CNBC's Santelli Schools NYT's Friedman in Ponzi Schemes and Social Security

The question of whether or not Social Security is a Ponzi scheme moved from Wednesday's Republican presidential debate to the set of CNBC Thursday.

In a heated debate, CNBC's Rick Santelli and New York Times columnist Tom Friedman argued the issue with them ending up calling each other "idiotic" (video follows with transcript and commentary):

RICK SANTELLI, CNBC: I was watching that debate last night, although it wasn't really a debate. It was more like a weird press conference. But I’d like to know does Mr. Friedman think Social Security is a Ponzi scheme?

TOM FRIEDMAN, NEW YORK TIMES: No, I don't think it’s a Ponzi scheme.

SANTELLI: Earlier in the show you said we're putting a burden on our kids that's unsustainable. What’s a definition of a Ponzi scheme?

FRIEDMAN: Yeah, I think it’s a program that’s made promises that it cannot keep in full and it needs to be fixed and reformed.

SANTELLI: Isn't that exactly what a Ponzi pyramid letter is?

FRIEDMAN: No, I don’t think it is. A Ponzi scheme is a criminal endeavor and I don’t think this is it.

SANTELLI: Forget the criminal side. You need more people to perpetuate a myth because if the people stop, the myth is known to all. That’s my definition of a Ponzi scheme. Let’s call it a chain letter, a pyramid scheme. Isn’t that by definition what Social Security is? Take the legalities and the fraud out.

STEVE LIESMAN, CNBC: Why is it a Ponzi scheme, Rick, if we’re paying as we go?

SANTELLI: I didn't hear an answer, Steve. I didn’t hear Mr. Friedman make an answer..

FRIEDMAN: We’re paying as we go. Ronald Reagan fixed it. Why can't we fix it?

SANTELLI: What does Ronald Reagan have to do with my question?

FRIEDMAN: What does your question have to do with reality?

MICHELLE CARUSO-CABRERA, CNBC: We brought it up because it came up last night. It’s going to be the biggest thing in the…

SANTELLI: Because if you can't decide that more people is the only thing that makes Social Security work we have a real issue because many people in government seem to like to read your work.

FRIEDMAN: Well, what makes Social Security work is fixing Social Security in terms of the population.

SANTELLI: I didn’t ask whether we should fix it or not. I asked if it's pyramid scheme.

FRIEDMAN: Your question is idiotic. That’s what you asked.

SANTELLI: Your answer is idiotic. I’m done, I feel good.

Who was being idiotic?

Well, since this issue - given that Santelli's position is similar to Republican presidential candidate Rick Perry's - is clearly going to be with us for a while, let's look at some of the facts.

According to the Securities and Exchange Commission:

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 speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three—hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons. Decades later, the Ponzi scheme continues to work on the "rob—Peter—to—pay—Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

Sound eerily familiar?

Much as in the original Ponzi scheme, Social Security also paid huge returns to its first investors who, whether intentionally or not, led Americans to believe the plan worked marvelously, thereby engendering the support of an exceedingly grateful nation.

The first American to ever receive a check from this new national savings plan was Ernest Ackerman, a streetcar motorman from Cleveland, Ohio, who retired exactly one day after the program went into effect.

For the five cents that was deducted from Ackerman's check the sole day he was a "participant" he received a lump-sum payment of 17 cents. That's a 240 percent return, which annualizes out to 87,600 percent!

Nice investing, Ernie.

In 1939, a series of changes were made to this new retirement system that included moving up the start of monthly payments by two years. As a result, the first monthly Social Security check went out on January 31, 1940, to Ida May Fuller, a retired legal secretary from Ludlow, Vermont.

This maiden disbursement was $22.54, which, according to Social Security Online, after cost of living increases and 35 years of receipts until her death in 1975 totaled a startling $22,888.92 in payments from a system to which Fuller contributed $24.75.

Please bear in mind that Ponzi only promised people a 40 percent return on their money; the first Social Security recipients received yields approaching 100,000 percent!

As people familiar with Bernie Madoff know, few participants in a Ponzi scheme ever achieve such spectacular returns, and the whole scam invariably implodes when the real investors have the nerve to ask for their money back.

When regulators finally shut Ponzi's operation down in 1920, they were only able to recover $1.593 million. Sadly, this was a small pittance compared to the $15 million he owed his 40,000 investors, not including the interest he had promised them.

This makes it quite logical that 75 years after our government implemented Social Security on a "pay as you go" basis - remarkably just fifteen years after Ponzi's scheme imploded - folks like Perry and Santelli who have paid into this program since they received their first pay checks are concerned that there won't be enough money available to fund their own retirements.

Irrespective of the protestations of folks like Friedman and most of his colleagues who seem able to attain positions of esteem in the media without possessing even the most rudimentary arithmetic acumen, these fears are warranted as are the comparisons of Social Security to a Ponzi scheme.

Yet now that the flaws in this equation have finally been exposed, the debate is unconscionably focused on the machinations of extending this scheme - in Friedman's terms, "fixing" it - rather than making radical changes to the entire program to remove it's Ponzi-like nature.

After all, as the best returns from this plan have already been realized by folks like Fuller and Ackerman - as well as millions of seniors in the past seventy years who received yields on their contributions that can't possibly be replicated - shouldn't the rest of us who can add one plus one without difficulty and have been paying for others to retire since we first started working be entitled to invest in a better mouse trap that doesn't put an undue burden on our children and grandchildren?

Such a question becomes even more appropriate considering the gags yet to be played on us if "fixes" folks like Friedman advocate are implemented.

This typically amounts to raising the the Social Security tax cap above its current $106,800 threshold. But no one wants to address whether that means such folks end up receiving more in their old age, for if they don't, this program has become a wealth distributor rather than a retirement plan which quite goes against what the Supreme Court found Constitutional prior to enactment.

Hypocritically, the more sensible solution of raising the age at which one can begin to receive benefits - this was 65 in 1935 when life expectancy was 57 versus today's 77! - is considered verboten by folks on the left who don't think people should have to work longer despite them living longer.

As a result, no matter how you slice it, their "solution" is to once again demand that people pay additional funds into this failing system above and beyond what was originally dictated by statute.

Isn't this despicably akin to regulators asking the folks who were defrauded by Ponzi to contribute more to his scheme in the hopes that this would avert insolvency and increase the likelihood that they'd eventually get their money back?

I quite imagine Friedman and his ilk saying "No."

(H/T I Hate The Media via iOwnTheWorld)