How can you tell a Ponzi scheme from a legitimate MLM? The hallmark of a Ponzi scheme is that the people who start them make money, not by a legitimate investment or business, but primarily by getting new people to pay fees to join the scheme. There often are little or no real products or services being sold. The scheme looks legitimate, but usually promises much higher-than-average returns. Often, the early participants will get these returns, but it comes from the fees paid by the later entrants. Eventually, these schemes fall apart because it isn't possible to keep recruiting enough new people to keep it going. The rule of thumb is, "If it sounds too good to be true -- it probably is." Here are six questions to ask anyone who asks you to join an MLM.
Ponzi schemes are named for Charles Ponzi, who lured thousands of investors in New England in the 1920s. He promised 40% returns in 90 days for investing in a business which bought and sold international postage stamps. He received $1 million during one three-hour period. He paid off a few early investors, to make his scheme look legitimate, but really he had only bought $30 worth of the international mail coupons. (Source: SEC, Ponzi Scheme, Pyramid Scheme)
Some people say that Social Security is a Ponzi scheme. That's because workes are paying into the Social Security Trust fund now. Despite the name, the funds aren't being held for them in a trust. Instead, the funds are being used to pay out benefits to other retirees now. Where will the funds come from when the current workers are ready to retire? New workers.
People call it a Ponzi scheme because there won't be enough workers in the future to pay the benefits for all the Baby Boomers who will be retiring. The benefits will have to come out of the general fund, creating a budget deficit.
