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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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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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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The NHS rations In Vitro Fertilization (IVF) with Long Waiting Times while Abortions are Readily Available

Posted by PITHOCRATES - September 2nd, 2012

Week in Review

There may be no waiting list for abortions.  But there is a waiting list for In Vitro Fertilization (IVF).  Even though both come with obvious time limits on these treatments.  Wait too long and you’ll either have a baby.  Or it may be too late for you to have a baby (see Third of women with right to IVF rejected by GPs who don’t know enough about fertility treatment by Sophie Borland posted 8/27/2012 on the Daily Mail).

One in three women are being refused IVF on the NHS even though they have the right to treatment, a report has found.

Health trusts are routinely denying treatment for women despite the fact they are eligible under official guidelines from health watchdog NICE.

Even if women are referred for IVF, many are forced to wait more than two years for it to start during which time the chance of success dwindles as their bodies age…

Recently a major study ranked Britain near the bottom of a European league table on spending for fertility treatment with even Serbia, Montenegro and Slovakia paying more to help childless couples…

The NHS also pays for abortions.  If the NHS wanted to improve their long-term financial outlook they’d transfer more of their current abortion funding to In Vitro Fertilization (IVF) funding.  Because there is only one thing that will solve budget woes in countries with aging populations.  More babies.  Because babies are future taxpayers.

On a side note it is interesting how the NHS works on both sides of the birth/abortion issue.  They administer medical treatment to restore a normal biological function.  And they administer medical treatment to terminate a normal biological function.  (Though there appears to be less waiting times for an abortion.)  Making the birth/abortion issues a complex issue indeed.  And one we’ll probably never see resolved to everyone’s satisfaction.  Apart from the moral issues the economics of the issue are interesting.  Those who favor abortion also favor large government spending.  And it is their most sacred cause, abortion, which is preventing the continued growth in that government spending.  Because it eliminates future taxpayers.

All right, back to topic.  So why are they making it so difficult to get IVF in the NHS?  Well, you probably figured that out based on the previous two paragraphs.  Money.

Susan Seenan, of the charity Infertility Network UK, said: ‘It’s shocking and blatantly wrong. Primary care trusts are just trying to ration treatment…

‘We know the NHS has limited resources but all couples want is to be treated fairly…’

In fact, 45 per cent of couples who responded ended up paying for the treatment privately as the waiting lists were too long.

IVF normally costs between £3,000 and £4,000 but nearly a quarter of those who went private paid more than £10,000 for the treatment, according to the survey.

It’s that aging population and a generous welfare state set up during a time before widespread use of birth control and abortion.  They built a pyramid scheme.  Where the people at the top, those drawing the majority of benefits, grew at a lesser rate than those at the bottom.  The young and healthy workers entering the workforce.  Based on these assumptions there would always have been an increasing amount of money coming into the government (even without raising tax rates) to pay for the few drawing generous state benefits (in particular pensions and health care for the retirees).  But that all changed when women stopped having the babies the state planners assumed they would have.  So with a baby-bust generation following the baby-boom generation you get an aging population.  And large budget deficits.

Whose fault is it?  It certainly isn’t the seniors.  Or the women who stopped having babies.  It’s the state planners who created an unsustainable welfare state.  Because they are the ones who created the great Ponzi scheme to pass the costs for one generation to another generation.  This is wrong.  Even if it worked when there was a growing population growth rate.  Because the future is uncertain.  Things change.  Like family sizes.  And life-spans.  Another thing the state planners never saw coming.  None of this would have been a problem if government allowed each generation to take care of themselves.  Because a family bases their decisions on their economic circumstances.  So they live within their means.  They save their money and exercise frugality in their spending.  But when you pass your costs on to a later generation you don’t save as much or exercise as much frugality.  Because you don’t have to.

As time passes and the number of new taxpayers gets smaller the government raises tax rates.  Leaving taxpayers with less.  Making it harder to support themselves.  Which leaves them little choice but to demand more from government.  Which only makes the problem worse.  Making some couples wait years for IVF.  Because with their tax rates they can’t afford to go outside of the welfare state for treatment.

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Japan’s Future is Bleak thanks to their Welfare State and their Aging Population

Posted by PITHOCRATES - April 28th, 2012

Week in Review

Japan made two great mistakes since World War II.  Establishing a great welfare state.  And interfering into the private sector economy during the Eighties.  Causing a great asset bubble.  And a deflationary spiral lasting a decade or two.  Which has compounded their first mistake (see As Japan strains to care for elderly, sacrifices begin by Chico Harlan posted 4/28/2012 on The Washington Post).

In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.

And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.

Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.

Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.

Talk about inverting the pyramid.  Which is what social security is.  A pyramid scheme.  Which will work as long as those entering the scheme outnumber those collecting benefits from the scheme.  Because everyone pays a little to support the big consumers at the top.  But what happens when the big consumers at the top outnumber those paying into the system 4 to 1?  You suffer.  And sacrifice.  With a capital ‘s’.  Especially those at the bottom.  Who will pay in more than those at the top ever did.  While only collecting a fraction of their benefits.  If they collect anything at all.

This is the problem an aging population causes a spendthrift government.  You simply can’t spend at a greater rate than the rate your population is growing.  Because all government spending has to be financed by the taxpayers.  Those with jobs.  In the private sector.  So if the population growth rate falls (i.e., the population is aging) the tax contributions from the individual taxpayers must increase.  Basically enslaving the younger generation to the older generation.  The lesson of Japan should be a cautionary tale to governments everywhere.  For it will happen to you if you try to be too generous with your state benefits.

As it rose into an economic power after World War II, Japan created a generous social security net, with a universal health-care system and a universal pension system in which people were covered as employees or via a basic national program. But since the collapse two decades ago of the real estate and stock market bubble, the foundation of that system has started to crack. Tax revenue has dropped amid deflation, forcing Japan, whose debt-to-GDP ratio is highest among developed countries, to fund its social programs with more and more borrowing…

Kakuta [a 20-year-old college student] said he didn’t think the cutbacks to the current system were coming fast enough. And he doubted the ability of Japanese politicians to draft the right policies.

“To me,” he said, “it sounds more and more like we’re passing this on to the younger people. . . . I feel especially bad for the generation after mine. And that certainly doesn’t motivate me to have more children.”

Who would want to burden their children with a life of near-subsistence?  So it is not surprising that the younger generation may not have the same number of children that their parents did.  Which is the worst thing possible for the government.  For there will be fewer people entering the workforce.  While the population of those leaving the workforce will grow ever larger.  Making the burden on the young even greater.  For each individual will have to support more retirees.  The retirees will, in effect, become their children.

The U.S. is following the Japanese.  For we already know Social Security and Medicare are going bankrupt.  And now with Obamacare thrown in the mix the U.S. will run to catch up with Japan.  As the Europeans are trying to do as well.  Perhaps heralding the end of Western Civilization.  As we turn the hands of time back.  To when there was a ruling elite and impoverished masses.  Who will work for no one but the state.  In exchange for their meager state allowance.

Marx and Engels had it all wrong.  You don’t destroy the middle class with a revolution of the working class.  You do it with the welfare state.  And let the middle class destroy themselves.  By demanding ever more from the welfare state.  It may take a little longer.  But it is so much easier to do.  All you have to do is give people lots of free stuff.  And the people will take it from there.  To the European sovereign debt crisis.  Or to something worse.  To something like that lurking in Japan’s future.

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Jobs and Unemployment, Taxpayers and Tax Consumers

Posted by PITHOCRATES - March 19th, 2012

Economics 101

The Privileged Class enjoys the Good Life Today by Buying Votes with Government Benefits

Jobs are everything.  They pay your bills.  They pay the government’s bills.  And they pay for all those government benefits.  Especially those government benefits.  Which are little more than a pyramid scheme.  Where the few collecting those benefits are at the top of the pyramid.  And those with the jobs paying the taxes to fund those benefits are at the bottom.  And every good pyramid scheme needs to do one thing.  To keep the base growing at a greater rate than the top grows.

Why do politicians do this?  Give out so many benefits?  Simple.  For votes.  Specifically, to buy votes.  We’ve come a long way from the Founding Fathers’ America.  Adam Smith’s invisible hand and free market capitalism.  Representative government.  The things that let all people enjoy life.  Not just the noble class.  This change began in England.  Ironically with the noble class.  Who presented Magna Carta (1215) to King John.  Saying they paid the taxes.  So they were going to have a say in how the king spent those taxes.  As well as protect their privileges and liberties.  And Parliament was born.  Changing England forever.  The American Founding Fathers built on this.  And improved on England’s form of government.  The constitutional monarchy.  By getting rid of it.  Along with heredity power.  And the nobility.  The Founding Fathers had put an end to privilege.  Pity it didn’t last.

There has always been a privileged class.  And there will always be one.  There will always be a small elite group trying to live a privileged life.  Once we called them the aristocratic landowners.  Today we call them politicians and government workers.  Who are a little craftier than their landowning forbears.  For they just can’t have the right last name.  Or marry a good last name.  Because, technically, there is no aristocracy these days.  No.  They need the taxpayers to vote them this good life.  And fund it.  By paying higher taxes.  Which means the taxpayers will live less of a good life to give the politicians and government workers their privileged life.  Hence the government benefits.  And the buying of votes.  Because no taxpayer in their right mind will sacrifice their good life to support a privileged class.  The nobility wouldn’t do it for King John in 1215.  And taxpayers won’t do it now.  So the privileged class buys votes with these benefits.  Particularly from those who don’t pay taxes.

Jobs Matter because the Taxes of the Taxpayers have to balance the Consumption of the Tax Consumers

There are two types of people in the world.  Those who like high taxes.  And those who don’t.  Those who like them are the politicians and government workers who live a privileged life.  And, of course, those who don’t pay taxes but receive government benefits (another steadily growing group).  These are the tax consumers.  Then you have those who don’t like high taxes.  Those with real jobs in the private sector.  The taxpayers.  As government grew from our Founding so did the number of tax consumers.  Which, of course, required more taxes.  And higher tax rates.  On the shrinking group of people with jobs paying the taxes.  To support the growing group of politicians, government workers and recipients of those government benefits consuming those taxes.

This complicates the pyramid scheme.  As you have fewer people supporting more people each taxpayer has to pay a larger and larger share of the tax burden to support the tax consumers.  Meaning you have to increase tax rates further.  Which isn’t easy to do.  Worse, as workers pay more in taxes they have less to spend in the economy.  Thus reducing economic activity.  Businesses hire fewer workers.  As more businesses go through this the unemployment rate begins to rise.  Which means, of course, the number of taxpayers begins to fall.  Making it harder to provide the taxes for the tax consumers.  A group that continues to grow even when the unemployment rate rises.  Because government is like a bacteria.  It takes on a life of its own and grows simply by splitting and creating new bureaucracies.  A growth that never stops.  And soon the rate of that growth overtakes the growth rate of the taxpayers.  Violating the one cardinal rule of pyramid schemes.  Keeping the base growing at a greater rate than the top grows.

This is why jobs matter.  For everyone.  The taxpayers.  And tax consumers.  Because the taxes of the taxpayers have to balance the consumption of the tax consumers.  A fact lost on many voters.  Who don’t understand (or don’t care) that the freer their ride the less free the life of the taxpayer.  Who believe these government benefits can keep coming no matter how many people are working.  They are perfectly all right with the unemployment rate going to 100%.  And having the government provide everything free of charge.  But government can’t do this.  Even with the power of the printing press to print money and give it away.  Because if no one works who is going to build the houses we buy with that free government money? 

Taxpayers voting on How the Government Spends their Money ensures Responsible Government Spending

Someone has to work.  Because houses (and the other things we buy) don’t spontaneously appear.  So who will build them?  Would you labor to build something when the government gives you money?  Even if you don’t have to work?  Probably not.  The only reason we work is for a paycheck to buy the things we want.  The more things we want the harder we work.  That’s incentive.  Take it away and no one will work.  Just as if you tax someone too much you’ll take away their incentive to work harder.  And to vote to raise taxes.  Which is why jobs matter.  Because they pay the bills.  They pay your bills.  They pay the government’s bills.  And they pay the bill for all those government benefits.

Politicians can buy votes by giving away more government benefits.  Converting taxpayers into tax consumers.  Preserving their privileged life.  However, there is a limit to this.  Because as you convert taxpayers into tax consumers you reduce the tax revenue to pay for those benefits.  Especially during periods of high unemployment.  And if they raise tax rates to make up for the reduction in taxpayers this will increase both the rate and duration of unemployment.  By increasing the cost of doing business.  And leaving workers with less money to spend.  Both of which reduce sales revenue.  And the need for workers.  Over time this combination of high spending obligations and low tax revenue can have dire consequences.  And can bankrupt cities.  States.  Even countries.

This is why the nobles met King John on the field of Runnymede.  And presented him Magna Carta.  The nobles were paying a lot of taxes for the king’s wars on the Continent.  If the king continued he could have bankrupted them.  So by making the king apply his Great Seal to Magna Carta they were forcing him to, among other things, spend responsibly.  As they, the taxpayers, now had a say in how the king spent their taxes.  The only way to ensure responsible government spending.  And when politicians and government workers maintain their privilege by having those who don’t pay taxes vote to raise taxes on those who do it removes all responsibility from government spending.  So they spend.  And they tax.  To pay for that spending.  Hurting job creation in the process.  Which is a very big problem.  For jobs are everything.

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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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