Four Years in Prison for Running a Social Security-Like Ponzi Scheme

Charles-PonziThis particular Ponzi scheme hit close to home for me because I knew Robert personally.
When I found out about it, I couldn’t believe this person I’d spent time with was capable of this criminal act.
But as sobering as that was, it pales in comparison to another Ponzi scheme most of us have been suckered into…

Submitted by Henry Bonner, Sprott’s Thoughts:

Dear Reader,

Our Canadian neighbors are one of the friendliest countries for the natural resource sector.

But Canada is also more advanced in other realms, like Social Security.

Today’s article originally appeared in the Lifetime Income Report, by Zachary Scheidt.

The Canadian system seems to work so much better that US residents are joining their program, as Mr. Scheidt explains in the video presentation below.

Canada PPflags

Good investing,

Henry Bonner

Four Years in Prison for Running a Social Security-Like Ponzi Scheme – Zachary Scheidt

On Jan. 31, 2011, Robert Duncan was sentenced to four years in prison and ordered to pay a restitution of $3,839,751.

Why? For basically doing what the government does every day, as you’ll see…

I knew Robert personally. We had lunch together at the Capital City Club in Atlanta, where he was a member. Robert came into our office several times to pitch his hedge fund idea to Bill, my boss and mentor.

Bill ended up investing more than a million dollars into Robert’s fund, believing the money would be invested in a low-risk strategy with reliable returns. It was the single worst investment Bill ever made…

A Classic Criminal Ponzi Scheme

Something went wrong with Robert’s investment strategy. From what the investigators could determine, Robert took a small loss one month but was too embarrassed to report the loss to his investors. So he fudged the monthly figures and promised himself to make up the difference the next month.

But that didn’t happen. Instead, Robert lost more money and had to tell a bigger lie the following month.

When one investor decided to pull a small amount of cash out of the fund, Robert used contributions from a new investor to make the payment.

On paper, Robert’s fund was profitable. Investors were happy with their returns. And whenever someone wanted to withdraw money from their account, the funds were available.

It wasn’t until Bill decided to pull his million-dollar investment out that things started going south. At first, Robert claimed the funds were invested in illiquid stocks that couldn’t be sold. But that didn’t make sense given the strategy Robert said he’d use.

Bill’s million-dollar withdrawal was the tipping point that finally exposed Robert’s Ponzi scheme. There simply wasn’t enough money coming in to the fund to pay out the investor (Bill) pulling money out of the fund.

Robert served his time in prison, but it’s unlikely he’ll ever be able to repay investors the $3,839,751 he owes them. The money simply isn’t there, and Robert doesn’t have access to that kind of cash anymore.

This particular Ponzi scheme hit close to home for me because, like I said, I knew Robert personally. When I found out about it, I couldn’t believe this person I’d spent time with was capable of this criminal act.

But as sobering as that was, it pales in comparison to another Ponzi scheme most of us have been suckered into…

A “Socially” Acceptable Ponzi Scheme

The American Social Security system is a Ponzi scheme putting Robert Duncan’s to shame.

This year, Americans are being taxed at 12.4% of their income to fund Social Security. But instead of going into a personal account, these taxes are used to pay benefits to other citizens drawing Social Security benefits today.

Unfortunately, the payments streaming into the program don’t cover the cash being paid out of it. In fact, the Social Security fund has been shrinking in size since it began running a cash deficit in 2010.

Sound familiar? That’s the exact scenario Robert Duncan found himself in when his investors started pulling money out of his fund.

Analysts in charge of the Social Security fund have admitted the cash will run out in 2033. But a new study from researchers at Harvard and Dartmouth suggest these figures may be too optimistic. They say Social Security will run out of money in 2029, four years earlier.

I find it very interesting (and quite ironic) that Robert Duncan went to jail for four years for his Ponzi scheme while the U.S. government operates a very similar program — which is mandatory for you to participate in — and nobody in the government’s going to jail.

Canada Has Found a Better Way

In contrast, the Canada Pension Plan is light-years ahead of the U.S. Social Security program.

Canada is investing its Pension Plan capital into the free market and actually growing the fund. That’s in stark contrast to the steadily declining balance in the U.S. Social Security fund.

See, US Social Security takes money from workers and “invests” it in Treasury securities. Since Treasury securities are essentially government IOUs, that means the government is simply borrowing our Social Security money.

And returns on Treasury securities are pathetic. The 30-year Treasury bond currently yields 3.05%, while the 10-year bond yields 2.27%. With returns like these, it’s no wonder Social Security is going bankrupt.

But the Canada Pension Plan has an entirely different approach.

In the 1990s, Canada hired a team of investors to take the money in the Pension Plan and invest it in growing assets around the world. Canada expects to actually grow its reserves year after year by using the power of a free market.

The chart below shows the projected value of the Canada Pension Plan over the next 25 years: 1

Screen Shot 2015-06-07 At 10.36.44 AM

That’s the exact opposite trajectory of the U.S. Social Security fund, which will be depleted by 2033.|

So how could Canada set up a Pension Plan that’s actually growing while the U.S. fund is continually shrinking? The answer has everything to do with what the two programs invest in.

Take a look at the table below. It shows the long-term investment returns for different investment programs (including returns for Social Security “investments” over the course of your career).

Screen Shot 2015-06-07 At 10.43.31 AM

Notice that investments in free markets — even including conservative allocations to bond markets — result in much higher returns than Social Security is returning.

See, investing in a free market gives us the ability to benefit from competition… from creativity… from motivated entrepreneurs growing their businesses…and from economic growth around the world.

That’s exactly what the Canada Pension Plan is tapping into with its free market investment program. This free market investment program spells the difference between the U.S. Social Security Ponzi scheme and the robust growth program in Canada.

To growing your income!

ZScheidt

Zach Scheidt
Editor, Lifetime Income Report

P.S.: You can learn more about how the Canadian Pension Plan may be open to US residents here.

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1 http://www.cppib.com/en/our-performance/cpp-sustainability.html

 

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