had a relationship with the International Monetary Fund and the United States Treasury. Jeffers and Minderhout promised investors profits of up to 4,000 percent. Most of the money collected in the scheme went to Jeffers to pay commissions to salespeople, to make payments to investors to keep the scheme going, and to pay his own personal expenses.

In February 2006, Edmundo Rubi pleaded guilty to bilking hundreds of middle and low-income investors out of more than $24 million between 1999 and 2001, when he fled the U.S. after becoming aware that he was under suspicion. The investors in the scheme, called “Knight Express”, were told that their funds would be used to purchase and resell Federal Reserve notes, and were promised a six percent monthly return. Most of those bilked were part of the Filipino community in San Diego.

On May 10, 2006, Spanish police arrested 9 people associated with Forum Filatelico and Afinsa in an apparent Ponzi scheme that affected 250,000 investors from 1998 to 2001. Investors were promised huge returns from investments in a stamp fund.

12DailyPro was a version of what is commonly known as a "paid autosurf" program where "investors" deposited money and received an extremely high profit (44%) within a short period (12 days). Charis Johnson created what authorities considered one of the largest modern day versions of the Ponzi scheme. She accumulated a total of over US$1.9 million from the program. More than 300,000 people joined over the course of 8 months, spending over $500 million . When a federal investigation of 12DailyPro took place, its main payment processor, Stormpay, froze all funds related to it. Stormpay has since refused to return any of these funds. On February 24, 2006, the United States Securities and Exchange Commission (SEC) ordered 12DailyPro and its parent company to cease and desist all operations. On February 28, a Los Angeles judge ordered all company assets and records to be turned over to an appointed receiver for investigation. Charis F. Johnson now faces criminal and civil suits from both local and federal agencies.

Stormpay also used to collect usernames and passwords and try to use them in other legitimate online payment services like PayPal.

High Yield Investment Programs are related to established economic rules such as supply and demand, material assets that appreciate based on value-added through high-end skills such as high-end electronics, buidings & estates, hotels, technology parks, museums, theater and organic systems such as businesses involved in producing the previously mentioned material assets. HYIPs could involve printing of cards as certificates, with units being transferable to third parties. The monetary value of units rises over time, so most holders of such cards won't want to transfer their units. At the same time, the card can be used as a means of exchange for value making it a form of money. It's like turning the HYIPs into a form of Central Bank and the units it issues become currency.

Matteo Quintavalle is an Italian scammer, who cheated investors with more than US$10 million by promising very high yield in Costa Rican real estates and hotels. After grabbing the money in San Francisco,California, Mr. Quintavalle went to Costa Rica and bought hotels, resorts and even soccer players ' contracts and gave false contracts to the original investors let they think they were owning those properties in Costa Rica. Mr. Quintavalle is currently under arrest awaiting trial.

In August 2007, a bank in Second Life called “Ginko Financial” claimed it could give returns of 40% to 60%, collapsed and gone insolvent with debts of L$ 200 million (around US$750 000). Some residents have lost amounts of L$ 2.5 million (around US$10 000) in the scheme. Due to this, there have been calls for a localised version of the United States Securities and Exchange Commission for the site.

On August 31, 2007, the Securities and Exchange Commission ("SEC") filed an emergency action against James Blackman Roberts ("Roberts"), FOMAC International, Inc. ("FOMAC"), and Consultores Las Tres Americas S.A. ("Consultores LTA") to halt an ongoing Ponzi scheme and freeze assets for the benefit of defrauded investors. The complaint filed by the SEC alleges that, since 2002, the defendants have raised at least $50 million in principal from approximately 450 investors located primarily in the U.S. and Costa Rica. The complaint further alleges that as early as 2005, the defendants experienced significant losses while trading investor funds in the Forex markets, misappropriated at least $3 million, and then used new investor money to pay returns and principal to existing investors. As a result, the complaint alleges, the defendants misrepresented to investors that these Ponzi payments were actually returns from their Forex trading

On 20 September 2007, a complaint was filed in Federal District Court in Manhattan, accusing political fund-raiser Norman Hsu of operating a Ponzi scheme. Hsu attracted investments by claiming to be running a legitimate business involving the importation of clothes from China, and is reported to have cheated investors out of at least $60 million.

In September 2007, another bank in Second Life called "The Bank" owned by the in-game character "Jasper Tizzy", operated as part of an in-game group of companies known as Atlas Venture Capital (AVC) and Countless Galaxies (CGI), stopped processing customer withdrawals. This was closely followed by the disappearance of Jasper Tizzy and his staff; Paydayloan Lindman and Teanna Nomura. They claimed they could give returns on average of 10% to 20% per month and, like in many of these schemes, they were making good on their claims for several months. The beginning of the end was when a separate venture supported by The Bank, the Kristatos Fashion Mall (KFM), was abandoned by the owner, Teanna Nomura and caused AVC and CGI to prematurely cave in on themselves. As with the Ginko episode, some residents have lost amounts of L$2.5M (around US$10,000) in the scheme and more calls for Linden Labs to clamp down have been raised as a result.

As a political metaphor Some free-market economists, such as Thomas Sowell have argued that national social security systems, such as the Social Security (United States) system in the United States and the National insurance system in the United Kingdom, are actually large-scale Ponzi schemes.

Sowell and others point out that, under these national systems, incoming payments, made up of taxes and/or other kinds of non-voluntary contributions, are neither saved nor invested. Instead, current contributions (from one set of individuals, due benefits at a later time) are used to pay for current benefits (to another set of individuals).

Sowell and others claim that this "pay-as-you-go" system has begun to show its inherent flaws as North American demographics trend toward more pensioners and fewer workers, because of declining birth rates and increasing life expectancy.

Retirement programs run by country, though they involve the taxes paid in by workers being redistributed to pensioners, nevertheless differ in a number of basic features that are usually found in Ponzi schemes, but are not fundamental to them:

Retirement systems, like Social Security, are openly declared for what they are. In a genuine Ponzi scheme, the perpetrators falsely claim that there is some business that generates the promised revenues. In Social Security, people know where the money comes from, and actuaries supply written predictions of future cash in-flows and out-flows.

Retirement systems promise a stipend to the country's retired persons, not the quick and exorbitant profits to current investors that Ponzi schemes invariably offer.

Retirement systems rely on the taxing power of nation-state to ensure continuous funding, as opposed to voluntary investor contributions. In practice, this taxing power has been used primarily for dedicated revenues (taxes), although in theory general tax revenues could be used to supplement worker payments into the systems. (Historically in the U.S., Social Security has almost always been in surplus, so this has not yet become an issue.) When and if the politics is used to raise required contributions via tax, or to reduce benefits (including raising the retirement age), there would certainly be opposition from those who would pay more or get less, but politicians have only those two choices (plus borrowing) if revenues are inadequate, aside from gradually ending the New Deal completely.

The idea of making Social Security a "fully funded" system has been discussed several times but always floundered on the cost. The cost has gone up as making any fundamental change has been deferred.

In the long run, retirement systems pay out an approximately equal amount to what was paid in, per contributor, plus interest . In the short run, pension surpluses can be used to cover a government's current government finance shortfall, as has been happening in the United States since Social Security contribution rates were increased in 1983.

Retirement systems are in many ways insurance rather than investment systems. A person who dies before retirement gets no money back (regardless of what he/she paid in). Someone who lives to a very old age continues to get payments regardless of the amount of money he/she has paid in. And someone disabled, even at a relatively young age (well before he/she can make significant payments into the system, or have significant private investments), still receives payments until the end of his/her life. Due to this, the typical retiree who does not become disabled early sees a lower rate of return than the risk free rate.

Unlike a Ponzi scheme, government receipts (taxes) and payouts (entitlements) can be calculated quite accurately in the short term (five to ten years), and predicted (with a range of assumptions) for periods beyond that timeframe. A sudden collapse is therefore unlikely , depending on one's definition of "sudden".

The U.S. Social Security Administration provides the following response Schemes" , which also describes the original Ponzi scheme in detail) to the "Ponzi scheme" accusation as applied to a pay-as-you-go system like Social Security:

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go insurance programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end. So we could that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary. (There does not have to be precisely the same number of workers and beneficiaries at a given time--there just needs to be a stable relationship between the two.) As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.

If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security). During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems.

The monetary system There is an argument to be made that debt based monetary systems are essentially sophisticated Ponzi schemes. Debt based money, or fractional reserve banking requires that interest be paid on money which was created at the same moment a loan was created. Because of these ongoing interest payments, there is always less money available in circulation than there are debts. Paying the interest and debt must therefore require ongoing, additional and larger loans from the banks. The result is an exponentially increasing system which must collapse when the imbalances between currency and debt becomes too large, with the corresponding transfer of the ownership of real assets to the owners of the debt; the private banks. Through the creation and extinguishment of debt money, real assets are effectively "harvested" by the private banks and then sold to those with the money to buy the foreclosed assets.

This "boomerang" effect in the creation and extinguishment of debt money can also create a "boom-bust" cycle in the broader economy as debt money is created (thereby increasing the money supply) and subsequently destroyed (decreasing the money supply) when an inflated price "bubble" bursts, thereby resulting in a collapse in prices and a drying up of liquidity in that market, allowing the banks to foreclose on distressed assets and recycle these assets into the market at lower "fire sale" prices.

See also

Finance
Holiday Magic
HYIP
Investment
List of finance topics
Pyramid scheme
Lottery
Get-rich-quick schemes
Matrix scheme
Reed Slatkin

References External links

US Securities and Exchange Commission background information
Ponzi Schemes, by Bill E. Branscum, a financial crimes investigator.
Ponzi and HYIP Scam Prevention

"Ponzi" Schemes
Ponzi" Schemes. Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp ...

Ponzi scheme - Wikipedia, the free encyclopedia
A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns ("profits") to investors out of the money paid in by subsequent ...

Charles Ponzi - Wikipedia, the free encyclopedia
Charles Ponzi (March 3, 1882 – January 18, 1949) was an Italian immigrant to the United States who became one of the greatest swindlers in American history.

Ponzi scheme
Ponzi scheme. A Ponzi scheme is an investment scam that appears to be actually paying high returns by paying the supposed returns out of victims' own capital.

The Ponzi Scheme
Charles Ponzi promised to double your money in just 90 days. Many people did get their money. Read this story to find out how.

Ponzi scheme financial definition of Ponzi scheme. Ponzi scheme ...
Ponzi Scheme. A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates return by acquiring new investors.

Ponzi Schemes
Ponzi Schemes Named for Charles K. Ponzi, a small-time hustler who hatched a big-time fraud when he claimed astounding return rates on investments within 45 days.

Blogrush isn’t a Pyramid Scheme it’s a Ponzi Scheme
The last couple of days the SEO blogosphere has gone a bit Blogrush crazy, while some people seem to be ...

Ponzi Scheme - Safe From Scams (UK)
The Ponzi scheme has been around a long time, but it's still working. We show you how to avoid being a victim

Ponzi Scheme
Ponzi Scheme - Definition of Ponzi Scheme on Investopedia - A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns ...