Op-Ed ¦ April 14, 1999
Carl Ponzi Returns: The Privatization of Social SecurityHarkens Back to an Old Scheme

By David Langer

While reading in the December Smithsonian about Carlos Ponzi, the man who invented the ''Ponzi scheme'' back in 1920, it occurred to me that those who wish to privatize Social Security might be operating in much the same manner as Ponzi did. While the parallel isn't 100%, there are key similarities that should give pause to all.

The Ponzi scheme has wide appeal because it is sold as a way to become rich with little effort. The idea of sizable gains can be irresistible to even sophisticated investors. The scheme, of course, omits critical details. In Ponzi's case, his claim that the investment he would make with the money would provide outlandish yields to investors was so persuasive that he made a fortune in a short time. His upending came when doubts about the viability of such high yields began to surface, but he had a grand time spending his spectacular gains till then.

The siren song of the privatizers has alluring claims, too: average families can expect to retire with $1 million or more, and low-income families with at least $500,000; they can ''choose a privately invested system structured for average, unsophisticated investors . . .'' Workers will benefit from the economic growth that can be expected because of the great sums that will pour into the private market, with more new jobs and expanded opportunity.

(Look at Chile's privatized program, say the privatizers. While Chilean workers earn little, they can expect to have more savings than the average American worker.)

Privatization also will solve Social Security's financial problem and give workers more control of their money. Moreover, they declare, Social Security is a Ponzi scheme. As with the Ponzi scheme, there is much that is omitted from this sales pitch. There is no mention of the self-interest of the privatizers: the enrichment of the privatizers more than Ponzi imagined.

As with the Ponzi scheme, it will be necessary for new investors and new money to keep coming in forever to prop up past gains and ensure future capital gains; otherwise, the system collapses. The expenses will be far greater than under Social Security. As stock prices rise, the financial institutions will benefit from increased merger and acquisition activity, which will cause many jobs to be lost. The excessive amount of capital available will cause yields to drop and lead to greater investment risk taking and probable economic collapse (e.g., Southeast Asia).

Privatization differs from a Ponzi scheme in that at least initially there might be some real value, so long as there are above-average gains in corporate income. As stock prices continue to rise beyond a reasonable valuation, however, buyers of stocks need to beware. Another difference is that some of the spokesmen for privatization are trusted names from the top echelon of the financial world. Thus, they appear to the public to be more believable when giving their public testimony on behalf of privatization, and thus have a quasi-fiduciary responsibility to provide complete information, that is, the risks and the opportunities of privatization, just as they do for their regular clients.

- David Langer, a consulting actuary and president of David Langer Co., Inc.
New York

Ponzi Rebuttal ¦ Letter by Milton Evrati, Pensions and Investments, August 9, 1999

Privatization and Ponzi ¦ Letter by David Langer, Pensions and Investments, August 23, 1999