A lot of people in the financial industry are trying to figure out the individual costs to them of the $50 billion Bernard Madoff hedge fund fraud. The allegation is that Mr Madoff operated a “Ponzi scheme” scam wherby hedge fund investors were paid money, not from the performance of the funds, but by money paid in by new clients. As soon as the inflows of new clients dried up – partly due to the credit crunch – the scam came to light.
As a result of this case, no doubt those who have been calling for much tighter regulation of financial markets will have yet another stick with which to hit the system, never mind that fraud is and should be prosecuted under the normal law of the land anyway. But what interests me, however, is that systems such as Social Security in the US or public sector pensions in the UK have been funded under what is, essentially, a Ponzi system, whereby retirees depend on future generations continuing to fund a system that is rapidly becoming broke. I do not see any stories about politicians, in different countries and different parties, facing indictment for scamming the electorate. Maybe, however, the ultimate problem is that in a Welfare state, the scam artists are us. We are all in on the heist.
At some point, one of two things is going to happen.
1) A government is elected that actually cuts both existing and future pension payouts and raises the retirement age by at least a decade.
2) This doesn’t happen, and the growing ranks of pension-receiving former state workers constantly re-elect those who won’t touch their pensions, leading to inevitable bankrupcy of the country, increased taxation on the younger workers like myself, and an ever-increasing exodus of productive youth from this country. The over-taxed get sick of it, overthrow the rulers by force and put every pension-receiver in cheap, low-dignity accomodation. Depending on the anger and the character of those in charge, mass euthanasia is also possible.
The simple fact is that there is no way all those promised pensions can be paid. The recipients will either accept a reduction voluntarily soon, or lose almost all of it later (one way or another). Is the second an alarmist, extreme scenario? Maybe. One way or another, if you’re in state employment now and planning to retire in over maybe 15 years, you’re not going to get what you’ve been promised now.
Those who work have to support those who do not work. The wealth can be transferred either through the state or privately via dividends and interest possibly via pension funds, etc.
There are differences between the two arrangements. The justice of the two systems can be debated. Libertarians will clearly argue that state funded schemes are unjust whereas private schemes are just. The effect on productivity and economic growth can be debated. Again, libertarians will argue that reducing taxation and state intervention will speed growth.
But in both schemes young workers will have to support old retirees.
It is not a ‘simple fact’ that retirement cannot be supported. History suggests that with economic growth smaller numbers of workers have been able to support larger numbers of non-workers. Hence the creation of teenage education and leisure which now stretches into the early twenties and retirement itself. Not to mention a shorter working week for workers themselves.
There is nothing at all ‘simple’ about this increase in economic productivity.
The idea that pensions are unaffordable is a dismal, pathetic malthusian lie that takes demography as destiny. If it were true it would make no difference whether we tried to arrange pensions publicly or privately.
I have a slightly different and older take on the matching of standards affecting the issue of pensions for UK government employees.
Running a defined benefits pension scheme is a financial business, like many others. Continuously (effectively at least every year), the value of investments and future obligations and earnings should be calculated (on a going concern basis). If there is a shortfall, the employer (here government) must put in additional funds, sufficient to match its contractual obligations.
Not totally unreasonably, and as would be required of a non-government employer, should there be some sudden unpredicted downturn in the value of investments, it might be acceptable for the entry of additional funds to be spread over a very modest number of years, with the residual and shrinking deficit being recorded in the balance sheet (and other accounts) of the employer as a debt or debts, of specified and possibly different durations.
Now comes the interesting bit, which differentiates government pension schemes from those of non-government organisations.
Most governments continuously run a national debt: normally properly recorded in their accounts, and judged, as to its soundness, particularly as a proportion of GDP. So why not invest (part or all of) the government pension fund in government stock? Is that not in fact what the UK Government has been doing?
Well, there are at least two problems with this:
(i) Proper accounting of this has, at least as far as I understand it, not been done. The pensions fund managers of government pensions schemes do not record massive investment in government stock. And the Government does not record this massive investment as part of government borrowing, ie part of the national debt.
(ii) The example, well known to us, of the fraudster Robert Maxwell, whose business empire collapsed due to the fraudulent transactions he had committed to support it, including illegal use of pension funds.
Now, it seems to me that, at least since the enquiry following Maxwell’s death in 1991, Chancellors of the Exchequer, First Lords of the Treasury, other government ministers, Treasury officials, the National Audit Office, the House of Commons Public Accounts Committee and the whole of the House of Commons have variously done wrong in the preparation, auditing and approval of government accounts.
So my take on it all is not of a Ponzi scheme (where the victims should really be viewed as limited to new recruits to pension schemes for government employees), but the simpler one of false accounting.
Best regards
Pensions in general are not unaffordable, but goverment ones are increasingly getting to be. The expenditure required to pay them is taking an ever-increasing budget percentage everywhere you look. More people on the payroll, more promises, less people of working age in proportion to non-working age, more and more people getting benefits in way or another. You have cities in the US now where over half the budget is spent paying existing pensions, and i expect the same is or will be happening here.
JK,
It is perfectly true that all there ever is at any point along the timeline is “Gross Output X” and who has claim to a portion of it. It is wrong to see a moral equivalence between a Statist system and a Free Market as far as how the allocation is done. I’m not saying that’s what you’ve expressed, I just didn’t see you specifically point it out.
Under our (at least here in the US) current Public structure of Social Security and Medicare we have a $54 Trillion accrual basis debt and that is before any new unfunded entitlements that roll off the assembly line. Most private (though publicly “Insured”) defined benefit plans are vastly underfunded. Most State (e.g. Wisconsin, Illinois) Employee Retirement Funds were vastly underfunded even before the Market went south, and so now are majorly so. So under Defined Benefit arrangements, infinitely more promises can be made to specific people (government employees, Union sheltered employees, social “victims”, etc) than can actually be harvested from the future production. Everyone else (that is everyone else in the productive sector) by and large have their future tied up with defined contribution systems.
So the system of providing for those who retire and/or otherwise unproductive is not apples to apples. Under one system, the free market system, it would be more of a defined CONTRIBUTION system whereby there are no guarantees and the individual knows their savings for retirement are at risk, but under a Statist system it is about a defined BENEFIT system whereby the individual is led to believe that their future outflow is fixed, even regardless of future conditions. One system relies on the free flow of funds, the other the brute force of the State and presumably working on behalf of certain people over others, which is what the State does in a nutshell (of course it moves from being just to unjust when it moves from protecting life and property to offensively transferring from Peter to Paul).
So, yes, the Gross Output of a nation at any point in time, in an advanced economy, supports those who labor and those who don’t. The difference, of course, at the root philosophy is whether those who are supported were themselves productive and decided to forgo current consumption and invested instead and are deserving of their equity (though at risk) or if people get a slice of future production even though they’ve been nothing more than a parasite their whole lives, producing little or nothing, if not costing society more than they produced. In other words, is it all based on free markets or a double blind system of theft and coercion. That’s the primary difference, not necessarily what but how, and if it is just. Of course the more any system relies on brute force and special interests fractured from labor, the incentive people have to be productive and your overall National Gross Output shrinks making less for everybody. The smoke and mirror games played thus far by the US government is conning people into thinking they were working for themselves when they actually were de facto working for the State. An illusion that can’t be perpetrated any longer.
The only question now is where do we go from here and who gets less than they thought they were under the smoke and mirror system. One can only hope that social order will be maintained, but when you’re talking $54 TRILLION it’s less than guaranteed it will. The simplest way to look at it is social disorder arrives when economic allocations are insanely out of sync. I think five years GDP of the US out of sync rises to that level.
So how it sits in the UK I don’t know, but I operate under the assumption that while the US is in bad shape, most European countries are in worse shape heading off into the next few decades. I’ve always assumed that that is why the European Union was created, to create economies of scale (like that would have accomplished anything) heading into the endgame of your own various Ponzi Schemes. I think the whole thing collapses once the Peters and the Pauls are defined.
I take issue with JK’s initial premise: “Those who work have to support those who do not work.” In a rational world those who do not work[1] would be supported by their own previous labors, i.e., their savings (including retirement accounts).
Pension plans (private or governmental) could qualify as “savings” if they are properly funded. That eliminates most governmental plans, which aren’t funded at all. It also eliminates defined benefit plans, which history has shown are unsustainable and only loosely related to previous labors (since the benefits are generally calculated on an average of the last three years’ wages). Only defined contribution plans make any economic sense, which is why almost all private employers have adopted them (and why governmental employers have not, given their propensity for economic irrationality).
The true actuarial debt of the US government is so huge, and so unsustainable, that I cannot see any solution short of default. The government may tinker with Social Security and other federal employee retirement plans (increasing the taxes which support them, limiting benefit increases, even pushing back the “normal” retirement age), but in the end actual default on that obligation is the last thing it will do. It will repudiate foreign debt first.
[1] I’m limiting this discussion to retirees, and excluding children and the infirm, which is a different discussion entirely and off-topic from the principal point of this thread.
Social Security is indeed a ponzi scheme –
It depends ENTIRELY on a growing number of ‘workers’ to sustain the ‘non-workers’. There is no money ‘growth’ as in investments. Money is simply taken from you and given to someone else.
Over time this pyramid had started to become inverted.
Originally, if my memory serves correctly, there were approximately 7 ‘workers’ for every ‘non-worker’. This is now down to about 3 to 1 and if it continues, will reach 1 to 1 and eventually, with an aging population, well, you see where this is going.
One possible solution, which has already started, is to continue raising the ‘retirement’ age, until, there simply are very few people who live long enough to collect. Of course, this has some ‘issues’ – basically people not wanting to ‘contribute’ to something that they will receive no benefit from ( sounds like most taxes, doesn’t it !! ) but that can be remedied at the point of a gun is necessary !!
I am amazed at the number of people who have NO CLUE to the fact that their employer must ‘contribute’ a matching amount to Social Security.
The thing was a fraud from the beginning and the creators of it KNEW IT. They also knew they would be dead LONG before it fell apart. But, in the mean time, and this was the impetus to create Social Security, it gave and has given politicians a HUGE bucket of money from which to buy votes in the form of creating all sorts of ‘qualified people’ who were/are entitled to money from the bucket ( this is the REAL reason it is in such sad shape – people collecting who NEVER put anything in or very little ) – I know this first hand though I had nothing to do with it nor any control over it.
Contribute the same amount of money to private investments, instead of having it taken from you for Social Security, over your working career and you can
sit on a beach, that you OWN, in your retirement and tell the gov’t to pound sand. But then that would be selfish and wrong – right ?? !!!
The one political party that created Social Security and has kept it alive is the same party that has told people for decades that they would be taken care of and retirement was nothing they should worry about. I leave it to the reader to determine which party that is.
The whole thing stinks but I must depend on it because I really was NEVER given a choice of where I wanted my money to go.
Another item in the ‘THANK YOU VERY MUCH FDR’ column
I wasn’t trying to make a complicated point. Maybe ‘support’ was the wrong word. If everyone in the world decided at once to retire on their savings they would soon find nothing to buy in the shops, even if those savings were honestly earned.
“The justice of the two systems can be debated. Libertarians will clearly argue that state funded schemes are unjust whereas private schemes are just.”
That is just silly. Private pension plans and/or individual retirement accounts are founded upon actual savings accounts. Public pensions are based on taxes (sometimes, though increasingly rarely with actual money to back it up).
You are comparing essentially bank accounts (private) with taxes (public) in degrees of “justice.”
Both taxes and money are amoral. Having $5 in the bank or $5 million in the bank is morally the same. Taxing 20%, 22% or 50% is morally the same. It is the utter corruption and perniciousness of the higher tax rates we see in the real world together with the greater authority of the state that creates problems, not the percentage.
As for the Malthusian evasion, that only goes so far.
The very objection to Malthus hinges on the vibrance of business, technology, and opportunity to overcome the limited carrying capacity of land. It does not apply to manmade famines, which are the rule, not the exception.
The Ethiopian famines (and many others in Africa), the genocide in the Ukraine, Mao’s terrors, among many others provide proof that mankind’s ingenuity may be able to overcome nature indefinitely but is no match for his fellow’s superior stupidity.
One possible solution, which has already started, is to continue raising the ‘retirement’ age, until, there simply are very few people who live long enough to collect.
But that was the case when Social Security was first instituted. Average life expectancy was 61, and the system didn’t pay out until you were 62. The numbers on that kind of system would look good to any actuary. But what is the average US life expectancy now? 75? Even without an easing of population growth the increase in the number of people who reach advanced age would have meant trouble for the system.
I’m all for a defined contribution system, but where do the contributions go? Into equities? We’re talking about such big numbers it’s hard to envision a scheme that didn’t result in huge distortions in the market. Gold?
The amount my parents paid into social security compared to the amount that they get out of it now is preposterous. And they and many retirees like them feel like nothing they get is enough and that they deserve more. They have ridden the inflation gravy train for much of their lives….you know, buy a house for 6K in the 50’s, and then sell/buy/sell etc up the ladder.
They like to complain about the sense of entitlement that young people today have, but hell, maybe these kids got it from some of their grandparents. I know that there is no way I will get from the government, %-wise, what has been garnished from salaries at the point of a gun, and used to finance SS for retirees.
And as Mart says, the retirement age is going to have to go up with the ‘greying’ of America.
JK is wrong in principle….those who work should not be forced to pay for those who do not work. This principle is the downfall of free societies.
There is another option: During Truman’s administration there was a Social Security Death Benefit added to the entitlement list. The average funeral in the US costs $5000. The Death Benefit pays less than $300.
If the benefits are fixed, inflation will naturally devour the fiscal disaster (creating other disasters, but life, ’tis the suck as Shakespeare said).
I agree that the US debt can’t be paid. And that applies to both the federal level and the tens of thousands of smaller agencies.
For those unfamiliar with the US, we have not only the 50 states but thousands of county and city governments plus school districts, water districts, and many other semi-governmental entities.
And few of them have properly funded their promises of pensions. Many have also promised to provide health insurance. And not a few also promise cost-of-living adjustments.
The basic amount of the pensions might be bearable, at least it is fixed and known. But open-ended health insurance and cost-of-living increases certainly are not.
Two premises must change. The first is that payouts can never decrease no matter what the fund’s investments return. When the fund loses money why is the public obligated to replace it?
The second is the ability of elected officials to make promises which forever bind taxpayers. I have no objection to paying off a retiring person.
But once the payoff is done and the monies are taken by the retiree or put into an annuity or IRA the matter should be at an end. The agency and the public should have no further obligation.
Social Security is a separate disaster about to happen. It is different in that payouts are transfers from those still working and are readily identified. SS won’t remain solvent but it differs in concept and execution from the public pensions funds.
The public pension funds lack the explicit transfers of Ponzi schemes; instead the funds pretend to be a reasonable response to political promises.
In reality politically self-serving guesses were, are still being, made to underfund. And failure was as certain as gravity when a serious economic downturn came along.
“If everyone in the world decided at once to retire on their savings they would soon find nothing to buy in the shops, even if those savings were honestly earned.”
Well, that’s a ridiculous premise. One would have to count among that “everyone in the world” gag young people who have nothing to retire on and who would rather work, anyway.
I was about to remark that pensions are paid like a ponzi scheme but the author got here before me
Having said that I intend to try and get some other kind of income going before I retire on a poxy NHS pension
Its time to abolish a lot of stuff
State workers do more in their “working” years to harm the economy than they do when they retire and do nothing. Luckily they don’t do much more when they’re working than when they retire. Their contributions to the various Ponzi schemes are simply stolen from real producers.
I wouldn’t mind opting completely out of Social Security and Medicare, in exchange for not cannibalizing future generations as current retirees have been doing, but from what I’ve read, government-employee pension obligations are the main short-term financial tsunami. At least local and state governments can declare bankruptcy. It’s not clear to me which of the US’s obligations are debts and therefore Constitutionally have to get paid, or are mere promises on which the US can renege; I suspect that most pensions and SS/Medicare are mere promises (unless a corrupt judge changes the game and rules otherwise).
Some of you are missing JKs point. He’s not saying that people have to work to provide for the shiftless but that the net consumption of an economy must match its production.
Take, for example, a population of 100 people. Say 50 of them manage to save enough to fund retirement. Now, 50 people must produce enough for 100. It matters not whether this funding is via state or private sources.
If the funding is private, quite possibly the value of the devices funding the pensions contracts and people may or may not to be able to stay retired (Could we be seeing this now?). If state funded, politicians will be unable to reduce the funding and, oh dear…
Anyway, JK’s point is that money is used to enable the exchange of goods and services, it is not the actual goods and services. Don’t lose sight of the basics. Bread comes from wheat, not a bank account.
tdh, the US Supreme Court has already ruled (several decades ago) that Social Security does not create any contractual rights in beneficiaries; the government is free to change its terms or reduce benefits as it chooses. But I very much doubt that they would. They might “tweak” it a bit prospectively, such as by extending the “normal” retirement age far in the future or by slowing the rate of increase in benefits, but I believe they would default on sovereign debt before reducing benefits to current recipients.