Our World Today
January 14 2013
Young people pound Ponzi to pieces
| “Forgive us our debts.” A line from the Lord’s prayer. I think it is curious that ‘debt’ is at the heart of today’s troubles. Apart from Adam and Eve, we can blame Bismarck. He was the Angela Merkel of his day: chancellor of Germany in 1889, and started Old Age Pensions, a real novelty then, but now accepted as a birth right.
An exceptional man, Bismarck. He singlehanded created the Germany as we now know it. He lived till 83, in a time when the average life expectancy was 37 years for men and 40 years for women. The state pensions he initiated did not kick in until age of 70, to be paid by future generations. Since families were big, that posed no problem, because in 1880 the median fertility rate among women in today’s G-7 countries of Canada, France, Germany, Italy, Japan, the U.K., and the U.S. was 4.6. Decades ago I was in the insurance business, and studied how pensions were structured. Many years after that I was part of the pension board of an organization that administered its own pension for its employees. Basically pensions are based on two factors: longevity tables and interest rates. From 1950 till after 2000, interest rates were at least 5-6 percent. Such high returns made investments grow, and kept pension funds in the black. Then too mortality was stable. Now people live longer, while interest rates are close to zero, causing tremendous headaches for the actuaries and their pension funds. Governments, with their political promises of life-time benefits also bank on two factors: economic growth and population growth. Both are now also close to zero. Result that both pension funds and government finances are in dire straits. Bismarck was smart. In his time very few people reached 70. Projecting age 70 from 1883 to 2013 means that pensions today should start when people reach age 85 or 90, instead they often begin at 60 or even earlier, and that while people live longer, and with return on capital next to nothing, the two legs of pensions are broken. Canada and the USA, are trying to bring the retirement age up a couple of years, but there is too much opposition. Both are threatened by demographics: old people are the fastest growing segment in the population, while the number of young people is at an all-time low, with falling birth rates, (it is below the rate of natural reproduction of 2.1, with rates in Germany, Italy, and Japan as low as 1.4), falling marriage rates, and thus an explosion of singles, people who never marry, often moving back to mama. Bismarck’s option that the next generation pays the benefits of the previous one, no longer works. Enter Ponzi. |
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In 1920, an Italian immigrant to the U.S. by the name of Charles Ponzi started a business that would buy postal reply coupons in Italy and exchange them for stamps in the U.S., taking advantage of significant price differences due to high postwar inflation. He attracted investors by promising extraordinarily high returns—50 percent within 45 days. He simply used the money of later investors to pay high returns to earlier investors, extracting huge profits along the way. By the time the fraud collapsed, investors had lost nearly $20 million, the equivalent of about $225 million in today’s dollars. Such frauds have been known as Ponzi schemes ever since.
The second-biggest Ponzi scheme is more recent. It was concocted by the New York hedge-fund manager Bernard Madoff, and collapsed in 2008 with losses of approximately $20 billion. But the biggest Ponzi scheme is still happily fooling all of us in the developed economies. We in the Western World, and Japan, have borrowed enormous funds from the future, basing it on a global growth and lots of young bodies. There are strong indications that future growth to fund today’s pensions and medical costs will never come. The young people are saying by their attitude: go and fly a kite; we will not cooperate; we refuse to produce enough children to fund your folly. In other words, young people are pounding Ponzi to pieces.
The result is that, financially all Western governments are in deep trouble. Debt has been accumulated at a frightful pace, and the Ponzi scheme that so well worked for Bismarck, is backfiring: there are not enough young people to pay for the old people’s benefits.
And these obligations are huge: income for life and free medical care, increasing exponentially for older people who become sick more often. The young people are in no position to pay for this: many good jobs have gone to low wage countries and robot technology is threatening to eliminate a lot of other jobs. Good bye Ponzi.
What is happening to these young people? There are two changes in their attitudes. One is religion. By and large young people are abandoning it, and with it they are also letting go of marriage. Joel Kotkin notes in a recent report titled “The Rise of Post-Familialism,” that one of the factors all major world religions have in common is that they make family and kinship central in their lives. Indeed, the more devout young people are, the higher their rates of marriage and the more children they have. Lack of religious values leads to secularism and agnosticism and forestalls family formation.
Then there is contraception which has abolished the old trinity of sex, marriage, and childbearing, and decoupled sex from baby making. And with that link broken, the connections between sex and marriage — and finally between marriage and childrearing — are severed, too.
And this trend line is heading higher. Divorce rates are stable, but cohabitation is now so common that it is crowding out matrimony as the formal form of family formation. Also increasing levels of education push the average age at first marriage higher.
The conclusion is simple. Times have changed. Two trends are irreversible: people live longer, which means immense outlay for medical purposes and pension benefits, while birth rates decline and so what happened in the past no longer works.
Add lower growth – or no growth at all – another leg on which society depended, and the haggling about money and taxes and benefits will only lead to utter stagnation. What cannot continue, will not continue. Young people sense this. They sense a future with little prospect and so intuitively refrain from commitments, such as marriage and childbearing.
Next week’s column will be based on Revelation 22: 2: “The leaves of the tree are for the healing of the nations.”