Social Security and the Elderly Bread: Individualistic Solutions Inferior, Except When The World Ends ... and Then Who Would Be Counting?

John Kay reminds us of an excellent analysis of why we implement "welfare" programs in, "The welfare state’s a worthy Ponzi scheme", from which a highlight follows:

Social security is a means of inter-generational transfer. The only bread fit to eat is bread baked today: but why should today’s bakers feed the retired bakers of yesteryear? Why should we look after old people, who can no longer do anything for us? 

... We feed the generations of our parents and grandparents in the expectation future generations will come along and do the same for us. ... One day, the world will end and the last generation of workers will have been cheated of their expectation of a peaceful retirement. ... 

A brilliant analysis of the issues was provided half a century ago by Paul Samuelson, the great economist – an analysis that might have received wider attention had it not been written in mathematics and published under the uninviting title of “An exact consumption-loan model of interest with or without the social contrivance of money”. 

The only individualistic solutions to the problem of ageing are to store bread to eat, or sell, when it is stale and you are old; or to take the opportunity when young to bribe younger people to look after you in your dotage. Samuelson showed these outcomes were inferior to the outcome of the social security contract for every generation except the one alive on judgment day.

The rest of the article -- over at the Financial Times -- is also well worth the read, despite Kay's acceptance of the idea that "Ponzi scheme" can be reasonably applied to these social contracts. The designation of Ponzi scheme only applies to those plans that will fail even if everyone involved sticks to them and keeps going, failing because the scheme's earnings will necessarily be less than those promised in payout. Social security and the like will continue to function and pay out what's promised so long as our society sticks to them, administers them sensibly, and doesn't end. That's partially because we adjust the earnings / output to what can be done with the current demographic environment, but that makes it not qualify as a Ponzi scheme. The mere fact that someone won't be able to derive theoretical benefits after the society ends isn't enough to qualify as a Ponzi scheme. If it were, every transaction that isn't fulfilled instantly would be a Ponzi scheme.