Pensions Pyramid scheme

toomsie

Not sure how seeing pension as a Ponzi is a conspiracy. Perhaps you have experience with conspiracy theorists and they primarily talk about pensions & savings conspiracy as well as the regular conspiracy such as did man actually land on the moon, which don't interest me.

To understand pensions & savings I need to understand the risks involved, so I can make a logical choice. The withdraw of national-savings-certificates makes saving less of a nobrainer. There is no longer a straightforward way save and hedge against inflation. This will no doubt force me to try to understand the science and possibly the theorists of inflation. Knowledge that previously I didn't need to concern myself about.

I am still do not know what an average sensible young person is doing regarding saving for the future.

grey_gym_sock

ok, let me try answerting the ponzi idea properly:

a ponzi scheme is 1 where the early members get a high rate of return, only because the number of new members is increasing rapidly, and their contributions are used to pay out to earlier members. to keep this going, the number of new members has to keep rising geometrically - i.e. if it starts by doubling every month, it has to keep doubling every month - and it is therefore certain to break down at some point. when this happens, the number of new members will not just fall slightly, it will reduce to almost none at all, and members who joined too late will get virtually nothing back for what they put in.

this bears no resemblance to the state pension.

the basic idea of paying current pensions from current tax receipts, so nothing is saved now to pay the pensions of current earners, would be perfectly sustainable if the relative sizes of the working population and the retired population remained the same. due to increasing life expectancy, the ratio of workers to pensioners is reducing, so there is some imbalance which needs to be made up for. but it is being made up for.

the first big move was back in the 1980s, when mrs thatcher cut the link between the state pension and earnings, so the state pension was only increased by inflation each year, not by average earnings.

the other obvious move is increasing the age at which the state pension starts being paid, first for women (to bring it up from 60 to 65, the same as for men), then for everybody (they've talked about 67 or 68, but it will then go higher).

there have also been lots of other rule changes designed to reduce the cost of paying pensions, especially to do with SERPS/S2P.

unlike the state pension, ponzi schemes do not have the option of scaling back the amounts they pay out in order to make themselves more sustainable.

also, there is the possibility of raising NI/taxes to help pay for the state pension.

in addition, the state pension is totally unlike a ponzi scheme in that, if ppl don't think they're going to get enough back for the contributions, so they'd like to refuse to join the scheme (which is what triggers the collapse of a ponzi scheme - new members drying up), they can't, because NI contributions are a tax, so they have to join whether or not they want to.

finally, NI contributions do not go into a "NI fund", which is then used to pay state pension and other related benefits. there is no NI fund. NI contributions go into the overall pool of public finances; and pensions and other benefits come out of the overall pool of public finances. so any taxes can be used to pay state pension. and the sustainability of the state pension is the same issue as the broader sustainability of UK public finances. which, despite the current government talking up how bad it is (for their political ends), is quite difficult but not going to completely fall apart, mainly because the UK has its own currency.

jamesd

The general definition at wikipedia covers it well enough "A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation".

It's not required that a Ponzi scheme have a high rate of return. The Madoff scheme didn't, but attracted people in part because of its consistency of returns. The state pensions attract people in part by assurances that they will get a payout of some sort, and through the compulsion of law.

Ponzi scheme can adjust the amount paid out or paid in. One type is one that promises a high income and pays it for a while, then resets people's investment value back to zero or to some lower value on which to base their future payments. It's an approach similar to the way the state pensions are being changed for employees under the proposed changes.

The state pension system and changes to it do partly fit the profile of a Ponzi scheme, except for the illegality aspect:

1. The number paying in is decreasing but the amounts they are paying in are increasing and their proposed benefits are decreasing.
2. The number taking out is increasing.
3. There is a subsidy from another scheme that pays the difference between the income and expenditure.

The combination of increase payments in and decreased accrued rights on the way out for current payers is part of how the scheme is to be kept going.

The people taking money out at the moment and over the next few years are those roughly called the boomer generation, who will end up extracting more than they paid in, overall. So effectively they are the ones behind the scam, voting more money for them to be paid for later by others. Others taking benefits out of the scheme are politicians, seeking votes and power or wealth for themselves and their associates.

This particular scheme probably won't fail. The pay in and payout rates will be adjusted to keep it going. The losers are those who pay in more than they can take out, the winners the rest and the politicians using it to buy votes.

But of course it can't really be a Ponzi scheme because it's not illegal. Nor is it illegal for politicians to provide benefits to themselves or voters that will be paid for by later generations or others (by defaulting on government debt, say).

CLAPTON

jamesd wrote: »

The people taking money out at the moment and over the next few years are those roughly called the boomer generation, who will end up extracting more than they paid in, overall. So effectively they are the ones behind the scam, voting more money for them to be paid for later by others. Others taking benefits out of the scheme are politicians, seeking votes and power or wealth for themselves and their associates.

This particular scheme probably won't fail. The pay in and payout rates will be adjusted to keep it going. The losers are those who pay in more than they can take out, the winners the rest and the politicians using it to buy votes.

But of course it can't really be a Ponzi scheme because it's not illegal. Nor is it illegal for politicians to provide benefits to themselves or voters that will be paid for by later generations or others (by defaulting on government debt, say).

The 'boomer generation' are aged about 47/8 to 67/8.
The majority of state pensioner are therefore people older than that. (the male state pension age is 65 currently while the female one is rising from 60)
i.e. people who fought in the WW2 and those who were children then.

In any taxation situation there are winners (who get more out that they put in) and losers (who pay in more than they get out).

It's also true for the NHS ; some people use it a lot and others don't; those that use it a lot can be considered winners, those that use it a little can be considered losers.




Who can say what the younger generation will take out of the state system; without knowing the future none can know.

However, none of this has anything to do with ponzi systems.

grey_gym_sock

the simple and correct answer is that the state pension is not a ponzi scheme.

there are ways in which it is like 1. there are ways in which a raven is like a writing desk. that doesn't mean it is 1.

JoeCrystal

CLAPTON wrote: »

It's also true for the NHS ; some people use it a lot and others don't; those that use it a lot can be considered winners, those that use it a little can be considered losers.

But seriously, if you have to use NHS because of poor health then they are not really a winner.

toomsie

Thanks for the information.

xylophone

there is no NI fund.

http://en.wikipedia.org/wiki/National_Insurance_Fund

grey_gym_sock

xylophone wrote: »

http://en.wikipedia.org/wiki/National_Insurance_Fund

hmmm, perhaps i should have said:

the NI fund is just an accounting convention. the division between it and other public finances is purely a matter of convention.

imagine a world just like this 1, but in which the NI fund didn't exist at all. you wouldn't notice any difference.