A few generations ago, people and governments in Europe decided that they wanted to take care of the poor, the old, the sick, and the unfortunate. These are all beautiful, lofty goals, and certainly humanitarian in intention. The idea was to take money from those that can afford it, and give it to those who can’t. In other words, take it from the productive, and give it to the unproductive. If those receiving the benefits are a small segment of the population, and those donating to them are a large population, then each giver must allocate a small amount of their winnings towards this ideal. Many would agree that this is an excellent use of their money, and thus it was mandated that the productive people make these donations.
If we look at this structure as a pyramid – the old, sick, and poor – are at the top of the pyramid, and everyone else is at the bottom. The money flows upwards in this scenario, just as it would if you were one of the first ‘investors’ into Amway. The people at the bottom, however, look at the people at the top who receive all this money, and they want to be like them. The decide they would like to join the ranks of the poor, the sick, and the old, and suddenly people start moving from the bottom of the pyramid to the top so that they may receive those gifts. For each 1 person moving to the top of the pyramid, the bottom loses 1 person, and thus each person at the bottom must donate more of their winnings for the comfort of those at the top. As the people at the bottom start having to pay more and more they feel their lives might improve with much less effort if they were at the top of the pyramid, and thus the top swells, and the bottom shrinks.
Eventually the people at the bottom say there is no more money to give, so they have 2 choices. They must either borrow to continue on this path, or they must find more people who are willing to be at the bottom with them. To create more people at the bottom means having more babies or allowing people from other countries to come in. If they are unwilling to do this, they can borrow money until their creditors say enough is enough, and start to lose faith that they will ever get their money back. At this point, their creditors will cut of the flow of money, and the money going upwards start to die. This is when the pyramid collapses, and it is the point that we have reached today in these club med countries in Europe.
Providing for the old and the sick is certainly a humanitarian mission that we should respect as an ideal. But let us not kid ourselves into believing that the system is anything more than a pyramid scheme that requires an ever increasing number of people at the bottom. If this system were being run by a private company, it would certainly be shut down by the authorities. It was always doomed to fail from the beginning, but pyramid schemes always work beautifully for the people who benefit at first. Once the funding is cut, the game is over. The amazing thing about this, is that Japan and countries in Europe have the option of always increasing immigration to get more people at the bottom, yet they refuse to do so.
Without more babies, more immigrants or some generous donation of a trillion bucks, the club med countries have seen their pyramids crack.
I don’t always call social security programs a pyramid scheme, but when I do, Charles Ponzi smiles