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| Real insurance vs. social security "insurance" | | Date Created: Feb 21, 2005, 01:11 PM |
from a college alumni discussion of issues group:
Many Private INSURANCE as weli as Social Security ARE
BOTH welfare systems AND based on Ponzi schemes, yes?
It appears we have a bit of confusion regarding what insurance and Ponzi schemes are.
Unfettered insurance company in private hands is where the person buying the insurance (insured) pays small amounts over time and what s/he feels s/he can afford against the possibility of a disastrous loss that could not be afforded if and when it occurred. If you know you're going to need to pay for something (like replacing a road, a car, or retirement) then you're always better off putting the money you would have given to the insurance company and saving it (letting it accrue interest or whatever investment risk you feel comfortable with). In fact, if you know when you're going to need it and how much it's going to cost, you can easily figure how much you need to save so that it's there when you need it. Don't want to save? Insurance is going to cost more unless you're "lucky" and the disaster strikes.
The insurance company (insurer) is a for profit business that, contrary to liberal belief, can't survive unless it makes money. It figures the relative risk of needing to pay out what the insured is buying insurance against and spreads this over many insureds such that the premiums taken in are more than what is paid out in claims. The insured is in effect betting they'll need it and the insurer is betting they won't. Of course there are lots of varieties of this including insurance that retains a value like whole life insurance. Ideally, the insurer figures the risk for each of its insureds and charges them accordingly but because of the power of large numbers they can spread this risk out such that some aren't truly paying what their risk should make it (teenage male drivers for example) and others are paying more than they need to. One can imagine who this is a problem for "health insurance". Insurance companies help people when disaster strikes but they make a profit doing it. The deal should known and agreed to by both parties though.
There is no pyramid or Ponzi scheme here. The problem is when the government gets involved and heavily regulates the insurance industry based on what it (the politicians in government) sees as social good and forces insurance companies to go against sound business principles or provide some coverage they don't want to cover (so they have to make up for it somewhere else). The malpractice insurance crisis for doctors is caused by the reality that in certain states and certain court conditions (having nothing to do with doctor malpractice or competence), the plaintiff attorneys have scammed the system so badly and won multi-million dollar awards (interestingly, making more money than any doctor could ever make for saving someone's life or bringing them into the world) that insurance companies can't judge their probable payouts, so they have to jack their premiums up to astronomic levels.
Using insurance to provide for your health care needs would be like using car insurance to pay for oil changes, tires, or routine maintenance. The example I use is that groceries are a fundamental need but you don't use insurance to pay for your groceries. How would you like it if the government or an insurance company told you where you had to shop, what you could buy, how much, of what quality, and ultimately how much they were going to pay or not pay? Dentists have largely avoided insurance coverage as payments and are doing fine. We don't have a dental care crisis.
Social Security is a socialist Ponzi scheme because it uses the rhetoric of helping the poor and the old by society "chipping in" to provide what they (and apparently no one else but the government) could provide. These poor people were discriminated against we're told. They couldn't find a job because of the Robber Barons. They were too foolish to save for their retirement. So the government had to step in and create a welfare dependency and ignore all the ways people had devised to support themselves and their families and communities. We couldn't just "let them eat cake" now could we?
Ponzi refers to Charles Ponzi who didn't originate investment scams but became known as the poster child for them in 1920. The idea is that you take in money on the promise that you're going to invest it and make more money on it and then give the investor back their money plus a generous addition. Problem is there never was an investment to add to the money so the money coming in is used to pay off the initial investors, but eventually a large number get screwed. Ponzi is reported to have taken in $15 mil in eight months and only ended up paying out $200,000. Does this sound familiar?
When social security started it was great for the retired and about to retire people who hadn't payed anything. The rest were taxed at a higher rate (which made the Depression worse, not better) and were told that the government would "invest" this money for them and pay back that and more to them when they retired. Of course politicians aren't much different from Charles Ponzi and the federal government quickly began using the excess of money coming in for other "really important needs" and putting IOU's in the "SSI Trust Fund" vault. Future tax earnings could pay for the payouts to the retired couldn't they? As long as more money was coming in than being paid out, the system appeared to work.
A few problems though. In addition to the unintended consequences of the increase in the power and bureaucracy of the federal government, it became apparent that it's a welfare entitlement so it caused dependency on the government but people didn't actually own the money they were putting in. If they died before retirement there was nothing there to give to their families. The current politicians could change the rules any time. The rate of return on this "investment" of SSI tax dollars turned out to be very poor compared to what something as "risky" as the stock market could do over the same period of time with an asset you own.
But the big problem was the baby boom generation which is just coming into retirement years. Population growth in developed countries like the US has decreased below sustainability (not counting immigration), so there will be fewer workers paying their taxes into the system to pay for the retiring baby boomers who aren't really going to be paid by the money they put in during their careers but are still dependent on it (unless they were smart enough to see through the scam). This is why SSI is fatally flawed and will go bankrupt unless benefits are cut, the age of retirement is raised, or SSI taxes are raised.
But why not just stick the old head in the sand and deny the reality? It's obviously just a Bush plot for oil or something. What does Bush really have to gain by taking on this issue other than that the nation really does need to get off welfare schemes and get back to individual freedom to make choices and live with the benefits and consequences of them.
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