30% to 75% Monthly Returns

[MachineGhost]

In other countries, Mavrodi might become a pariah and such scams would be banned. Not in Russia. Before MMM-2011, Mavrodi was famous as the mastermind of an even bigger Ponzi scheme in the 1990s. And in the past few months he has launched yet another one, MMM-2012, that is luring hordes of investors by touting the prospect of returns ranging from 30 percent to 75 percent a month.

Mavrodi dismisses allegations of any deception or illegality. "People voluntarily enter the system," said the reclusive financier in a video he recorded in response to Reuters' questions. "They are warned of the risks. They are conscious of everything. How can there be fraud here?"

http://www.reuters.com/article/2012/09/ ... 8H20120917

[Storm]

Interesting story.  On the one hand, if a pyramid is fully disclosed, it should be legal for people to put their money into it.  Here is where you run into trouble though:

Let's say I want to run a fully honest pyramid scheme.  I tell everyone that it must inevitably break down, so I am only promising that the first ten generations of investors will get their money back.  That's great, however, now nobody would willingly become the 11th generation investor, so in truth, only the first 9 generations of investors will get their money back.  Well, now nobody wants to be the 10th generation investor, etc.

So, there indeed must be some fraud committed in any pyramid scheme.  It is the last generation of investors, which is probably the largest group, that must be defrauded in order to enrich the earlier generations.  So, in other words, just like social security... 

[Pointedstick]

Interesting story.  On the one hand, if a pyramid is fully disclosed, it should be legal for people to put their money into it.  Here is where you run into trouble though:

Let's say I want to run a fully honest pyramid scheme.  I tell everyone that it must inevitably break down, so I am only promising that the first ten generations of investors will get their money back.  That's great, however, now nobody would willingly become the 11th generation investor, so in truth, only the first 9 generations of investors will get their money back.  Well, now nobody wants to be the 10th generation investor, etc.

So, there indeed must be some fraud committed in any pyramid scheme.  It is the last generation of investors, which is probably the largest group, that must be defrauded in order to enrich the earlier generations.  So, in other words, just like social security... 

Zing!

[stone]

Interesting story.  On the one hand, if a pyramid is fully disclosed, it should be legal for people to put their money into it.  Here is where you run into trouble though:

Let's say I want to run a fully honest pyramid scheme.  I tell everyone that it must inevitably break down, so I am only promising that the first ten generations of investors will get their money back.  That's great, however, now nobody would willingly become the 11th generation investor, so in truth, only the first 9 generations of investors will get their money back.  Well, now nobody wants to be the 10th generation investor, etc.

So, there indeed must be some fraud committed in any pyramid scheme.  It is the last generation of investors, which is probably the largest group, that must be defrauded in order to enrich the earlier generations.  So, in other words, just like social security... 

Saying pay as you go pension provision is a pyramid scheme is nonsense IMO. The pay outs to current pensioners are covered by current wage earners and so on and so on. The system can continue like that for perpetuity. A pyramid scheme relies on more and more people joining. That is what makes it doomed to collapse. Social Security with current pensions linked to the earnings of the current wage earners is a fully covered perpetual system.

[Pointedstick]

Saying pay as you go pension provision is a pyramid scheme is nonsense IMO. The pay outs to current pensioners are covered by current wage earners and so on and so on. The system can continue like that for perpetuity. A pyramid scheme relies on more and more people joining. That is what makes it doomed to collapse. Social Security with current pensions linked to the earnings of the current wage earners is a fully covered perpetual system.

What if the number of pensioners explodes and the number of wage-earners collapses (e.g. Japan)? In this case, taxes on earners will need to rise, payments will need to fall, or money will need to be injected from outside the system. Obviously in a country that controls its own currency, money can simply be created to cover the losses, but this breaks the pay-as-you-go promise. You simply can't have high benefits, low taxes, and fiscal independence in a system with a declining number of earners and a growing number of pensioners.

[Storm]

Stone, I agree with what you are saying, and my comment was mostly a joke, however, I think we must acknowledge that any pension system is based on the assumption that there will be the same, or more people added to the system as new employees as there are retirees.  If, like Pointedstick points out, Japan happens and twice as many people retire as are hired, the system quickly starts to collapse, like any pyramid scheme.

I do think, as far as pyramid schemes go, pension plans are pretty much innocuous, however, I find it somewhat humorous, (in a gallows humor type of way) that pyramid schemers are usually prosecuted and jailed, while pension plan administrators are generally respected members of society.

[Pointedstick]

I do think, as far as pyramid schemes go, pension plans are pretty much innocuous, however, I find it somewhat humorous, (in a gallows humor type of way) that pyramid schemers are usually prosecuted and jailed, while pension plan administrators are generally respected members of society.

If I were a pension administrator, at cocktail parties I would probably delight at describing myself as someone who runs an elaborate, socially-acceptable pyramid scheme. That would sure get people talking!

[stone]

Saying pay as you go pension provision is a pyramid scheme is nonsense IMO. The pay outs to current pensioners are covered by current wage earners and so on and so on. The system can continue like that for perpetuity. A pyramid scheme relies on more and more people joining. That is what makes it doomed to collapse. Social Security with current pensions linked to the earnings of the current wage earners is a fully covered perpetual system.

What if the number of pensioners explodes and the number of wage-earners collapses (e.g. Japan)? In this case, taxes on earners will need to rise, payments will need to fall, or money will need to be injected from outside the system. Obviously in a country that controls its own currency, money can simply be created to cover the losses, but this breaks the pay-as-you-go promise. You simply can't have high benefits, low taxes, and fiscal independence in a system with a declining number of earners and a growing number of pensioners.

Unlike a pyramid scheme that is dependent on escalating growth, the social security demographic hump is just a temporary blip. You can not get an ever greater prepoderance of retirees. Sooner or later (in a predictable way) the glut of pensioners will pass off the mortal coil and be replaced by the smaller subsequent generation.

The real constraint of lots of pensioners needing care by a few people of working age applies just as much if everyone held HBPP for their retirement rather than having a pay as you go social security set up. You can't use financial engineering to magic workers out of thin air.
As Mosler says:

“The problem is that 30 years from now
there will be a lot more retired people and proportionately
fewer workers (which is true), and the Social Security trust
fund will run out of money (as if a number in a trust fund is an
actual constraint on the government’s ability to spend…silly,
but they believe it). So to solve the problem, we need to figure
out a way to be able to provide seniors with enough money to
pay for the goods and services they will need.”? With this last
statement it all goes bad. They assume that the real problem of
fewer workers and more retirees, which is also known as the
“dependency ratio,”? can be solved by making sure the retirees
have sufficient funds to buy what they need.
Let’s look at it this way: 50 years from now when there
is one person left working and 300 million retired people (I
exaggerate to make the point), that guy is going to be pretty
busy since he’ll have to grow all the food, build and maintain
all the buildings, do the laundry, take care of all medical needs,
produce the TV shows, etc. etc. etc. What we need to do is
make sure that those 300 million retired people have the funds
to pay him??? I don’t think so! This problem obviously isn’t
about money.
What we need to do is make sure that the one guy working
is smart enough and productive enough and has enough capital
goods and software to be able to get it all done, or else those
retirees are in serious trouble, no matter how much money
they might have. So the real problem is, if the remaining
workers aren’t sufficiently productive, there will be a general
shortage of goods and services. More “money to spend”? will
only drive up prices and not somehow create more goods
and services. The mainstream story deteriorates further as it
continues: “Therefore, government needs to cut spending or
increase taxes today, to accumulate the funds for tomorrow’s
expenditures.”? By now I trust you know this is ridiculous and
evident that the deadly innocent frauds are hard at work to
undermine our well-being and the next generation’s standard
of living as well.

[AgAuMoney]

Saying pay as you go pension provision is a pyramid scheme is nonsense IMO. The pay outs to current pensioners are covered by current wage earners and so on and so on. The system can continue like that for perpetuity. A pyramid scheme relies on more and more people joining. That is what makes it doomed to collapse. Social Security with current pensions linked to the earnings of the current wage earners is a fully covered perpetual system.

LOL!

The payouts are not covered.  The system has outgo exceeding income years before it was expected, but it has been expected for at least two decades now.

Study the numbers...  When SocSec started it was 30+ earners per recipient.  Now it is just over 2 earners per recipient.  Already it has had to cut promised benefits at least once and increase taxes more than once.  Repeating both will be necessary since the declining labor pool is insufficient to pay projected retirees.

[stone]

AgAuMoney, I guess you are a lot more familiar with the specifics of the US Social Security set up than me. My understanding was that they had projected that the baby boomer generation would initially create a glut of payments and then make a big draw down. That is demographics. It will reach equilibrium because there isn't an ever shrinking population of people of working age versus an ever vaster population of retirees. It is like a wave that will pass by. Anyway this demographic issue bedevils ANY type of provision for the elderly. Stock prices surge and crash in time with demographics in a system where people buy stocks with savings in order to  divest them to pay for retirement. It is an issue with the reality of having lots of retirees. Something like the Social Security system needs to be conducted with a certain amount of common sense to make sure that demographic shifts are catered for sensibly.

[Pointedstick]

That is demographics. It will reach equilibrium because there isn't an ever shrinking population of people of working age versus an ever vaster population of retirees.

Actually, there is, and that's the problem. All throughout the western world, births have been falling and the elderly have been living longer. When Social Security was established in 1937, the retirement age was 65 and the average male life expectancy was only 58! Now the retirement age is 67 and the male life expectancy is 75.6. So SS has morphed from a reward for beating the odds to a nearly-certain entitlement.

Additionally, fewer and fewer non-retirees are actually working. The labor force participation rate has been falling for 20 years (after rising as women joined the workforce en masse). Many of these labor force non-participants are not only not working, they've gone on Social Security disability, often using hard-to-verify conditions like lower back pains or chronic migraines. Some even get disability for conditions they've brought on themselves, like adult-onset diabetes stemming from a terrible diet. So they're contributing to the problem of a smaller pool of workers contributing to the funds available for the payees.

These trends are not subsiding. The Baby Boomer generation is a hump on top of the trends.

[rickb]

When Social Security was established in 1937, the retirement age was 65 and the average male life expectancy was only 58! Now the retirement age is 67 and the male life expectancy is 75.6. So SS has morphed from a reward for beating the odds to a nearly-certain entitlement.

This is one of the most misleading statistics ever cited - let me guess, Fox News?

In 1937 the incidence of infant (and childhood) mortality was WAY higher than it is now which tended to reduce the average life expectancy.  Excluding the improvements in infant and childhood mortality, the average life expectancy really hasn't changed that much.  For example, this table http://www.ssa.gov/oact/tr/TR02/lr5A3-h.html shows the average life expectancy for a 65 year old male has increased from 11.9 (76.9 years old at death) in 1940 (darn close to 1937) to 15.8 (80.8 years old at death) in 2001 (darn close to now) - while the "at birth" life expectancy increased from 61.4 to 73.8.  Sources citing the "at birth" number as if it means that folks now are drawing on SS for 12 more years(!!!!!!!!!!!! - that's 12 exclamation points BTW) are being deliberately misleading.  The number that would actually be meaningful is the life expectancy for an 18 year old.  Before this age you're distinctly unlikely to contribute much toward SS in taxes, and your life expectancy at this age pretty much says how long you're likely to draw from SS.  Lacking this information, we could say in 1940 an average 65-year old male was likely to draw on SS for 11.9 years while in 2001 an average 67 year old was likely to draw on SS for 13.8 years.

Meanwhile, the SS tax has increased from 1% (matched by employer) on a maximum of $3,000, to 7.65% on a maximum of $106,800 with a 2.35% tax on amounts above $106,800 (all matched by employer), see http://www.ssa.gov/policy/docs/statcomp ... 2.a3.  We've multiplied the tax by a factor of more than 7 on 35 times as much income to cover an additional 1.9 years (less than 20%) of benefits.

Whatever issues SS has, the difference in life expectancies between 1937 and now are not one of them.

[Pointedstick]

looks like you're right about that, rickb. I hadn't considered the impact of mortality at birth and childhood pulling down the average life expectancy when I compiled that data--straight from BLS data I might add, without so much as thinking about Fox News, which I can't even watch even if I wanted to because I don't have a TV. Believe it or not, it's possible that people might come to erroneous conclusions all on their own without being manipulated by the evil sinister media! 

[smurff]

Many of these labor force non-participants are not only not working, they've gone on Social Security disability, often using hard-to-verify conditions like lower back pains or chronic migraines.

Nearly all conditions are hard to verify when it comes to whether or not they're disabling, which is what Social Security's Disability program requires.  That a big chunk of the population has no insurance, or is underinsured with limited access to good quality medical care, adds to the problem of verifying their conditions.  That people with chronic conditions continue working for years through their pain and misery, only to stop when the condition worsens to the point they can no longer move, also adds to the verification problem.  The Social Security Disability Program does not automatically approve anyone, and has an initial denial rate of 65%.  (Before they offered assistance on how to build a case, the denial rate was higher than 70%.)  And most of the people denied don't move forward in the appeals process.

Some even get disability for conditions they've brought on themselves, like adult-onset diabetes stemming from a terrible diet. So they're contributing to the problem of a smaller pool of workers contributing to the funds available for the payees.

I don't think it's fair to blame the sufferer.  Would you blame him for his disabling condition if his spine were severed in a hiking or surfing accident?  After all, he brought it on himself.

With few exceptions, ALL standard American diets are terrible, partly as a consequence of of our industrial production, processing, and distribution of food.  By the time a sick person wises up and figures out a non-terrible diet, the damage may be done (and permanent). 

[Pointedstick]

That's sort of a bigger question: How responsible are people for their decisions and the consequences--positive or negative--of those decision? I personally tend to err on the side of more rather than less, keeping mind that the less responsible we are held for our decisions, the less our successes can be attributed to our actions.

[MachineGhost]

Additionally, fewer and fewer non-retirees are actually working. The labor force participation rate has been falling for 20 years (after rising as women joined the workforce en masse). Many of these labor force non-participants are not only not working, they've gone on Social Security disability, often using hard-to-verify conditions like lower back pains or chronic migraines. Some even get disability for conditions they've brought on themselves, like adult-onset diabetes stemming from a terrible diet. So they're contributing to the problem of a smaller pool of workers contributing to the funds available for the payees.

SSDI is an earnings-based contributions program.  If you don't work long enough (or a have a deceased parent that did), you can't apply for it.  It's not like general welfare that SSI is.  And the payable amounts are not anywhere near living wage: $18K a year for SSDI and $8400 for SSI.  In a way, SSDI is closest to a Citizen's Dividend in concept.  SSI, however, is a joke and comes with ridiculous limitations such as you can never have more than $2K in savings or assets.  Ever.

The problem with conservative thought is it believes that any kind of public assistance produces dependency and sloth, rather than improving self-esteem and opportunities.  The world is not black and white with a level economic playing field, most especially if you're below upper class, disabled or a minority.  Ignoring this for sake of selfish ideaological purity solves nothing.

[AgAuMoney]

AgAuMoney, I guess you are a lot more familiar with the specifics of the US Social Security set up than me. My understanding was that they had projected that the baby boomer generation would initially create a glut of payments and then make a big draw down.

Yup.  But that isn't "pay as you go."  The idea was to save up the excess while they were working, and have it when it was time to pay it out.  Unfortunately, under Bill Clinton the OASDI revenues were made part of the regular income (making the budget deficit look really nice) and all the money was 'borrowed' away.  Like borrowing from your own piggybank, the money is gone and you have to pay yourself back which is never easy.  It's going to get interesting.

And the BLS released new numbers I had not yet seen when I made that post.

Currently there are 1.75 workers per retiree and on average over 10,000 boomers are expected to retire per day for the next 30 years.  At 1.75 workers per retiree, taxes will have to increase significantly to maintain the current benefit level.

I paid my first OASDI taxes in 1976.  Since then they have changed the benefit formula to cut benefits, raised the age at which I can receive those benefits by two years, and started taxing benefits.  All those are benefit reductions to what I was originally promised.  In addition they have changed the CPI calculation several times, ostensibly to better reflect reality, but the real experienced affect is to reduce COLAs, further cutting promised benefits.  It's especially hard when the areas they alter are those which have the least impact on the elderly such as the way housing expense is calculated.  This change resulted in no inflation and even deflation the last few years, so no COLA for OAI recipients.  But yet their food and energy expenses have increased, not decreased.

In 1991 the forecast was that outgo would exceed income sometime after 2020 and probably by 2025.  In 2005 the forecast was "probably about 2020."  It happened in 2010.  Now they are predicting that the "trust fund" will be exhausted about the time I am eligible for my full benefit (early 2030's) and they expect that if nothing is done by then, benefits will be cut by approximately 25% (so they pay about 75% of 'promised' and it becomes truly "pay as you go").  Of course, that's about 20 years from now, a lot can change.

I expect I'll see more benefit reduction, probably a change in formula as well as more means testing resulting in either outright benefit reduction or increased tax on benefits.  For those younger than me I expect to see more increases in the age for full benefit.  But as hard as it is to get anything past the AARP, it could very well be that no proactive changes will be made.

Either way, the program is not sustainable in its current form with current demographics.  It would be in even worse shape without the immigration amnesty programs (1987? and ).

[MachineGhost]

Either way, the program is not sustainable in its current form with current demographics.  It would be in even worse shape without the immigration amnesty programs (1987? and ).

Wouldn't a simple way to end the funding shortfall is ending the illusion that it is a contributions-based pension scheme and uncap the maximum amount of income that the FICA taxes are applied to?  It seems to me this would do more for social justice "fairness" than wasting time futzing around changing marginal income tax brackets which all just seems to go to the War Deparment Department of Defense anyway.

I do wonder what the breakdown is of revenues from the payroll tax vs income tax for funding OASDI.  Which funds the majority?

[MediumTex]

I paid my first OASDI taxes in 1976.  Since then they have changed the benefit formula to cut benefits, raised the age at which I can receive those benefits by two years, and started taxing benefits.  All those are benefit reductions to what I was originally promised.  In addition they have changed the CPI calculation several times, ostensibly to better reflect reality, but the real experienced affect is to reduce COLAs, further cutting promised benefits.  It's especially hard when the areas they alter are those which have the least impact on the elderly such as the way housing expense is calculated.  This change resulted in no inflation and even deflation the last few years, so no COLA for OAI recipients.  But yet their food and energy expenses have increased, not decreased.

I find it most interesting that basically everyone born after some arbitrary year [I forget..1945?] is taking a hit of varying degrees [depending how far after that year you were born] to the 'promises' that were made by Social Security. And yet when cutting the benefits of public pensions are mentioned, the outcry from the recipients is that they can't change what was promised to them, and contributions were made on their behalf. How is that any different?

I once heard it described as "fiscal child abuse."

[AgAuMoney]

I do wonder what the breakdown is of revenues from the payroll tax vs income tax for funding OASDI.

Supposedly OASDI is funded entirely from FICA (the 6.2%? that is not medicare/caid) from both the employee and employer.  (or you pay both parts if you are self-employed)

However as we are now paying benefits partially from the 'trust fund' then obviously that portion is now being paid from general revenue (income taxes being the largest part) and additional borrowing.

[AgAuMoney]

when cutting the benefits of public pensions are mentioned, the outcry from the recipients is that they can't change what was promised to them, and contributions were made on their behalf. How is that any different?

You're going to have to find a public pensioner to answer that one. 

Personally I don't think there is any substantial difference.  The only difference is technical - the OASDI programs are operated under and regulated by an entirely different section of the law and body of gov't.  I'm sure some people will argue that is a substantial difference, but since congress can change any law...

[Pointedstick]

when cutting the benefits of public pensions are mentioned, the outcry from the recipients is that they can't change what was promised to them, and contributions were made on their behalf. How is that any different?

You're going to have to find a public pensioner to answer that one. 

Personally I don't think there is any substantial difference.  The only difference is technical - the OASDI programs are operated under and regulated by an entirely different section of the law and body of gov't.  I'm sure some people will argue that is a substantial difference, but since congress can change any law...

My parents are both (will be, actually) public pensioners in a state that's a fiscal wreck (IL), and they're hopping mad. I think what drives them is how generous their pensions are compared to Social Security payouts, which are actually pretty small. By contrast, their pensions are for lifetime payments equal to between 70 and 90% of their top earning year (!) and lifetime free medical care (!!!). With such generous pensions, you can see how one might decide to save less of their own money. As long as the system endures, what's the point, right? Thankfully, they wised up about 15 years ago, but they still don't have nearly as much as IMHO they ought to if the state pension system goes belly-up, as I imagine it will soon given how ridiculous it is to imagine that even a tenth of the money required for such fancifully generous payments has been set aside (it hasn't).

[stone]

I suppose military pensions are genuine pay as you go pensions. They are paid from current government funds and there is no pretense about it being contribution connected (is that true for US military pensions as with the UK?). That seems to me by far the most sensible way BUT I guess it is impossible to hope that such a general system would not get encroached upon by politics. Military pensions are a political no-go area and so can afford to be no-nonsense.

When people talk about the social security trust fund having been "raided" by politicians in the past, I think that all needs to be seen for the nonsense that it is. The trust fund etc are nothing other than accounting records. If some politician claimed to be funding something ten years ago by way of "raiding" the trust fund then that has no bearing on whether a politician today takes any heed of that. Clearly that politician ten years ago was simply deficit spending and lying about it.  If a current politician cuts payments to current pensioners then ALL the blame sits with the current politician.

I guess the overall issue stems from a smaller and smaller proportion of the economy's output going as wages. As the economy shifts from paying out a lot as wages to instead paying out return on capital harvested by Wall St, then less and less is available for payroll taxes.

[MachineGhost]

I guess the overall issue stems from a smaller and smaller proportion of the economy's output going as wages. As the economy shifts from paying out a lot as wages to instead paying out return on capital harvested by Wall St, then less and less is available for payroll taxes.

So fine, uncap the damn FICA tax.  What is the problem, y'all super-rich bastards?

[stone]

I guess the overall issue stems from a smaller and smaller proportion of the economy's output going as wages. As the economy shifts from paying out a lot as wages to instead paying out return on capital harvested by Wall St, then less and less is available for payroll taxes.

So fine, uncap the damn FICA tax.  What is the problem, y'all super-rich bastards?

Sure. Put even more money in, get even less money out. 

Pugchief, I thought that one thing that is clear about social security is that it is cheap to administer. The money that goes in does mostly get to recipients without getting creamed off by administrators. The same can't be said about most retirement provision systems.