Of pyramids and pension scams

Common Sense looks at reform of Social Security

Of pyramids and pension scams

By Quentin Langley

Dateline 22 April 2005

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 be familiar with the concept. As a second generation recruit there is 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.

Pyramid selling schemes are illegal. We might reasonably ask why. 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, and the government has been running its own pyramid scheme for decades. The name Social Security is a disgraceful con. It offers no security. If any genuine insurance company offered such a service its directors would be jailed for fraud.

Now, sixty 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 collapse in the end.

The fact that Social Security offers a payoff only after you retire helps postpone the inevitable collapse. It takes longer for people to notice the financial instability. But pyramid schemes all collapse in the end.

Another reason the collapse of Social Security has been postponed is that people who refuse to participate are jailed. But even with compulsory membership, pyramid schemes all collapse in the end.

It is possible to benefit from Social Security. The best advice is to have been born some time before the Second World War. People born later are unlikely to come out ahead. And those born after 1960 would be unwise to assume they will receive any payment at all.

The people certain to lose out are those who die before retirement. 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, Social Security is targeted at the less well off, claiming it will make them rich, but actually costs the poorest and least educated far more money and offers a much lower chance of any return. It hits minorities especially hard.

So why does the government continue to run a scheme which would land anyone else in jail 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 22 April 2005

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