Otto Eduard Leopold von Bismarck was the first statesman in the world to start a state sponsored pension system. In 1889 he created a revolutionary system of providing pension for people who reached the age of 70, by taxing the younger people who are still in the work force. It may come as a surprise that the pension plan is such a recent invention, but then again, one should also note that the earliest examples of a ponzi scheme in literature only predate Bismarck’s reforms by 30-40 years.
The two are one and the same. A mandatory pension plan, once created, requires everyone to pay into it for the benefit of the so-called oldest investors. In order for the pension plan to work, the more people there are entering a pension plan at the age of 70, the more people there must be to pay for that persons pension. A ponzi scheme works the exact same way. Once it is created, the very first people to pay into it then begin to receive dividends on their investments. But as more people are attracted to it, the more people expect to receive their entitlements.
But if a pension plan is a ponzi scheme such as I assert, why then has it not fallen apart like a ponzi scheme? And the answer to this is very simple, in a ponzi scheme, you are told by the administrator of the program you will receive your rewards in a matter or weeks, months, or at the latest, by the end of the year. In a pension scheme, you are told that you must pay, under due threat of forcible confinement. Furthermore that you will not receive any rewards before the age of 65, at least in most countries. In other words, pension schemes take years to develop.
It also helped Von Bismarck considerably that the average age of a Prussian in 1889 was 45 years old. He could rely on a very large proportion of working age citizens to pay for the very few who lived to be 70. However, living to be 70 is no longer uncommon, in fact in Germany, one need only live to be 65 now before receiving pension. The second cause for concern is that there are far fewer working age citizens in comparison to the number of pension collecting seniors. What was once likely a 100-1 paying to pensioner ratio, has now become a 3-1 ratio, and its fast on its way to a 2-1 ratio.
Now, hopefully everything that you have just read is nothing new to you. In fact, if you are even close to being sentient, you should know that it is to your own detriment to plan on receiving a pension. I could try to sell you real estate, mutual funds, gold and silver, etc. But that isn’t the point here, the point is to have a discussion to envision the results of the inevitable and in particular, its effect on the general public. That will be forthcoming in the next blog post.