Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - April 28th, 2014

Economics 101

(Originally published July 8th, 2013)

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1′s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1′s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1′s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1′s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.

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Nanny States emasculate the People and Screw and Frighten Retirees

Posted by PITHOCRATES - December 22nd, 2013

Week in Review

This world isn’t what it used to be.  Everywhere people are looking for others to pay their way.  Or are so emasculated that living frightens them so that they run to government to parent them.  Forever.  What happened to those rugged men that entered the wilderness and built civilizations?  Who asked not for help.  All they wanted was to be left the hell alone.  Because they were men.  Rugged and fiercely independent.  Who filled their speech with obscenities whenever they talked about any form of government or nobility.  Because the government and noble classes were nothing but freeloaders looking for the good life they could force others to give them.

Today people have been so brainwashed by their government that they are incapable of doing anything without government helping them.  It’s a wonder that they can wipe their bottoms after a poop these days.  The growth of the nanny state has brought advanced economies to their knees around the world as the costs of their nanny states push them to the brink of bankruptcy.  And still the privileged/frightened people ask for more (see Business groups oppose ‘made in Ontario’ pension plan by Dana Flavelle Economy and Madhavi Acharya-Tom Yew posted 12/17/2013 on The Star).

Ontario’s plans to introduce its own mandatory pension plan could put the province at a competitive disadvantage, business groups warn

“It will add a huge competitive disadvantage to the businesses in the provinces that opt to go down that road,” said Dan Kelly, president of Canadian Federation of Independent Business.

But labour groups and retirees are applauding the province’s move to fill the void left by Ottawa’s decision not to enhance the Canada Pension Plan at this time…

Federal finance minister Jim Flaherty and junior minister of state for finance Kevin Sorenson rejected growing calls to expand CPP [Canada Pension Plan]contributions and benefits, saying now is not the right time to hit employers with higher payroll taxes…

Business groups said they welcomed Ottawa’s decision, noting CPP contributions are one of the two biggest payroll taxes they pay. The other is employment insurance premiums…

Few dispute that Canada’s pension system is no longer adequate to meet the needs of an aging population. People are living longer and saving less, while fewer private-sector employers offer pension coverage at work, a trend that plagues many industrialized nations.

Why are people saving less?  Two reasons.  First, the more the government taxes away the less they can save.  Second, with the government making promises they can’t keep (we will take care of you in your retirement so instead of saving your money spend it) why should anyone save anything for their own retirement?

Of course labor groups (the privileged) and retirees (the frightened) applaud this.  Labor wants to give their members a better life than those outside their union.  And retirees are living so long into retirement they’re living beyond their contributions into the CPP.  And are all for a little generational theft to make up the shortfall.

The defined-benefit pension is a relic of another era.  It doesn’t work anymore.  If we would have kept having babies like we once did the Ponzi scheme may have kept working.  But we didn’t.  So the Ponzi scheme is collapsing.  As they all eventually do.  The rest of the private sector has gone to 401(k)s and other such retirement vehicles.  Where we put OUR money away for OUR retirement.  Where the government can’t get their dirty little fingers on it.  This is the future of retirement savings.  Because unlike defined-benefit pensions they are sustainable.

All government pension plans need to make such a change.  Because once they do the age of the population will not matter.  Because you are saving YOUR money for YOUR retirement.  Those retired and those within a decade or so of retirement need to be protected from the folly of government in their retirement.  But younger generations coming up need to provide for their own retirement.  Because we can’t keep raising taxes.  For all that does is send jobs from the First World to the Third World.  Good for the Third World.  But bad for the First World.  And retirees.

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FT197: “Global warming insurance would probably sell as well as Obamacare.” —Old Pithy

Posted by PITHOCRATES - November 22nd, 2013

Fundamental Truth

The Scam of the Ponzi Scheme is that there is no Investment

A Ponzi scheme is a pyramid scheme.  An investment scam.  Here’s how it works.  Say three scammers build an investment fund that they promise will return an 18% return on investment.  A pretty good return these days.  If they have 100 investors who invest $25,000 each that brings in $2.5 million into the investment fund.  Now here’s where the scam comes in.

They pay each investor an 18% return each year.  So their $25,000 returns $4,500.  A return they can’t get anywhere else.  An investment just too good to be true.  Some take that $4,500 check and spend it on something special for themselves.  Others leave it in the fund.  While others beg to get into the fund.  Of course they wouldn’t do these things if they understood what happened to the $2.125 million that the fund didn’t pay out to investors.  That went into the pockets of the three scammers.

That’s the scam of the Ponzi scheme.  There is no investment.  The scammers collect the money people invest.  Put aside some money to pay out as a generous return on investment.  While keeping the rest.  These scammers sit on top of the pyramid.  And the more people that join the investment fund the wider the base of the pyramid gets.  Pouring more money into the scam.  Providing more money to pay out even higher returns on investments.  Getter ever more people begging to get into the fund.  While burying the scammers under an avalanche of cash.

Our Aging Population is sending the Health Insurance Industry into a Death Spiral

All Ponzi schemes share these characteristics.  And one other one.  They all fail.  And the scammers go to jail.  Why?  Simple.  The scam works as long as the base of the pyramid continues to grow greater than the top of the pyramid.  As the base grows larger the scammers spend more money, though.  Because there is more money to spend.  And spend they do.  Putting down deposits and paying on large mortgages and loans.  Buying very costly things that have a voracious appetite for cash.  So over time more money flows out at the top of the pyramid.  Which isn’t a problem until money stops flowing into the bottom of the pyramid.  Or begins to flow out.  Because people want to use their money for something else.  Like for a down payment on a house.  And once the money flowing out of the bottom of the pyramid exceeds the ‘return’ on investment the fund pays those high returns on investments shrink and disappear.  Exposing the scam.

This is what has happened to Social Security and Medicare.  Thanks to an aging population.  Women are having fewer babies than they did during the baby boom generation.  So today we have fewer taxpayers entering the workforce who pay the taxes that pay for Social Security and Medicare.  While the baby boomers are retiring and leaving the workforce.  And living longer into retirement.  Consuming far more money than they ever paid into these entitlement programs.  So there is far more money flowing out of the top of the pyramid than is flowing into the bottom.  Inverting the pyramid.  And putting these programs onto the path to bankruptcy.

Health insurance is little different.  It just covers so much these days that insurance premiums have soared to pay for this ever expanding coverage.  And the aging population just makes a horrible situation worse.  The elderly are living longer and consuming the lion’s share of health care services.  Further raising the cost of health insurance.  Making it unaffordable to many.  So people simply choose not to buy it in their youth when they are young and healthy.  And wait to buy it later in life when they need it.  Such as when they start raising a family.  At which time they’ll try to find employment somewhere that has good health insurance.  When they start consuming health care services.  Creating adverse selection.  Where only those who consume health care services buy health insurance.  While those who don’t consume health care services (i.e., the young and healthy) don’t.  Creating a death spiral.  As there are no non-consumers of health care services subsidizing the high cost of the large consumers of health care services.  So premiums rise.  To allow fewer people pay for more.  More people drop their insurance because they can no longer afford it.  Shrinking the insurance pool.  So premiums rise.  To allow fewer people pay for more.  More people drop their insurance because they can no longer afford it.  And so on until the cost of health insurance equals the cost of the health care services.  And the insurance market goes the way of every Ponzi scheme before it.

When Reality hits People in the Pocketbook they tend to Lose their Idealism

Enter the Affordable Care Act and the mandates.  Forcing the young and healthy to buy insurance they won’t use.  So they can use their premiums to pay for the old and sick.  The greatest generational theft in history.  Something the young and healthy see.  And don’t like.  For they are not running out and buying health insurance on the health exchanges.  In fact the majority of the people to enroll thus far are the high consumers of health care services.  Which is basically the opposite of the goal of Obamacare.  The young and healthy may have supported President Obama and the Affordable Care Act but that was only in generalities.  Yes, we should help those who don’t have insurance.  And, yes, we should do something to save the environment.  We should stop discriminating against the LGBT community and let them get married.  In the abstract these are all noble goals.  But when the reality hits their pocketbook then it’s no longer an abstract thing to feel good about.  Especially when they can’t get a job with their college education because they had the misfortune to enter the workforce during the worst economic recovery since that following the Great Depression.  The Obama recovery.

This is when youthful idealism turns into skepticism.  As reality settles in hard.  This isn’t raising taxes on the rich.  Something they won’t have to deal with until much later in their career.  This is in the here and now.  When they stop hearing inspiring words from the president about what we can do if only we implement his policies.  But only hear B.S. and lies.  For if they had that youthful idealism they would be rushing to the health exchanges to buy health insurance to make the world a better place.  But they’re not.  And this has the left worried.  Not just about trying to fix the broken Obamacare website.  But will this skepticism spread to other items on their liberal agenda?  Such as the fight against manmade global warming?  They still want their carbon tax.  And they’ve worked hard to get kids graduating from high school convinced that we’re destroying the planet and need to make polluters pay.  If the young lose their faith on Obamacare they may just stop fearing global warming to the point that they may start driving big SUVs again.

In the abstract the youth will support many things.  Until it starts hitting them in the pocketbook.  And if we make the fight against global warming hit them in the pocketbook they would quickly become indifferent about manmade global warming.  Even becoming manmade global warming skeptics.  Perhaps even noting that the glaciers once stretched down from the poles to near the equator.  And moved back towards the poles.  Before there was any manmade global warming.  Something that probably bothers them today but they’re not yet ready to question the left about manmade global warming.  But if we made them buy insurance to protect themselves from the ravishes of global warming they probably would.  The prognosticators can run off a list of calamities that will befall us from unchecked global warming.  So actuaries should be able to put a cost on that.  And set insurance premiums to cover the cost when the calamities of manmade global warming hit us.  Putting these premiums into a Save the Planet from Manmade Global Warming Trust Fund.  Just like the Social Security Trust Fund that has nothing in it but government IOUs.  Let the youth start paying a monthly premium to save us from manmade global warming and see how soon they become global warming deniers.  If we did this global warming insurance would probably sell as well as Obamacare.  Because when reality hits people in the pocketbook they tend to lose their idealism.  And this is the biggest fear the left has.  Because they count on that youthful idealism to win elections.  For once people lose their idealism they tend to vote Republican.

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Hinchingbrooke Hospital breaks free from the NHS Bureaucracy and Improves Health Care

Posted by PITHOCRATES - October 13th, 2013

Week in Review

Britain has government-run national health care.  The National Health Service (NHS) provides free health care to all Britons.  And the medical tourists who travel to the country for free health care.  Straining the NHS budget.  At a time when Britain’s aging population is stretching their limited resources thin.  Leading to longer wait times.  Longer travel times as they close local hospitals to consolidate their resources in fewer locations.  And rationing.

Even with their longer wait times, travel times and rationing of services they are still running a deficit in the NHS.  To address these chronic cost overruns they are trying to find £20 billion ($30.54 billion) in efficiency savings over three years.  But there is a beacon of hope for the NHS.  At Hinchingbrooke Hospital (see Set doctors and nurses free to use their common sense – as Hinchingbrooke Hospital does by Charles Moore posted on The Telegraph).

Last month, I visited Hinchingbrooke Hospital, near Huntingdon, the only NHS Trust in the country operated by a private partner…

I spent half a day at Hinchingbrooke, talking to doctors, nurses, administrators and patients, and seeing several wards…

One can visit a large organisation without being aware of big problems. Indeed, one of the great difficulties of the NHS is that internal communications are so bad that people can work well in one area without being aware of utter disaster a few yards away. In the case of Hinchingbrooke, under previous management, maternity was very good while the colorectal unit was shameful. So what follows is not definitive; but I feel I learnt something.

Uniquely in the NHS, Hinchingbrooke’s executive board is dominated by clinical practitioners (doctors and nurses, to you and me). The chief executive is an obstetrician. Only three of the 14 board members have non-clinical backgrounds.

In the only trust that has a private partner doctors and nurses determine how best to treat patients.  Instead of the faceless bureaucracy in the rest of the NHS.  Or what the proponents of Obamacare hope to force onto the American people.

One of the key working methods, borrowed from Toyota, is “Stop the Line”. Anyone in the hospital can stop the line if he or she believes that there might be a “serious untoward incident” or danger to a patient…

A similar, lesser action is a “swarm”. If you are urgently worried about something, you can summon all the relevant people together immediately. Unlike “whistle-blowing”, which is inevitably retrospective and often involves grievance and disloyalty, these ways of acting are instant and preventative. You are encouraged to use them. Someone stops the line in Hinchingbrooke most days.

Nurses work differently from most parts of the NHS. They all wear uniform, even if in managerial roles, and they are encouraged to take part in management without abandoning clinical work…

But what struck me about Hinchingbrooke was not that it was brilliantly original – simply that it was free to act according to common sense. Involve staff in decisions. Make sure that doctors and nurses can run things. Learn from commercial examples of how to improve services. Let the right hand know what the left is doing. Encourage innovation. Don’t “benchmark to the middle”, but to the top. And little things: get A&E nurses to wear identifiable name-badges; get rid of hospital car-park fines. Most of this is simple, but, in the leviathan of the NHS, it is not easy. And at present there are about 2,300 NHS hospitals in the United Kingdom, and only one Hinchingbrooke…

This is far behind the public. As you understand better if you spend a morning in Hinchingbrooke Hospital, the public want health care free at the point of use, but have no ideological prejudice about who delivers it, or how. They rightly judge by results – are they, their spouses, parents, children, well or ill? Are the staff medically competent, efficient and kind? They are not sentimental about the most shocking producer interest ever to have gained power in this country.

The one hospital where things are greatly improving is the one hospital that is moving away from bureaucratic national health care and towards private health care.  Like it once was in the United States.  While President Obama and the Democrats want to move the American health care systems towards the bureaucratic national health care of the NHS.  Where there are longer wait times.  And service rationing.  Well, everywhere in the NHS but Hinchingbrooke Hospital.

Do President Obama and the Democrats care that they will destroy the American health care system?  No.  Because it’s not about health care.  It’s about creating the “most shocking producer interest ever to have gained power in this country.”  Yes, it’s about the power.  Social Security and Medicare made the elderly dependent on government.  Giving the government power over the elderly.  If they can’t raise taxes they just threaten to cut Social Security and Medicare benefits.  National health care, though, makes everyone dependent on government.  Giving the government power over everyone.

Until the day they can no longer maintain that power.  And that day has come in Britain.  Their aging population is breaking the system.  Which is in essence a Ponzi scheme.  The masses in the workforce pay in via taxes.  And the few sick consume health care services at the top of the pyramid.  While a bloated bureaucracy makes sure to take very good care of itself.  But the aging population is shrinking the workforce paying the taxes.  And swelling the number of sick consuming the health care services.  Inverting the pyramid of the Ponzi scheme.  As it will in America thanks to Obamacare.  Because the United States has an aging population, too.

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Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - July 8th, 2013

Economics 101

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1’s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1’s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1’s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1’s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.

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FT167: “When we lived more austerely there was no need for painful austerity to cure a bloated government.” —Old Pithy

Posted by PITHOCRATES - April 26th, 2013

Fundamental Truth

Wise Men in Governments can Do Anything but Pay for their Nanny States

Economics changed in the early Twentieth Century.  America once again had a central bank.  Progressives were expanding the role of government.  And a new economist entered the scene that the progressives just loved.  For he was a macroeconomist who said government should have an active role in the economy.  A role where government tweaked the economy to make it better.  Stronger.  While avoiding the painful corrections on the downside of a business cycle.  Something laissez-faire capitalism caused.  And could not prevent.  But if wise men in government had the power to tweak the private sector economy they could.  At least this is what the progressives and Keynesian economists thought.

That economist was, of course, John Maynard Keynes.  Who rewrote the book on economics.  And what really excited the progressives was the chapter on spending an economy out of a recession.  Now there were two ways to increase spending in an economy.  You can cut tax rates so consumers have bigger paychecks.  Or the government can spend money that they borrow or print.  The former doesn’t need any government intervention into the private sector economy.  While the latter requires those wise men in government to reach deep into that economy.  Guess which way governments choose to increase spending.  Here’s a hint.  It ain’t the one where they just sit on the sidelines.

Governments changed in the Twentieth Century.  Socialism swept through Europe.  And left social democracies in its wake.  Not quite socialism.  But pretty close.  It was the rise of the nanny state.  Cradle to grave government benefits.  A lot of free stuff.  Including pensions.  Health care.  College educations.  And a lot of government jobs in ever expanding government bureaucracies.  Where wise men in government made everything better for the people living in these nanny states.  And armed with their new Keynesian economic policies there was nothing they couldn’t do.  Except pay for their nanny states.

According to John Maynard Keynes raising Tax Rates reduces New Economic Activity

The problem with a nanny state is things change.  People have fewer babies.  Health care and medicines improve.  Increasing lifespans.  You put this together and you get an aging population.  The death knell of a nanny state.  For when those wise men in government set up all of those generous government benefits they assumed things would continue the way they were.  People would continue to have the same amount of babies.  And we would continue to die just about the time we retired.  Giving us an expanding population of new workers entering the workforce.  While fewer people left the workforce and quickly died.  So the tax base would grow.  And always be larger than those consuming those taxes.  In other words, a Ponzi scheme.

But then change came.  With the Sixties came birth control and abortion.  And we all of a sudden started having fewer babies.  While at the same time advances in medicine was increasing our lifespans.  Which flipped the pyramid upside down.  Fewer people were entering the workforce than were leaving it.  And those leaving it were living a lot longer into retirement.  Consuming record amounts of tax money.  More than the tax base could provide.  Leading to deficit spending.  And growing national debt.

Now remember those two ways to increase spending in the economy?  You either cut tax rates.  Or the government borrows and spends.  So if cutting tax rates will generate new economic activity (i.e., new spending in the economy) what will a tax increase do?  It will decrease spending in the economy.  And reduce new economic activity.  Which caused a problem for these nanny states with aging populations.  As the price tag on their nanny state benefits eventually grew greater than their tax revenue’s ability to pay for it.  So they increased tax rates.  Which reduced economic activity.  And with less economic activity to tax their increase in tax rates actually decreased tax revenue.  Forcing them to run greater deficits.  Which added to their national debts.  Increasing the interest they paid on their debt.  Which left less money to pay for those generous benefits.

President Obama’s Non-Defense Spending caused a Huge Spike in the National Debt not seen since World War II

It’s a vicious cycle.  And eventually you reach a tipping point.  As debts grow larger some start to question the ability of a government to ever repay their debt.  Making it risky to loan them any more money.  Which forces these countries with huge debts to pay higher interest rates on their government bonds.  Which leaves less money to pay for those generous benefits.  While their populations continue to age.  Taking you to that tipping point.  Like many countries in the Eurozone who could no longer borrow money to pay for their nanny states.  Who had to turn to the European Union, the European Central Bank and the International Monetary Fund for emergency loans.  Which did provide those emergency loans.  Under the condition that they cut spending.  Money in exchange for austerity.  Something that just galls those Keynesian economists.  For despite all of their financial woes coming from having too much debt they still believe these governments should spend their way out of their recessions.  And never mind about the deficits.  Or their burgeoning debts.

But these Keynesians are missing a very important and obvious point.  The problem these nations have is due to their inability to borrow money.  Which means they would NOT have a problem if they didn’t need to borrow money.  So austerity will work.  Because it will decrease the amount of money they need to borrow.  Allowing their tax revenue to pay for their spending needs.  Without excessive tax rates that reduce economic activity.  Making the nanny state the source of all their problems.  For had these nations never became social democracies in the first place they never would have had crushing debt levels that cause sovereign debt crises.  But they did.  And their populations aged.  Making it a matter of time before their Ponzi schemes failed.  Something no nation with a growing nanny state and an aging population can avoid.  Even the United States.  Who kept true to their limited government roots for about 100 years.   Then came the progressives.  The central bank.  And Keynesian economics.  Putting the Americans on the same path as the Europeans (see US Federal Debt As Percent Of GDP).

Debt as Percent of GDP and Wars R2

With the end of the Revolutionary War they diligently paid down their war debt.  Which was pretty much the entire federal debt then.  As the federal government was as limited as it could get.  Then came the War of 1812 and the debt grew.  After the war it fell to virtually nothing.  Then it soared to pay for the Civil War.  Which changed the country.  The country was bigger.  Connected by a transcontinental railroad.  And other internal improvements.  Which prevented the debt from falling back down to pre-war levels.  Then it shot up to pay for World War I.  After WWI the Roaring Twenties replaced progressivism and quickly brought the debt down again.  Then Herbert Hoover brought back progressivism and killed the Roaring Twenties.  FDR turned a bad recession into the Great Depression.  By following all of that Keynesian advice to spend the nation out of recession.  From the man himself.  Keynes.  The massive deficit spending of the New Deal raised the debt higher than it was during World War I.  Changing the country again.  Introducing a state pension.  Social Security.  A Ponzi scheme that would struggle once the population started aging.

Then came World War II and the federal debt soared to its highest levels.  After the war a long decline in the debt followed.  At the end of that decline was the Vietnam War.  And LBJ’s Great Society.  Which arrested the fall in the debt.  Its lowest point since the Great Depression.  Which was about as large as the debt during the Civil War and World War I.  Showing the growth in non-defense spending.  Then came Reagan’s surge in defense spending to win the Cold War.  Once the Americans won the Cold War the debt began to fall again.  Until the Islamist terrorist attacks on 9/11.  Halting the fall in the debt as the War on Terror replaced the Cold War.  Then came the Great Recession.  And President Obama.  Whose non-defense spending caused a huge spike in the national debt.  Taking it to a level not seen since World War II.  When an entire world was at war.  But this debt is not from defense spending.  It’s from an expanded nanny state.  As President Obama takes America into the direction of European socialism.  And unsustainable spending.  Which can end in only but one way.  Austerity.  Painful austerity.  Not like the discomfort of the sequester cuts that only were cuts in the rate of future growth.  But real cuts.  Like in Greece.

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Social Security is a Ponzi Scheme according to Economist Paul Samuelson who wrote the Book on Economics

Posted by PITHOCRATES - August 19th, 2012

Week in Review

While the Europeans, the Japanese and the Americans all struggle with an aging population and pension and health care systems approaching insolvency Singaporeans are enjoying comfortable retirements.  How?  Because they did something crazy.  They acted responsibly and saved for their retirement and their health care.  Instead of depending on the state (see Singapore’s got some good ideas posted 5/17/2012 on ctpost.com).

…Singapore makes no promises but instead requires all citizens to save up to 36 percent of their income for their own retirement and health care. The government invests the savings in stocks and bonds; the money is not used for current expenditures.

The result? Singaporeans have comfortable retirements. Their health-care system delivers better outcomes while costing 80 percent less than ours, according to 2010 findings from the World Health Organization, and all of it is financed without imposing debt on the next generation. Singapore even reported an uptick in medical tourism last year.

Now, compare Singapore’s system to our own. When Medicare was debated and enacted, Paul Samuelson was America’s most influential economist. He was an adviser to presidents Kennedy and Johnson, author of the nation’s best-selling economics textbook and a soon-to-be Nobel laureate. In 1967, Samuelson wrote in Newsweek about the funding mechanism for Medicare and Social Security: “The beauty about social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in. . . . Always there are more youths than old folks in a growing population. More important, with real incomes growing at some 3 per cent per year, the taxable base upon which benefits rest in any period are much greater than the taxes paid historically by the generation now retired. . . . A growing nation is the greatest Ponzi game ever contrived.”

Samuelson was right about social insurance being a Ponzi scheme even though he was wrong on his economics.  He was a Keynesian.  And it was Keynesian economics that is responsible for so many of our problems today.  Encouraging governments to intervene into the private economy.  And to tax, borrow and print money to spend.  Which has given Japan their Lost Decade.  Gave the U.S. (and the world) the subprime mortgage crisis.  And gave the Europeans their sovereign debt crisis.

So here is one of the Keynesians’ greatest and most admired economists admitting that social spending is what it is.  A Ponzi scheme.  Of course the fatal flaw in the Keynesian model was women’s liberation.  The world changed.  Women stopped having babies.  And when they did we went from having a young population (more people entering the workforce) to having an aging population (more people leaving the workforce).  A baby bust followed the baby boom.  Which smashed apart the Ponzi scheme.  Because there are now more old folks drawing benefits than there are youths entering the workforce to pay for them.  So governments are spending more than they collect in taxes.  And the rate of spending is growing greater than its population growth rate.  Which is a big problem.  As Mr. Samuelson pointed out in Newsweek.

Meanwhile those who are saving for retirement are not having the same problems as they are in Keynesian economies with state pensions and national health care.  Of course a Keynesian would never approve of this.  For savings is to a Keynesian what sunshine is to a vampire.  And they will do everything within their power to prevent people from saving.  Despite their incredible record of failure.  But they keep plugging along.  Why?  Because governments love them.  They keep hiring them.  And they keep listening to their advice.  For they give legitimacy to their irresponsible spending ways.

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The Government Model of Doing Business is a Failure because it’s more Politics than Business

Posted by PITHOCRATES - September 7th, 2011

Finding other People to pay for Generous Benefits is the Government Way

The United States Postal Service (USPS) is not a part of government.  It doesn’t receive any tax dollars.  It’s supposed to survive alone on the revenue of their services.  In particular, the postage stamp.  But the USPS is dying.  Thanks to new technology.  People are using email.  And paying bills on line.  And FedEx and UPS deliver packages better than they do.  So they’ve lost a lot of business.  This enterprise that is not part of the government.  Which is now seeking help from the government.  To survive.

Even though it’s not a part of government it is protected by government.  The USPS has a monopoly on 1st class mail.  And like all businesses with a government enforced monopoly they didn’t innovate.  They didn’t exceed the expectations of their customers.  They just trusted in government.  That government would maintain their fat revenue stream.  So they could continue to pay fat pay and benefit packages.  But you can never truly keep competition away.  For there is always someone looking to innovate.  And exceed customer expectation.  The USPS has learned this lesson.  The hard way (see Obama crafting fix as Postal Service faces default by Emily Stephenson posted 9/6/2011 on Reuters).

The White House will offer its reform plan in the next few weeks for the agency, which lost $3.1 billion last quarter and is approaching due dates for multiple billion-dollar payments, said John Berry, director of the U.S. Office of Personnel Management.

The Obama administration wants Congress to delay for 90 days a $5.5 billion retiree health benefits payment due this month. The Postal Service has said it expects to default on that payment…

It has proposed cutting 220,000 jobs, or more than a third of its full-time staff, by 2015, and is studying about 3,650 of its 32,000 offices for potential closure.

A $3.1 billion loss in one quarter?  Revenue for that quarter was only $16 billion.  So that’s a loss of 19%.  What’s even more startling is that the retiree health benefits payment due is 34.4% of revenue.   That’s just over a third of all revenue going to people no longer working for the post office.  This is not a business.  This is pure government. 

It’s little more than a Ponzi scheme.  And it worked until technology provided competition in other forms.  Now they have a declining revenue base supporting an expanding group of benefit recipients.  Sound familiar?  Sounds a little like Social Security, doesn’t it?  Another failing Ponzi scheme.

Finding other people to pay for generous benefits will always end this way.  And that’s the government way.  Which explains why the economy produced zero jobs last month.  It doesn’t know how to create a job.  All it knows how to do is to take money from those who work and give it to people who support them.

In Canada the Government is letting the Private Sector find and bring Oil to Market

You know who knows how to create jobs?  Canada (see Canada’s Oil-Sand Fields Need U.S. Workers, Alberta Minister Says by Jeremy van Loon posted 9/7/2011 on Bloomberg).

Unemployed U.S. construction workers should look for jobs in Canada’s oil-sands industry, which faces a shortage of as many as 75,000 positions in the next few years, Alberta Energy Minister Ronald Liepert said.

Alberta’s oil sands, the world’s third-largest recoverable reserve of crude, needs workers including electricians and construction staff, Liepert said in an interview at Bloomberg headquarters in New York late yesterday. Labor restrictions between Canada and the U.S. need to be eliminated first, he said…

U.S. President Barack Obama will address Congress tomorrow with a plan to boost job growth by injecting more than $300 billion into the economy next year. Unemployment in the world’s largest economy remains at 9.1 percent more than two years after the recession’s official end. That compares with 7.2 percent in Canada.

In Canada the government is letting the private sector find and bring oil to market.  Which is good for Canada.  Because oil is high in demand.  Very, very high in demand.  The Keynesian economists all say our current economic woes are due to a lack of demand.  And the Obama administration is a Keynesian administration.  So you’d think they would let Americans find and bring American oil to market, too.  But no.

Instead, they put a moratorium on Gulf oil exploration.  Forbid oil exploration on most American land.  And put all their eggs in the green energy basket.  Especially the electric car.

The Success of Electric Cars depends on the Cost of Gas 

Electric cars don’t pollute.  But the power plants that produce the electricity that charge their batteries do.  The majority of which are fossil-fueled.  Why?  Because wind-generated and solar-generated electricity just can’t produce electricity as plentifully and as cheaply as fossil-fueled plants can.  Which will become a bigger and bigger problem as more electric cars plug into the electric grid (see Bidding for volts posted 9/6/2011 on the Economist).

ELECTRIC cars and hybrids could represent as much as 15% of the new car market by 2020, depending on the price of oil. This means that in some places a lot of vehicles will be plugged simultaneously into the mains after the evening commute home, in order to recharge their batteries for the following day. The sudden demand for power this will entail, on top of the existing evening peak, could put the small electrical transformers that serve local grids under considerable strain—possibly to the extent of causing brownouts.

First of all, note that the success of electric cars depends on the cost of oil.  Why?  Because gasoline-powered cars are better.  And people will always choose them over electric cars.  Unless the cost of gasoline makes them more expensive.

So the switch to electric cars will only happen at great cost to the consumer.  Who will pay more.  In more ways than one.

Electric cars are not like washing machines, which vary little from brand to brand in their electrical demands. Car batteries come in different capacities, have different recharging speeds and use different chemistries which have their own recharging criteria. The picture is complicated still further by the development of fast-charging systems that suck capacity out of the local grid with much greater relish than a traditional charger. And hybrids add yet another dimension since these, if electricity is too expensive, can run on petrol instead.

Luckily, a driver would not have to worry about making any of these tedious calculations if one of Dr Rogers’s software agents were working for him. All he need do when connecting his car to the recharging point of an evening is inform the system, perhaps using a key pad, when he wanted to drive the vehicle again and the likely distance of his journey. The negotiations would then take place on a computer system that linked all the local vehicle-recharging points.

Gee, I hope the electric car owner doesn’t have to rush their child to the hospital during the night.  Say some 6 hours before going to work.  About an hour before that electric car’s charging was scheduled to start.  If so, hopefully the child’s parents have a reliable gasoline-powered car in the garage as well.

Keynesians want to Grow Government and Spend Money 

The USPS is a microcosm of the United States.  At least on the path we’re currently on.  And you can see how well things are working for the USPS.

Keynesians worship the god of demand.  All problems go back to a lack of demand.  They want to tax and spend.  To give money to people to spend.  To stimulate.  As only Keynesians know best.  Despite their near century of failure.  But in the face of record demand for a commodity (oil) that America could look for and bring to market to meet that demand, they shun that demand.  Why?

Instead they’d rather see oil prices rise so high that people will reluctantly buy electric cars.  That will strain our electric grid.  Causing brownouts.  Or more consumer costs to upgrade the grid.  Either way, the consumer will pay more and be inconvenienced more if the government gets its way.

The examples of failure (the USPS and green energy) are all around us.  As are the success stories (Canadian oil).  Yet government keeps choosing failure over success.  Why?

Because something is more important than economic well being.  Political power.  And a bad recession is an opportunity.  To grow government.  And spend more money.  Which is what Keynesians want to do.  And will do.  Every time.  Despite their near century of failure.

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LESSONS LEARNED #51: “The longer you wait to balance your books the harder it will be to balance them.” -Old Pithy

Posted by PITHOCRATES - February 3rd, 2011

Almost half of a Plantation’s Value was its Slaves

Slave labor wasn’t cheap.  First there was the capital expenditure to purchase the slaves.  Then you had to feed them, clothe them, house them, etc.  It took money.  But that money made money.  Mostly on the big plantations.  Where the division of labor was minimal.  And large labor gangs could work a single crop profitably.

The more slaves on a plantation the more land they could work.  So the more slaves on a plantation the more valuable the plantation was.  Like a dairy farm with many dairy cows is worth more than one with fewer cows.  A productive dairy farm makes money.  And it can borrow money to grow.  Ditto for a cotton plantation. 

Now suppose we free dairy cows everywhere.  They’re free to walk off of their farms and pursue their own lives.  What will become of the dairy farm?  It won’t make money.  It won’t be able to pay back its loans.  The farm will lose value.  Because no one will buy it without the cows to make milk.  Dairy farmers everywhere will go broke.  And they will lose their farms.   

If not for the Civil War, Abolition would have been the Greatest of all Bailouts

When we discuss slavery, we focus more on issues of morality.  But the reason we had it for so long is partly due to the economics.  There was a large price tag attached to abolition.  And the question was who was going to pay?  Slavery, though immoral, was legal.  The plantations grew.  They purchased more slaves.  Worked more land.  Incurred debts to grow further.  All based on the collateral of their plantation.  Much of which was their slaveholdings.

Based on the 1790 census, there were just fewer than 700,000 slaves in America.  At the time, the nation’s finances were in a mess.  We were begging Europe to loan us money.  There was no money available to reimburse the slave owners.  And the North didn’t want to pay for this ‘southern’ problem.  There was no easy way to free the slaves without a huge financial hit.  For someone.  So we tabled the issue.  For another generation to consider.  And resolve.

But we didn’t.  By 1860, the slave population topped 3.8 million.  That’s over 5 times the number from the 1790 census.  The cost to reimburse these slave holders had grown to over $3 billion dollars.  That was almost 70% of the 1860 GDP.  In comparison, the total budget of George W. Bush reached as high as 69% of GDP.  Clearly, the cost of freeing the slaves was huge.  It dwarfed all other federal spending.  And this is one of the reasons that it took a war to finally resolve.  And it was our nation’s bloodiest conflict.  More died in the American Civil War than did in WWI and WWII combined.  And the war devastated the southern economy.  Besides the direct war damage, the South was impoverished.  And easy pickings for northern carpetbaggers.

The issue of slavery was less costly to resolve sooner than later.  But the price was always so great that the institution continued on because no one was willing to bear the costs at any time.  This only guaranteed that the final reckoning would be greater.  Which it was.  The final cost was so great it nearly destroyed the nation.  And bitter feelings linger to this day.

Never Let a Good Crisis Go to Waste

Woodrow Wilson and his fellow Progressives were going to change the world.  But that didn’t work so well.  In fact, a lot of their meddling just crashed the economy.  Secretary of the Treasury Andrew Mellon helped President Warren Harding fix the economy.  And we got the Roaring Twenties.

But the Progressives kept tinkering.  And Republican Herbert Hoover was even a bit of a Progressive himself.  Anyway, some government mismanagement (and inept Federal Reserve actions) gave us the Great Depression.  Our nation’s greatest crisis.   Which Franklin Delano Roosevelt (FDR) would exploit to transform the nation with his New Deal.

FDR’s economic policies failed.  Only capitalism re-unfettered for the war effort brought the nation back.  Even though he failed he is still remembered fondly by most Americans.  He stood fast with our allies and defeated Nazi Germany.  And he gave us Social Security.  Which, financially speaking, will cost the nation more than defeating the Nazis did.

The Great Ponzi Scheme Social Security

Social Security was originally intended to help poor widows who had struggled through the Great Depression.  It has subsequently grown to cover retirement and disabilities.  Not a big deal then.  The actuaries crunched their numbers.  They took into account immigration, birthrates, life spans, death rates and other important stuff.  Like actuaries are wont to do.  And they figured it would work.  Because we had a growing population.  With a lot more younger people entering the workforce than there were old people retiring and collecting benefits.

So, like a Ponzi scheme, Social Security was as sound as a pound.  As long as their assumptions held.  But they didn’t.  Immigration slowed.  Our life spans increased.  And worse, we just weren’t having as many babies as we once did.  Now we had more people retiring and collecting benefits.  And fewer entering the workforce to pay for these retirees.  The pyramid inverted itself.  The base was smaller than the tip.  And that just ain’t good for a Ponzi scheme.

Everyone predicts Social Security will go bankrupt.  They’ve been trying to fix it through the years.  To extend the solvency.  By reducing benefits.  Raising taxes.  And raising the retirement age (to decrease the years retirees collect benefits).  These ‘fixes’ have pushed insolvency out a few more years.  But it hasn’t addresses the elephant in the room.  Old people.  They’re living longer than the actuaries ever imagined.  Worse, because they’re living so long, they’re getting all kinds of medical problems that are costing Medicare and Medicaid a lot of money.  And, you guessed it, they’re going bankrupt, too.

Why Fix something Today that we can Leave for Future Generations?

Because there are so many seniors in these programs no politician wants to touch them.  They’re the ‘third rails’ of politics.  Seniors vote.  And if you cut their benefits, they’re probably not going to vote for you.  Every politician knows this well.  So, like slavery, they table the issue for a later generation to address.  But every day that passes, more seniors join the ranks of the retired and begin collecting benefits.  While fewer people enter the workforce to pay for their retirement.  Which guarantees that the cost to fix these problems will grow ever larger.

The day of reckoning will arrive.  It always does.  For the issue of slavery it was civil war.  Over in Europe as they struggle to control their out of control spending they’re having riots.  Which sometimes happens when you take away stuff from large numbers of people.  Let’s hope it doesn’t come to that here.  But one thing that we can be pretty certain about.  Fixing this problem is going to hurt someone in the wallet.  And the longer we wait, the greater that someone will hurt.

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LESSONS LEARNED #40: “Big Government is more efficient when old people die sooner.” -Old Pithy

Posted by PITHOCRATES - November 18th, 2010

Big Government is a Ponzi Scheme

When it comes to government funding, birthrates and death rates are key.  Think of government as a great Ponzi scheme.  Ponzi schemes work when more people pay into the scam than collect from the scam.  Like in a pyramid scheme.  Those collecting benefits are the few at the top.  Those paying in are the many at the base.

An increasing birthrate means more taxpayers for each successive generation.  This keeps the base of the pyramid growing.  A steady or increasing death rate keeps the top of the pyramid smaller than the base.  A declining death rate, on the other hand, will flip the pyramid upside down.  Because the population at the top will grow larger than the population at the bottom.

Big Government tries to keep as many people as possible dependent on government.  Lots of different programs attach lots of different people to the welfare state.  But when it comes to big numbers, old people can’t be beat.  The lion’s share of government assistance goes to them via Social Security and Medicare.  And they are the most politically active.  That means they vote.  And when they vote, they vote to keep their benefits.

Of course, this is a dual-edged sword.  Yes, old people can provide a loyal voting base to sustain Big Government.  But on the other hand, the cost of their benefits is growing so large that it is undermining the very foundations of Big Government.  How?  By the double whammy of a falling birthrate and a declining death rate.  For various reasons, fewer people are being born.  And old people are living longer.  This has flipped the pyramid in the great Ponzi scheme upside down.  The growth rate of those collecting benefits is greater than the growth rate of those paying into the scheme.

An Increasing Life Expectancy is Bankrupting Social Security

FDR signed Social Security into law in 1935.  The average life expectancy in 1930 was approximately 59 years.  The retirement age in the Social Security Act of 1935?  65.  That’s right, the average American would have been dead for 6 years before qualifying for Social Security retirement benefits.  That’s a 6 year cost cushion.  But not everyone died at 59, though.  So a lot of people lived to receive those benefits.  But one thing the actuaries were sure about then, this Ponzi scheme was going to be a big winner.  For Big Government.

The average life expectancy increased to approximately 70 years in 1960.  In other words, people were living approximately 11 years longer.  That 6 year cost cushion just became a 5 year cost exposure.  That’s a swing of 11 years.  The actuaries in 1930 never saw this coming.

Social Security had its first crisis in 1975.  To save the program, they increased payroll taxes and decreased benefits.  Another crisis came in 1983.  Now they started taxing some Social Security benefits.  Even taxed federal employees (who previously didn’t pay these payroll taxes).   And they would increase the retirement age for later retirees.

By 2000, the average life expectancy increased to approximately 77 years.  That’s another 7 years.  That’s a swing of 18 years from 1930.  A huge actuarial miscalculation.  The population was getting far older then the FDR administration ever guessed.  And, to make matters worse, the birthrate was declining.

A Declining Birthrate is Bankrupting Social Security

The birthrate (per thousand of population) had been declining from 1910 (30.1) to 1920 (27.1) to 1930 (21.3).  That’s about a 10% decline from 1910 to 1920.  And a 20% decline from 1920 to 1930.    Perhaps that’s the reason for the 6-year cost cushion they gave themselves.  They saw fewer babies being born.  Which meant fewer taxpayers would be paying for later retirees.

The birthrate fell to 19.4 in 1940.  Though it was falling, it wasn’t falling as much.  Only 9% from 1930 to 1940.  Then came the baby boom generation.  The birthrate in 1950 shot up to 24.1, a 24% increase from 1940.  More babies meant more taxpayers.  This birthrate held pretty steady in 1960.  No doubt the LBJ administration felt optimistic. 

LBJ exploded federal spending.  He added Medicare and Medicaid.  Made Social Security more generous.  And why not?  Things were looking up.  Birthrate-wise.

But it was short-lived.  The birthrate went from 23.7 in 1960 to 18.4 in 1970.  That’s a 22% decline.  The birthrate was 15.9 in 1980.  That was a 14% decline from 1970.  Or a 33% decline from 1960.  Birth control and abortion were taking their toll on the U.S. birthrate.  Fewer babies meant fewer future taxpayers.  And fewer taxpayers could pay for less government, not more.  The LBJ administration was wrong to feel optimistic.

The Selfish Baby Boomers Invert the Ponzi Scheme Pyramid

The baby boom generation has really thrown a wrench in the works.  The government used their spike in the birth rate as a baseline for future government spending.  But they screwed the government in the end.  Instead of being good little taxpayers by making even more little taxpayers, they stopped having babies.  They didn’t stop having sex.  They just stopped having babies.  It was the era of free love.  And ‘free love’ had no room for babies.

And it’s these baby boomers that are working themselves up to the top of the pyramid.  But being the selfish ingrates that they are, they’ve left no one to follow behind them to keep the Ponzi scheme going.  And to make matters worse, they’ll be living longer in retirement than anyone ever guessed.

It’s a perfect storm of sorts.  A declining death rate.  An even more declining birthrate.  And a huge chunk of the population about to go on the public dole.  But it gets even worse.  The boomers will be living longer in retirement because of huge outlays in Medicare spending to keep them alive.  In other words, the government is spending a fortune to make their financial problems worse.

Amnesty, Catholics and Dead Retirees May Save Social Security

They’re trying to fix things on the taxpayer side.  The Big Government legislators are desperate to give illegal aliens amnesty and citizenship.  To them it’s simple math.  More people equal more taxpayers.  And these taxpayers will be Catholic.  Catholics don’t use birth control and abortion like Americans currently do.  Their birthrate is less likely to decline.  (Approximately 1 in 5 of young children in the United States is Hispanic already.  They project that to increase to 1 in 4 within a few decades.)

On the benefit side, they’ve already raised the retirement age to 67.  And there’s talk about raising it to 69.  If more people die before they’re eligible to collect retirement, that’s a lot of benefits the government doesn’t have to pay.  They’re also talking about cutting the Medicare budget.  The less they spend, the more may die.  And dead people don’t consume Medicare benefits.

There’s no getting around the fact that old people are a huge drain on government.  Though they worked hard to get these people dependent on government, their continued living is becoming more of a burden than a benefit.  An increasing lifespan is anathema to Big Government.  Old retirees take more than they give.  Young workers, on the other hand, give more than they take.  The government needs more young workers.  And fewer old retirees.

(Social Security + Medicare) Spending = 2 X Defense Spending

To be efficient government has to minimize costs in relation to revenue (i.e., taxes).  And there’s an 800 pound gorilla in the room.  Old people.  Nothing can impact the budget more.  Even war.  Social Security and Medicare combined make up approximately 40% of the federal budget.  Defense spending is approximately 20%.  A blind man can see the gorilla.  Government needs these old people to hurry up and die.

And now add Obamacare to the equation.  Which will cover more people than Social Security.  The costs will be astronomical.  Social Security, Medicare and Obamacare will easily eclipse 60% of the total federal budget.  That kind of spending cannot be sustained.  Greece, France and Great Britain have proven this in the 21st century.

That’s some serious cost to contain.  And how do you contain that kind of cost?  You do what the Left says the private health insurers do.  Deny coverage to sick people.  And they will.  They’ll have to.  And with the power of life and death literally in their hands (i.e., death panels), they’ll be able to.  They’ll be able to maximize the number of young workers (by treating them).  Minimize the number of old retirees (by not treating them).  As well as minimize the number of undesirables who take more than they give (by not treating them).  Or even take more serious measures with those seriously ill or impaired (euthanasia).

Don’t think it can happen?  It’s happened in other Big Government states.  In fact, the Progressives even talked about the scientific benefits of eugenics and euthanasia here in the United States in the early 20th century.  To deal with undesirables.  So, yes, it could happen here.  Because it almost once did.

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