Just in case you don't know what a Ponzi scheme is, it works like this: I get N people to pay money into my "fund" and promise them that the fund will pay out some crazy benefit. They all like the idea and get their friends to put money in. As new people add more money in, I use the money coming in to pay out to the original investors and skim off a chunk for myself. The more people chucking money into the pot, the more I can skim off and the more I can dish out to investors. But since I'm not doing any kind of investing, the problem comes in when people stop chucking money into the pot, or even worse, when people want to withdraw their money.
Then all hell breaks loose, as it did with the Bernie Madoff case.
But what far too few people realise is that the government's "National Insurance" is nothing but a Ponzi scheme. While the economic population is growing there is no problem meeting pension requirements (and all the other things that National Insurance ostensibly pays for) but when the population starts ageing and you have more claimants than contributors, it all gets a bit messy.
Obviously, this whole shit-heap is going to have to end at some point—probably in tears. As loyal readers will know, I am always interested in the way in which we might manage transitions towards a more libertarian society. Thus it is with great pleasure that I point you to a solution over at the Adam Smith Institute.
An obvious choice, denied to voters
Imagine you were forced to pick between two options: Option one – you give me £10 today for me to safeguard for you, but there is a very high likelihood that tomorrow, when you wish to claim, I will default. Option two – you give me £5 today, and can invest your remaining £5 on your own, again with the assumption being that I will likely default tomorrow.
Whilst it's hardly a wonderful choice you would surely choose option two, to minimise your losses. However, when it comes to National Insurance Contributions (NICs), the government only gives you option one, and then pretends that you're safe.
"But wait!" I hear you cry. "The government wouldn't default on the state pension!"
"In which case," say I. "You are incredibly naive." I'm afraid that the signs are all there in various stories over the last few years—most pertinently, in this case, in the story about how the government were planning to force people to contribute a percentage of their wages towards a private pension over and above their NICs.
So, given that there is every reason to believe that the government—if not about to default anytime in the very near future—is attempting to shore up the ever more crippled finances, there might be a better way.
What about if the government offered people both options?
Every employee pays 11%, to be paired with a contribution of 12.8% from their employer. When the employee retires, provided there is enough cash in the National Insurance Fund, they receive a state pension, just as they would have under the existing system.
Every employee keeps their 11% share as income to be invested into a private pension arrangement, and the employer continues to pay a 12.8% stake towards national insurance. The employee waives their right to a state pension, but receives a 'recognition bond' that entitles them to slightly less than the value of their employee contribution to the National Insurance Fund to date.
The choice is thus open for every individual to make, and logic dictates that the choices will be made rationally, relative to each individual's age and circumstances. Most young people, and in particular those who have just started working will certainly be better off taking the private route, even if this means they will not get any personal benefit from the contribution of their employers. Older people, and in particular those close to retirement, who have been contributing to the fund over a lifetime's work will be much more likely to stay with the national insurance scheme.
Of course, the need for this choice is largely depending on my initial analogy – it assumes that the government is likely to default at some point in the future.
As I have pointed out, it is reasonable, I think, to assume that the government will, indeed, default. It may not be in the next ten or twenty years but it is safe to assume that, by the time that I reach retirement age, it will have done so.
NuLabour's solution was to keep your 11% and your employer's 13% and make you pay even more on top (and remember that both portions of NICs are going up by 0.5% in April): in the ASI's solution, the government keeps the 13% to pay out to current pensioners, and you get to invest your 11% as you see fit.
But this must be some kind of crazy talk! It'll never work, surely? Er, yes it will...
Greater Returns for the people
The benefits of pension privatisation are undeniable. The Chileans are certainly richer as a result of their privatisation scheme. This is despite heavy regulation that accompanied the scheme in the early years, which forbade, for example investment in foreign equities. As Chile's economy has developed, more opportunities have arisen, and even greater returns can be realised with less regulation being necessary. The plans from America have highlighted this trend too. The projections are much more favourable when regulation is looser, for example allowing a greater percentage of peoples' money to be invested in stocks, as opposed to bonds. Nonetheless, even with a 50/50 split between bonds and stocks, the SSA scoring looked favourably on the financial returns of the Cato plan.
Those who invested in private pensions have comfortably produced returns more than three times greater than state pensions, because of the efficiency with which they are invested. It is because of this that most people will be better off, even if they have to sacrifice the share of NICs paid by their employers. Furthermore, Michael Tanner of Cato noted that notwithstanding the fall in the value of the stock market over the last year or two, an employee who started investing 40 years ago would still have done much better had they invested privately than had they relied on Social Security – had they been given a choice. This plan is a sustainable way to give them that choice.
Yup: it worked in Chile and it looks as though it will work in the United States. Not only does it work, but everyone is better off. This can only be a good thing. So, which party is going to implement such an eminently sensible plan?