A Ponzi Scheme: Investments, Social Security, Healthcare

Andrew L. Pecora, MD

Editor-in-Chief Chief Innovations Officer, Professor, and Vice President of Cancer Services John Theurer Cancer Center at Hackensack University Medical Center

Charles Dickens created a character in his 1844 novel, The Life and Adventures of Martin Chuzzlewit, who took money fraudulently from unsuspecting investors after promising extraordinary returns. Years later, a real-life figure, Charles Ponzi (1920), did the same, redistributing the investors’ own money as a return on their investment without actually investing it and fueling the enterprise with funds from subsequent investors. The fraud continued until there were insufficient new investors to fund returns for existing investors. In addition to a long jail sentence, Ponzi received the inglorious honor of having the fraudulent investment scheme named after him. More recently, Bernard Madoff refined the Ponzi scheme to an art form, resulting in estimated losses to investors of $18 billion.

Eighteen billion dollars sure sounds like a lot of money until it is contrasted with the current $2.6 trillion at risk in the Social Security Trust Fund. Unlike a Ponzi scheme, here the money is invested, but at a rate of return of 4.6% (in 2010). This return is well below what the Social Security Board of Trustees project required to prevent the trust from exhausting by 2036. More staggering is the projection from the Trustees that an additional $6.5 trillion will be needed to pay all scheduled Social Security and disability benefits. Participation in Social Security is not optional, so Madoff’s scheme would appear that of a rank amateur in contrast. Presumably these facts, in part, prompted Texas Governor Rick Perry in a recent Republican debate to characterize Social Security as a “Ponzi scheme.” He was rightly criticized because unlike Madoff, the intent of Social Security is not to defraud investors (or in this case, taxpayers), but Perry is partly correct because we know that the program’s cost will soon exceed the current rate of return.

A significantly greater problem is the increasing cost of healthcare. By spending 17% of the gross domestic product on healthcare annually in the United States, even $6.5 trillion seems like a small sum. Here are a few incontrovertible facts: our population is growing and aging; people are living longer; and care is more complex and applied for longer periods, so it is more costly. Add to this equation some social expectations: Everyone has a right to healthcare, and people can freely participate in costly health behaviors (eg, smoking tobacco). Together, these factors do not hold great promise for reducing the cost of healthcare.

It is somewhat perplexing what our society finds acceptable to permit or to prohibit. We charge people more for automotive insurance if they have motor vehicle accidents or are at greater risk (eg, young drivers), but do not assess higher health insurance premiums for people who smoke tobacco, drink alcohol excessively, or do not have an ideal body weight. In contrast, we have no problem making it illegal for a 20-year-old to buy a bottle of beer, yet it is legal for him or her to vote in presidential elections, drive a car, marry and have children, and die in defense of our country.

Similar to a Ponzi scheme, the healthcare expenditures of the Centers for Medicare & Medicaid Services (CMS) will soon outpace the revenue needed to support it, despite the legal requirement to contribute to the fund. The math requires that we change the expectations of our citizens and begin to ration healthcare in one form or another, or dramatically change our behaviors and assume some level of responsibility as individuals for the cost of care. Otherwise, CMS and healthcare in general may become the greatest “Ponzi scheme” of all time.