Tuesday, 13 September 2011

Telling the truth

Republican Presidential candidate Rick Perry is in trouble. His misfortune began when he described the US pension system as a Ponzi scheme. This was something that nobody wanted to hear. There is now a long queue forming to attack Mr Perry, both from within his own party and from the Democrats.

George Orwell once said that "during times of universal deceit, telling the truth becomes a revolutionary act." If that inconvenient old Etonian were alive today, he would recognise the revolutionary candour of the Texan governor.

Pension systems in advanced economies are financially unsustainable. It doesn't matter whether you think Mr Perry would make a good or bad president. He told the truth about US Social Security.What he said also applied to European pension systems. The frightening thing is how people reacted to Mr. Perry's plain speaking.

The idea behind a Ponzi scheme is as old as time. A fraudster offers to pay investors an abnormally high return. Investors, blinded by greed, pay into the scheme. The fraudster returns these cash payments as interest payments back to the investor. So long as the fraudster can attract new investors the scam grows. However, when the the fraudster can no longer attract new investors the scheme collapses.

That pretty much describes modern pension systems. The government offers to pay its citizens a generous retirement income. Workers pay into a pension system on the understanding that they will receive generous future payments The system continues so long as there are sufficient workers today willing to pay into the scheme to pay current recipients.

Unfortunately, rapidly ageing populations make it a mathematical certainty that without a radical reduction in entitlements, pension systems in advanced countries will go bankrupt within 15 to 20 years. The ratio of workers to pensioners is now declining.  There are now too many recipients and not enough contributors. It will not be possible for the government to honour its future commitments.

That's pretty much how it Ponzi scheme works. But hey, I'm telling you nothing you don't already know. Anyone who ever looked down a British high street or into an Italian Piazza can see it happening. Let's face it, the streets aren't exactly bustling with young children or teenagers. So why the faux denial, and the outraged attacks on poor Mr Perry.

I have my answer, for what it is worth. Advanced economies are looking at a bleak future of decrepitude, and decline. It is too late to reverse this destiny. We have fallen into a demographic trap. There are no solutions, no escape routes, no fancy sophisticated answers from intellectuals. The world as we know it is going to disappear. In 20 years time, Europe will be one massive retirement home. Given the choice, between universal deceit and facing the future truthfully, the vast majority of us prefer the lie.


Anonymous said...

I thought that our government's solution to this problem was to flood the country with successive waves of vigorous young immigrants. "A look down any high street" etc.
However, as it is a Ponzi scheme, it must eventually collapse but the fall will be masked for as long as possible. A tax rise here, a smidgen of inflation there, another government bond issue .....

A David

Anonymous said...

If your comments relate to the UK as a 'hole' then you should acknowledge that some parts of northern UK are actually welcoming the fecund waves of incomers. There are plenty of them as Canada knows.

Jim said...

Its not technically a Ponzi scheme because a Ponzi scheme is mathematically guaranteed to fail - eventually to run out of people to get to enter at the bottom.

Pension schemes are Ponzi schemes but they are ones that are only open to the elderly and the beneficiaries die off over time, and the birthrate replaces them with new payers-in. With a stable rate of dying and a stable birthrate, a pension scheme can run forever.

We however have an ageing population and (prior to immigration) declining working population. The logical solution to that was reduced benefits for the pensioners in the future - ie increasing the retirement age, thus reducing the ratio back to a stable one.

We however have politicians who can't see past the next election, let alone 20 or 30 years. They have every incentive to lie, and promise things they know a) can't be delivered and b) won't affect them because they'll be long gone by that time.

Future pensioners are therefore screwed.

droog said...

In the USA contributions to Social Security are running a surplus. The SS Trust Fund has been receiving increased contributions from baby boomers in anticipation of the retirement of said boomers. The real problem in the USA is that the central government has been borrowing from the Trust Fund and as the baby boomer wave approaches they find themselves out of a source of cheap borrowed money plus the burden of having to pay into the Trust Fund.

So if Mr Perry or any "austerian" wants to dismantle the SS safety net I expect them to have the decency to pay back what they've taken. If the surplus isn't enough to allow a decent living to the last generation using SS then so be it. But if Perry is proposing to erase the central government's debt at the expense of those who have made contributions then we have yet another massive transfer of wealth from the low and middle classes into the government and other beneficiaries (i.e. Defence and Health Insurance costs). I wager Orwell would have seen through such a shameless plutocratic ploy.

In other words, I call BS.

Anonymous said...

@Jim: A pension is a Ponzi scheme. You pay into it expecting to get out more than you contribute. Otherwise you would not contribute as the discounted due to risk would make it not worthwhile.

Not everyone can pay into something and get out more than they pay in. That is where the mathematical certainty comes in.

Normally to confuse this, people start talking about the pension scheme being "profitable". Something can not grow faster than the general economy for long periods, otherwise it becomes the economy.

The devil is in the details, which is why pensions are so hugely successful until they're not.

@Alice: Why the sudden change in site decoration? I know you're probably thinking of a phrase ending in the word "you" right now, but the new logo looks like you're trying to break into the cement industry... ;)

Anonymous said...

Is calling the pension system a ponzi scheme Perry's only gaffe?
He was Gores election manager in Texas, he backed Hilary ClintonCare
he made it mandatory, through legislation, that Texan girls of thirteen have an innoculation that was proved to be hazardous to life.
He is against border control, he is for immigration amnesty.
He is a Democrat in Republican clothing - ask RON PAUL

Alice Cook said...

@Anonymous 21:00

oh dear! You hate my new logo. It took me at least an hour to design it.

I thought something more minimalist might work. What could be simpler than two squares one on top of another?

This redesign is my latest failed attempt to make the blog look more attractive. I have never been happy with its name, or look. I keep messing with it but never arrive at the point where I'm happy.

When I get the chance, I will try to come up with something different. However, I fear that my next attempt will be as successful as this one.

Stevie b. said...

Alice - a heartfelt welcome back.

"There are no solutions, no escape routes, no fancy sophisticated answers from intellectuals."

This is the problem. Everyone now thinks like you - everything is doom-and-gloom. This is a contrarian's Shangri-la!
I commented on a blog recently that there were reasons to be optimistic in say 5 years time and we’d hopefully muddle-through til then. The reasons ranged from Moores Law re solar power to the Athabasca tar-sands to advances in battery technology blah blah blah. Any slowdown between now and then would hurt but allow technology to catch-up and prevent e.g. an oil-price-induced recession anyway if there was no slowdown etc blah blah blah.

The point is that whether right or wrong (who knows!), the reaction was totally negative, whilst anyone trotting out the usual “we’re doomed” stuff got loads of “likes”. I thought I had reasons to be a pessimist, but these are clearly already well-reflected in the public at large and therefore in the markets. Every-one now knows we’re well-and-truly in the dark financial forest, so it’s time to at least start to look on the bright side – I think!

Alice Cook said...


How true. Now everyone thinks like me.

Someone summed up to me recently with an offhand remark. He said that Europe has "an end of Empire feel about it".


Umbongo said...

Surely one way out of the darkness is upping the pensionable age now, not in 20 years' time. Also, rather than having the current government (of whatever persuasion) writing a cheque to be met by future taxpayers, the UK pension scheme should become a funded entity like, you know, a "real" pension scheme as provided in the private sector.

Yes, the accumulation of a genuine fund will take years but you've got to start somewhere. BTW the assets in the fund should be genuinely out of reach of the state (except for pension purposes) to stop spurious "borrowing" a la the US Social Security system (as mentioned by earlier commenters). In this way NI contributions would become genuine insurance payments, not just income tax by another name.

Of course, a better way to deal with this is to drop state pensions completely and let individuals buy their own (or not) as they did 100 years ago.