Of Pyramids and Pension scams

If a private company did what governments do, its directors would go to jail

Of pyramids and pension scams

By Quentin Langley

Dateline: 13 October 2001

I have great idea to make everyone rich. You give me £128. In exchange, I let you join the scheme. You recruit ten more members and each of them pays you £128, of which you only have to pass on £64 to me. Result you have £640 – you are £512 up. But it gets better. Each of your ten recruits will find ten new members and will pass on to you half of their fees – a total of £6400 of which you need pass on only half to me. Pretty soon you will be rich, right?

You will, of course, be very familiar with the concept. As a second generation recruit there is indeed a reasonable chance you will make money. But there is only one person with no money at risk and who will, even if he recruits just one member, be £128 up, and I am that person. The earlier you get into a pyramid scheme the better, but the only way to guarantee success is to be the person who starts the scheme.

In the UK, pyramid selling schemes are illegal. Pyramid selling of goods is legal, but the selling of such membership schemes where nothing is actually traded and early members of the scheme are paid with funds from later members, is classified as fraud.

We might reasonably ask why such schemes are illegal. Plainly people need to be protected against force or fraud, but a scheme as outlined above makes very clear exactly what is on offer.

The answer should be clear. The government does not like competition. Because, of course, the government has been running its own pyramid scheme for the past ninety years. The name National Insurance is a disgraceful con. If any genuine insurance company offered such a service its directors would be placed in jail for fraud. The very similar “social security” system in the US is also badly named, as it certainly doesn’t offer any security.

Now, ninety years is a very long time to run a pyramid scheme. Most go bust a lot more quickly than that. No pyramid scheme can possibly survive unless the total number of people in the scheme is constantly growing. They all break down in the end.

The fact that National Insurance does not promise an immediate pay off, but only after you pass 65, helps postpone the inevitable collapse. It takes longer for people to notice the inevitable financial instability. Also, some people pay money into the scheme but do not live long enough to take anything out. But pyramid schemes all break down in the end.

Another reason the collapse of National Insurance has been postponed is that people who refuse to participate are put in jail. But even with compulsory membership, pyramid schemes all break down in the end.

None of this is to say that it is impossible to benefit from National Insurance. Like all pyramid schemes, early members often benefit. So the best advice is to have been born some time in the nineteenth century. Those of us born in the twentieth century are less likely to come out ahead. Anyone born after the war is likely to be a loser. And those of us born after 1960 would be unwise to assume that we will receive any payout at all.

The people certain to lose out, of course, are those who die before the age of 65. This especially applies to those who left school and started work – and therefore started paying in - at 14, 15 or 16. Like most pyramid schemes, National Insurance is targeted at the less well off, claiming it offers them particular advantages, but actually costs the poorest and least educated far more money and offers a much lower chance of any return.

So why does the government continue to run a scheme which would land the directors of any private company in jail for fraud and hits the disadvantaged particularly hard? Because, like every pyramid scheme, it is guaranteed to benefit someone – the one who started it.

Copyright © Quentin Langley 01 September 2001.

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