While writing the State Pension Boosting guide, the more I thought about the National Insurance and State Pension system, the closer it seemed to having all the characteristics of a Ponzi scheme.
The most famous of these is the Madoff scam, but there’ve been countless others. A Ponzi is effectively a disguised pyramid scam. With a Ponzi people invest in a scheme, on the back of a promise their money is being used to generate decent returns. The Ponzi then pays out, making some grateful investors recommend it to friends, bringing many more people in.
Yet rather than the investment actually delivering, the cash is coming from all the new people joining, and thus it only works until you hit a critical mass. For a full definition read my former Ponzi v Pyramid blog.
The Pension as a Ponzi.
We are all asked to pay into the National Insurance system on the promise that it will help protect us and provide a pension (amongst other things). Yet rather than actually put the money aside, it isn’t hypothecated, it just goes into the general pot of taxation.
When we actually get our pension it comes out of other, newer taxpayers’ contributions, rather than any money actually put aside to pay for us in our old age. We are made to believe it works because the state pension continues to pay out, rather than by any sound fundamentals.
Like a ponzi scheme, the system will continue to work until there are too many existing members to be funded by the new ones. In our case the problem will be a gradually ageing population. Worrying thought, yet frankly it’s still the best and only system we’ve got, so it’s no surprise, past, present and probably future governments will stick with it.
PS. Having written this, I decided to do a Google search and see if anyone else had considered the similarity between the two. And rather bizarrely I found an article published only a few days ago in the Birmingham Post. So it looks like the analogy may just grow!