Pensions = Pyramid Scheme

[Faultymain5]

Not sure if this is political, but I think it must be because it is government based.

So can anyone explain to me how pensions aren't simply a complicated ponzi scheme? Originally invented, not for you to have a decade or so of a comfortable existence before you croak, but in the hope you die before that decade is up (or before retirement) and they get to keep your excess.

I’m not sure what you mean? Your pension is yours. You would name beneficiaries so in the event you didn’t get to claim it, it would pass to someone you choose.

Talking state pension to clarify.

OP, your pension savings become part of your estate if you die before you are 75 (over that, the beneficiary pays tax). If you've started to take it via draw-down, then whatever is left becomes part of your estate. If you've used it to buy an annuity, then it will follow whatever the terms are.

State pension is an insurance scheme that will pay out for however long you live, hardly a Ponzi scheme, unless you believe all insurances are one?

www.thisismoney.co.uk/money/pensions/article-2787888/how-state-pension-funded-cash-runs.html

I'm really talking about the state pension here and about how it doesn't make sense (to me at least). Public Sector also has a similar funding problem.

I assume that you mean the state pension, since people with ‘money purchase’ (defined contribution) pensions are no longer obliged to buy an annuity when they retire, and anybody with a ‘final salary’ (defined benefit) pension will be getting a very good deal irrespective of how soon after retirement they die?

Is your question really, ‘I am the next of kin of somebody who recently died and I want to know why I’m not getting the pension payments [s]he would have received if [s]he had lived to the average age’?

The state pension isn’t backed by assets (current state pension payments are funded by current NI contributions) but I think it would be a stretch to describe it as a Ponzi scheme.

Even if you take the view that your own NI contributions will fund your own state pension, which they don’t really since it will be the contributions of working people when you retire that provide the funds, not everybody will have an ‘excess’ of NI contributions if they die relatively young, will they? What if you’re a 75 year old woman who brought up a family, didn’t work and then cared for elderly relatives? That woman wouldn’t have a full NI record because of the way things worked in the past, for example.

Where does the money come from to pay the state pension?

A pyramid/ponzi requires more people to fill the pot, making those at the top richer (or in this case receive their pension), but the more people you get in the scheme, the more people you need to keep it going.

So far would you say that was right?

I've wondered about this, too.

Private pensions are funded by your money (plus employer contributions) being invested for future growth. Your money is working for you and generating wealth for the country (I think) during the years that you are working. It remains yours even after you die, as it is part of your estate.

State pension OTOH is entirely different. IIUC it is paid in real time, not from investment. So the money that is collected through NI this month is the pot available from which to pay this month's pensioners (maybe not exactly this time frame, but not the years between money in pension out of private pensions). Hence the rising age at which people become eligible for the state pension.

It's a pooling of risks. Yes, the people who live longer benefit financially compared to those who die a couple of years after retirement.

That's how all insurance works, OP. If your house burns down or you're involved in a car crash, your house/car insurance pays. Effectively this is being paid for from the premiums of people who bought the insurance and didn't have to make a claim.

That's the whole concept of insurance.

@Nettletheelf
Is your question really, ‘I am the next of kin of somebody who recently died and I want to know why I’m not getting the pension payments [s]he would have received if [s]he had lived to the average age’?

We no. I leave that line of questioning to the other moneygrabbers on this site. I don't believe nor want "deadlef" (def: what the dead has left behind), it's a cultural thing.

OP, the money comes from people currently working and paying taxes. The current workers support the current retired people (and expect to supported by the future workers in their turn). There's no 'pot' of money.

The problem is that people are living longer so there's a greater burden on the current taxpayers.

OP, there is no "excess" created with state pensions. Contrary to what is widely believed, National Insurance contributions are not kept in some ring fenced personal fund to provide your pension. The money you and your employer pay goes straight into central government funds and is used to pay for everything funded by the state. It is for all practical purposes just another tax.

Your NI contribution record creates an entitlement to a certain level of state pension according to the prevailing rules. However the pension you finally receive is actually paid from central government funds, so actually from current tax receipts from all sources including PAYE/ NI being paid by current workers while you are retired.

There is no cast iron guarantee of receiving a state pension and this is purely discretionary like any other government spending. It depends on current government policy and could be scrapped altogether if a government wished to, though this would likely be so controversial as to be political suicide.

Changes in entitlement, however, have already been made by increasing retirement age, which reduces the amount of pension we will all receive in total.

@Lusacole

That makes sense, but still sits less right with me than car/home insurance. I think I need to think about why.

Oh I remember now, it requires more and more people to pay into it. There has to be a point where we aren't going to have more and more people able to do so. One way to fix this is by making you work longer (great for labourers, not).

State pension, they don’t put away your payments over your working life time OP. What you pay in now is being used to pay other people’s state pensions, this is the problem as there are to many pensioners and not enough births - as the pensioners increase and not enough workers paying NI etc this will create further issues

Thus the increases of pension age

Ah, I now get your point, OP. You are right that pensions being paid out now are not covered by the recipients previous NI payments, but then that holds true for an awful lot of government finance, it's all based on a fiat currency and a believe that the UK will be able to afford to cover pensions in 10, 20, 50 or whatever years time.
Out whole finance/banking system could be argued to be a Ponzi scheme that relies on trust and future earnings. When that trust is shaken, like in 2008, the whole pack of cards can come tumbling down.

OP, it only requires more and more people to pay in because we are living longer, so need more money in retirement. If that wasn't happening (i.e. if the average life expectancy had remained constant over the last few years) then it wouldn't need more and more people. It would be in a stable state when the workers (20-65 year olds) support the retired people and get supported in their turn.

This wasn't something that could have been predicted when the state pension was originally introduced. The improvements in life expectancy over the last 40 people have been better than anyone would have expected.

So, @Ifailed our whole structure is one big house of cards, built on wet sand.

When it all falls/sinks the vulnerable will be even more buggered than it is now. This actually goes further than the problems with the state pension.

@OnGoldenPond, the fact that there is no guarantee of the payment is a scary thought. At present it doesn't appear I'll have to rely on it, but thinking about the people that do...they won't even see it coming.

OP, what's your suggestion for a better system? Genuine question.

Are you suggesting we shouldn't have a state pension scheme? Or do think we should have one, and it shouldn't be unfunded (i.e. everyone should contribute to their own 'pot' of money). Either of those two options would be even worse for the vulnerable.

It's demographic timebomb that people are talking about, and which governments have been planning for (but not terribly effectively as we are really not good at looking beyond the short/medium term. But pensions experts have been warning about this since at least the 90s.

Basically, you are tight, you need a stable or increasing working population relative to the number of pensioners to keep government sums roughly where they are and with NI revenue (which also funds health service) making a decent bite from it.

With greater longevity in the post-war generation (we what a different a good childhood diet made, even though rationing wasn't liked at the time), there is a double whammy on the NI revenue - paying out pensions for longer, and more costs to the health service as people survive for longer but therefore have more eg cancers and expectations of state of the art drug. So other government revenue streams may need to be raided. This is actually a good thing, if you want a humane society which looks after its elderly.

That doesn't even touch on the social care aspect, though.

@Lusacole but it could have been predicted really, if you invest in research and technology, you expect results surely?

And we definitely had results from better healthcare prior to the 1990s, so not giving people a heads up about their intentions which makes it look as though - though I doubt it was - only thought of yesterday, putting people - but mostly women - in a disadvantaged position, by changing the age with little notice.

Faultymain5 yes, you are right, but as other's have said, how else would you organise it, and how would you transition out of it & to what?
We have worked ourselves into a position where our whole society is reliant on the magic-money tree of fractional banking and gambling on stocks and shares.
Collectively governments have printed debts of over $82,000,000,000,000, that's over $10,000 for every woman,man & child on the planet, money that the same governments will have to pay back, probably by printing even more bonds.
It's lunacy, but it's so big and all encompassing that we are all reliant on this myth being perpetuated. Because it's so important, those that run it are effectively beyond control and they know they are "too big to fail".
It rather makes funding the UK's state pension a piece of piss.

@Lusacole
I'm posing the question is it a Pyramid scheme? What in that question tells you I could possibly have the answer. I'm so scared of discussing pensions, I've been putting off dealing with my 4. It would take nothing to fix it, just concentration, but they've made it so difficult to understand I'm running scared. And you ask how I'd sort it.

One thing I would do is tell the public the truth, it is unsustainable as is. But that's why I'm not a politician. Truth doesn't work well with the masses.