'Is the State Pension a Ponzi Scheme?' blog discussion

Former_MSE_Lawrence

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Is the State Pension a Ponzi Scheme?" Blog.

Click reply to discuss below.

bryanb

Yes it is - get in early!

beer_tins

Well as long as it remains mandatory, it's not really a problem! And it doesn't promise large returns like these schemes normally do.

It is true that you don't get your own invested money back though, it is paid to others. My contributions that I pay aren't put aside for me, they pay for pensioners now. The deal is that when I retire, the people paying in then will be funding my pension.

The baby boomers have had a sweet deal out of the state pension. While they were working, population was growing fast and people didn't live as long, meaning the proportion of pensioners and the required contribution per worker was small. Future generations will have to cover the shortfall as population and the proportion of pensioners level out .

RabbitMad

Surely the most famous Ponzi scheme is the scheme Ponzi himself started back in the 20's or 30's, rather than this upstart Madoff?

philandstuff

Interesting blog, but there are some points you've missed out on:

1. A Ponzi scheme is not just a glorified pyramid scheme; the key difference is that you don't pay out a lump sum, but rather just a dividend. If I enlisted you in a Madoff-style Ponzi scheme which consistently gave 5% returns, I could keep paying you for 20 years without needing to recruit anyone! Even if I'd snaffled 50% of your capital outlay, you could still wait 10 years before realising you'd been had. In a pyramid scheme, where I promise to give you back 105% (the full amount plus dividend) of your return a year from now, you'll discover the fraud very quickly unless I can find some bigger fools. Because you pay out dividends rather than the full amount, a Ponzi scheme can continue much longer than a pyramid scheme could, without requiring exponential growth in recruitment. [In fact, in many Ponzi schemes, the dividend is reinvested rather than paid out; this means the Ponzi scheme has no outgoings at all and can sustain itself until the investors actually ask for their money back.]

2. A Ponzi scheme becomes unsustainable only when the money coming out exceeds the money going in; the pool of investors does not have to keep increasing. As well as the incoming contributions from new members, there is the income from the investment of all the capital. If a so-called "Ponzi scheme" pays out 0.1%, it can easily sustain itself without needing to expand the pool of investors because the returns are so low -- but then it's not a Ponzi scheme, it's a high-street bank current account!

3. When a Ponzi scheme collapses, the investors lose out. If the state pension pot runs dry, the government will just top it up from other sources, such as printing money. The government cannot go bankrupt for as long as it controls the printing presses! Rather than the investors paying for it by getting a smaller pension pot, the whole country pays because of the inflation caused by the extra money flowing around.

It's an interesting comparison, and it's been made before (it's even on the wikipedia page here) but in the end, the state pension is something different.

JimmyTheWig

I think the difference is that here we are starting with such a large number of people paying in.

EdInvestor

Ponzi schemes usually get discovered when there is a loss of confidence and investors start demanding their capital back - as with the Madoff scandal.But paying NICs is a legal requirement so there is no way to cease contributions, and they do not accumulate into a pot of capital anyway, so there is nothing to withdraw.

sidsmum

NIC doesn't only fund the state pension, but also sickness benefit and jsa. I've done very well out of my contributions, lol.

I seem to recall that some companies/councils operated similar superannuation schemes in the past. I suppose if the number of pensioners was such that all the money didn't get used, the rest of it could have been put into a pensions trust fund. However, did this happen or did it get Maxwelled?

nej

I used to do Kleeneze and went to a couple of the meetings they run (before realising I wasn't cut-out for the whole recruiting side of things and just concentrating on doing the catalogues).

Anyway, part of their "Well it isn't a Ponzi" rhetoric was the exact example of the State Pension, so the comparison is not new.

EdInvestor

sidsmum wrote: »

I seem to recall that some companies/councils operated similar superannuation schemes in the past.

The local government pension scheme is funded - there is a pot of money which is invested. The civil service, NHS and teachers schemes are not funded, but pay as you go, like the state pension.There are numerous private sector funded pension schemes.

sdooley

There is a fundamental difference - Bernard Madoff didn't have a printing press!