Journal damn_registrars's Journal: The Insurance Industry 35
Could someone clarify how the insurance industry itself is more than just a giant Ponzi scheme?
As I understand it, a Ponzi scheme works something like this
As I understand it, a Ponzi scheme works something like this
- Find some customers
- Promise them fantastic returns on their investment
- Take more money from customers over time
- Find more customers so you have money to pay the original customers
- Throw a huge party for yourself with the money to celebrate how awesome you are
Whereas insurance (particularly life insurance, though other insurance offers work much the same) works something like this:
- Find some customers
- Promise big payouts over time
- Take money (collect more as time goes on)
- Find new customers to pay off old customers
- Buy yourself an enormous mansion, private jet, golf course, gold-plated hummer, etc, to celebrate how awesome you are
So why is it that the first one is illegal, whereas we are nearly required by law (in the case of auto insurance) to pay into the second?
Well... (Score:2)
Insurance isn't really a Ponzi scheme because, on average, the amount you collect (when you die, or get in a car accident) is less than the amount you pay in over time (plus interest on collected premiums). An insurance company only needs more customers to even out the risk, not to pay off your claim.
Now, Social Security is a Ponzi scheme, because they pay out more per retiree than that retiree contributed while working.
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the amount you collect (when you die, or get in a car accident) is less than the amount you pay in over time
I think that all depends on which type of insurance you are looking at. Certainly car insurance pays less than the premium and works hard to ensure that they pay out as little as possible.
Life insurance, though, seems to work much differently. I was offered a $50k life insurance policy for $3.75 per month, with of course increases by age. They gave me the full list of monthly costs all the way to age 60 (at which point the cost goes to $35.83 per month). I did the math and found that if I paid into t
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Life insurance, though, seems to work much differently. I was offered a $50k life insurance policy for $3.75 per month, with of course increases by age. They gave me the full list of monthly costs all the way to age 60 (at which point the cost goes to $35.83 per month). I did the math and found that if I paid into this starting this month, following their price structure all the way to age 60, I would have paid in a total of $5,719 (over 1/3rd of that in the final year).
See, that's where they get you with those types of policies. You're probably going to live past 60, at which point your premiums will undoubtedly increase further. And, the insurance company isn't just sitting on the money you're paying in; they're investing it, increasing the effective amount.
If I then died before turning 61, the $50,000 would pay out to my beneficiary; essentially a net profit of $44,289 over what I had paid in.
Not quite. You're comparing the $3.75 you'll pay this month, to the profit you'll see decades from now. You have to discount the value of the money your beneficiary will receive in the future.
In the case of life insurance, though, I'm pretty sure we all have a 100% chance of dying at some point. Of course the insurance company could get lucky and have a customer cancel a policy before dying (at which point they make a huge profit), but in general the life insurance policies always pay out at some point.
When I'm talking about ev
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You nailed the distinction between insurance and a Ponzi scheme that makes insurance sustainable and makes Ponzi schemes eventually collapse.
But then you called Social Security a Ponzi scheme, which is utterly wrong. It's popular to claim, but it's wrong.
A Ponzi scheme requires two things: participants buy in once, and the payouts are made from the receipts (from participants making their ONE TIME payments.)
Social Security doesn't pay you the money that you paid i
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Therefore, Social Security is sustainable, and is not a Ponzi scheme.
You're right that SS isn't, strictly speaking, a Ponzi scheme. But, given the current demographic situation, it is not quite "sustainable".
As the population ages, and there are fewer and fewer workers per retiree, the benefit level will have to drop or the SS taxes increase. At some point along that path, SS benefits will no longer be enough to assure that the elderly aren't starving in the streets, or SS taxes will be so high that the workers are starving in the streets. (Of course, that assumes that the c
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A insurance company can continue to function, and pay benefits, without writing any new policies
If by writing new policies, you mean finding new customers, I disagree with your statement that an insurance company can get by without it. An insurance company with N customers, collecting a total of Y dollars per year, would have to be exceptionally well-managed to be able to sustain without increasing Y (at the very least) or N and Y (ideally in the eyes of the company's books).
However, given some time interval, the customer base will start to decline to some number less than N. If the company is no
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If by writing new policies, you mean finding new customers, I disagree with your statement that an insurance company can get by without it.
They can continue to pay claims without additional customers. The pool of money that you are paying into when you pay your premium increases whether there are new customers or not. The insurance company is investing that capital in (hopefully)low-risk investments, compounding what you, and the other customers, are paying in. If an insurance company is run correctly, they only ever pay out claims from the investment income, leaving the pool of capital intact, and able to grow.
I know it seems like you are get
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Don't believe that Social Security is in deep trouble. It's not, although there are many who would love for you to believe it is.
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The adjustment in premiums required to maintain full benefits for all the Boomers is pretty small. And if nothing is done, they'll still get 80% of their benefits.
Oh, I'm not worried about the boomers, or even my own generation (Gen X). But, at some point in time--many generations from now--if current demographic projections are remotely accurate, SS taxes will become unmaintainably high, or SS benefits will become unacceptably low. Somewhere down the line, perhaps a hundred years from now, there will be a generation of workers who have contributed to the system, but will receive nothing in return. To that generation, SS will look an awful lot like a Ponzi scheme.
You
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Just so you know, I'm accusing you of practicing the ancient art of making shit up.
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So enlighten us. What demographic projections are you expecting to be a problem many generations from now?
The US Census Bureau [census.gov](Excel spreadsheet) projects that in 2010 there will be 4.84 working age Americans (age 18-64), for each American aged 65 or older. By 2050, the Census Bureau projects that number will fall to 2.81, a drop of 42%.
Right now, the tax rate for Social Security and Medicare is 15.3%. Assuming no policy changes and wages rising at the same rate as benefits, to continue with the current benefit level, by 2050 that rate will have to increase to 26.35%. Or, if the tax level remains the same, ben
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The rate for Social Security right now is what - 12%? You're talking about an increase to 18%, and it's capped at an absurdly low number. As a rich man, I hit that limit every year before the tulips come up. So I don't even wind up paying 3% of my income into Social Security.
If the combined TAX/FICA burden on people gets too high (and people can pay a LOT more than what they are paying right now) then we can just cut the military budget which takes up more than 50% of spending.
We do have to change something
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We do have to change something in the next 40-50 years, or SS benefits will drop to 70%. When you say it might be a full-blown crisis, you are fear mongering right there.
We are certainly able to make the incremental changes necessary to continue SS (though, with how we seem unable to confront an issue until it actually becomes a full blown crisis, I have some reservations). I'm not worried about the next 40 years.
It's 80-90 years from now, where things become truly unsustainable. I don't see any reason why the worker/retiree number will not continue to fall. Unless we revise our immigration policy, or see a huge up-tick in Catholicism or Mormonism, and refrain from engaging
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>I don't see any reason why the worker/retiree
>number will not continue to fall.
The Boomers gotta die off eventually! And other options, such as raising the retirement age, are inevitable in most people's estimation. That would make a big difference.
If you're worrying about the birth rate falling to precariously low levels in a hundred years - that's probably going to happen, and we must plan for it.
But to shift the discussion a bit - suppose there were no Social Security. We will still have the situa
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So, in essence, if Social Security cannot take care of these old people, then you are also arguing that nothing else can take care of these old people either.
I'm arguing that the pay-as-you-go system is unsustainable, not that there is nothing else which could have been done. SS should have been set up initially as a socialized annuity type program, where each generation pays for its own retirement, not the previous generation's. That way, we totally eliminate the effects of demographics. The baby boomer generation would have been contributing to their own benefits, not relying on the next generation of workers.
But, I can't go back in time to change any of that.
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I'm arguing that the pay-as-you-go system is unsustainable,
Actually, you're asserting that, not arguing that.
I still don't get why it's unsustainable, when I described quite clearly how a very modest increase in FICA taxes, offset by a corresponding decrease in military spending, as well as the inevitable increase in retirement age, can maintain the solvency of SS.
If you can't counter my points, you're not really arguing me.
But, I can't go back in time to change any of that. So, today we should focus on tr
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I still don't get why it's unsustainable, when I described quite clearly how a very modest increase in FICA taxes, offset by a corresponding decrease in military spending, as well as the inevitable increase in retirement age, can maintain the solvency of SS.
I'm arguing a few points:
The first is that SS in its present form(current level of benefits and taxation), is unsustainable. I think you agree with me on this. In the medium term (~2050), we'll have to raise taxes or decrease benefits modestly to maintain the system. Again, we agree.
But, in the long term (~2100), we'll need to decrease benefits and increase taxes even more, as long as the worker/retiree number continues to fall. At some point, whether in 2100 or later, those taxes become too high, or benefi
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The first is that SS in its present form(current level of benefits and taxation), is unsustainable. I think you agree with me on this. In the medium term (~2050), we'll have to raise taxes or decrease benefits modestly to maintain the system. Again, we agree.
We do agree on that.
But, in the long term (~2100), we'll need to decrease benefits and increase taxes even more, as long as the worker/retiree number continues to fall. At some point, whether in 2100 or later, those taxes become too high, or benefits to
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But if each generation needs to save for its own retirement, you need to have some idea of what the economy is going to do as well, because the dollars saved have a different value than the dollars spent. A dollar saved in 1950 is not the same as a dollar saved in 2009. It loses value, and therefore must be invested if it is to retain value.
We have this same problem today. The Social Security trust fund owns over $2 trillion dollars in US debt, which will have to be used to pay benefits in the future. The buying power of that debt could be substantially reduced, were we to experience another 1970's period of inflation.
Instead, the SS trust fund could invest those contributions in TIPS (Treasury Inflation Protected Securities), instead of the current special purpose Treasury instruments. That would assure the buying power of the money paid into
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But what do you mean that the Security trust fund owns 2 trillion in debt?
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But what do you mean that the Security trust fund owns 2 trillion in debt?
Since the 1980's the Social Security Trust Fund has collected [ssa.gov] more in taxes than it has paid out in benefits each year. They have to do something with that money. So, they buy special Treasury Bonds from the federal government. At the end of 2008, the fund had $2.4 trillion dollars in these bonds.
That's the "cushion" in the SS system. Without that surplus, the baby boomers wouldn't be getting any benefits at all without a huge increase in taxes.
What I'm advocating is an increase in that "cushion", until it
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But doesn't that clash with your idea of investing the fund into inflation tracking government securities?
With the money in these securities, aren't we just daring the government to spend the money now and just try to come up with it later?
This is not good. It's as bad as the IOU's Congress likes to leave in the fund's accounting.
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With the money in these securities, aren't we just daring the government to spend the money now and just try to come up with it later?
Now you're getting into the really thorny issue. It's only a problem if you believe that when SS loans the government money, it increases the amount the government spends today. If it does increase the amount spent today, the whole thing is a giant fraud. If it doesn't increase spending, it all works out. I would argue that government spending isn't based at all on the revenue it takes in; they spend as much as they want, and worry about how they'll pay for it later. In effect, the revenue and spending calc
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If the money isn't used to buy bonds, it should be kept as cash. virtual cash to save paper. But Government bonds are probably OK.
As far as the limits of spending go, it's credit which has set the ceiling since Ronald Reagan.
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If the money isn't used to buy bonds, it should be kept as cash. virtual cash to save paper.
Well, you can't really do that. $2.4 trillion is 32% of the US's M2 money supply. Keeping all that money from circulating would cause devastating deflation. The government has to do something with it. Bonds are the safest answer.
As far as the limits of spending go, it's credit which has set the ceiling since Ronald Reagan.
Even credit hasn't proved to be a limit. The US government has been able to borrow as much money as it's needed. There have been people, from all over the world, lining up to buy US Treasury Securities (though not quite so many lately).
Since the 1960's the government has had a no-li
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"Prediction is difficult, especially about the future."
http://letterfromhere.blogspot.com/2006/12/bohr-leads-berra-but-yogi-closing-gap.html [blogspot.com]
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That's ...
that's ...
profound. Thank you.
We could... but... (Score:1)
2. You'd just be a pendantic asshole about it.
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Besides, if I leave you off the foes list, and allow you to continue coming here to insult me, the end result will be more people seeing how you behave. You're welcomed to continue posting here if you have something to say, though your post seems to indicate that you do not.
Now shoo. You're not welcomed here if all you want to do is insult people.
Insurance financing (Score:1)
I was a licensed accident/health and life insurance agent for one year, so I know a little bit about how it works. (yes, I really did that and was marginally good at it, but circumstances of a personal nature and my own proclivities for a more active and physical type job lead me away from that career)
Your premiums basically cover commissions and corporation overhead (especially the first year, agents get most of that, and then a much reduced amount every year you re-up after that, these are called residual
Sore spot with me (Score:2)
My doctor wrote a prescription in January. I get six pills per month for a year. I had it filled at Walgreens.
February I got it filled again.
Yesterday I went to get it refilled and the Walgreens guy wound'nt fill it, saying I could only get it refilled every 90 days because of the GOD DAMNED MOTHERFUCKING ASSHOLE CUNT SONS OF BITCHES DICKWEED INSURANCE COMPANY!
Sorry for the outburst.
We need to join the civilized world and get universal health care. I know a lot of people who have no insurance, thus having n
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Yesterday I went to get it refilled and the Walgreens guy wound'nt fill it, saying I could only get it refilled every 90 days because of the GOD DAMNED MOTHERFUCKING ASSHOLE CUNT SONS OF BITCHES DICKWEED INSURANCE COMPANY!
That isn't far from my general opinion of the insurance industry in general.
Around 10 years ago, I had my health insurance canceled without warning. To make it even better, when the insurance company canceled it, they made the cancelation retroactive, and un-paid several bills that they had paid several months prior.
At which point, the newly un-paid bills became my problem. And to make life even better, those bills immediately were considered "overdue". The first news I had of all that happening was
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A mentally retarded five year old could design a better system for paying for health care.
Actually, not in all cases. George W. Bush tried and failed.
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A mentally retarded five year old could design a better system for paying for health care.
Actually, not in all cases. George W. Bush tried and failed.
He tried? I must have slept in that day. Or was clearing brush part of his "attempt"? Or maybe playing golf?
Yes, someone can clarify how the insurance is ... (Score:1)
... more than just a giant Ponzi scheme!
See the bottom half of this post:
http://slashdot.org/~damn_registrars/journal/226579 [slashdot.org]
I confirm that they said it better than I can.
Even though I confirm that some might say the whole post is just a troll.