The popular economic media today is speaking of Bernard Madoff’s investment scam - where losers have potential losses totaling $50 billion U.S. - as the world’s largest financial scam, and possibly the most important piece of financial news of this decade. Madoff deceived investors in to believing he had formulated an “equation” for investment which guaranteed what the S.E.C. called “curiously steady” returns, in reality, Madoff had been paying off investors with future investors’ investments for at least a decade.

This editor disagrees. I mean, I don’t disagree depending on your definition of scam, or largest, or really, any of the terms used. It’s arguable, of course, as most things are. Government collective programs to provide retirement benefits have potential losses of much greater size possibly ten-fold the size, per year. In the United States alone, Social Security pays out benefits of nearly $500 billion per year, and growing at a rapid rate. In Canada, the Canadian Pension Plan, the social security offering of the Canadian government currently paying approximately $500 per month to those who contributed their maximum in the five years prior to retiring.

The Canadian social security system is much more interesting than it’s American counterpart. Social Security in the U.S. - implemented by President Franklin D. Roosevelt during the New Deal - follows a number of complicated procedures for determining what to pay out - effectively paying out a portion of a contributors “contributions” during the period each year, paid for by current contributors contributions. In Canada, a similar system is used, however, rather than not retaining any contributions - a portion of the contributions are reserved in a reserve fund, managed by the federal government with the target goal of beating average market returns; a lofty goal.

At the Canadian Pension Plan’s inception in 1964, the mandatory contribution rate was a minimal 1.8 per cent, with a clause to allow it to fluctuate with the amount of needed funding for a particular period’s retirees. You see, as baby boomers and other generational gaps begin retiring, the demographic of contributors-to-receivers changes and not for the better. In the 90s, CPP realized this problem - noting an insolvency date of sometime in 2015 - and an increasingly high contribution rate as that date drew nearer (thus, further halting economic growth, and requiring even higher contribution rates). In 1996, the Pension Plan formally announced the creation of the Pension Fund to replace, or compliment the former pay-as-you-go Ponzi structure.

The goal of the new Pension Fund, was to over the next million years, replace the pay-as-you-go Ponzi scheme with a funded-with-real-money fund, backing the majority of it’s liabilities for the future. Unfortunately, even that goal is likely too lofty - CPP defined a set of target dates, whereas by 2014 the fund will hold assets which cover 20 per cent of it’s total liabilities, and by 2075, the fund will be solvent for over 30 per cent.

Of course, the baby boomer retirement age is not finished. In fact, no where near finished. Baby boomers formally started retiring in 2007, and will continue to do so at accelerating rates for at least 15 years, by 2025 it’d be safe to say that baby boomers will have overwhelmingly completed the transition - increasing required funds for CPP (and Social Security) along with them.

Perhaps such a Ponzi scheme - the exact definition of which is an “investment” in which future investors pay off the prior contributors - is sustainable. It’s oft quoted than within 10 or so iterations of a Ponzi scheme, even of the broadest saturation (such as legally mandated Ponzi schemes) would have to collapse, for the population required to sustain it would increase past the size of the world. Of course, this time, since we’re talking about numbers which are inextricably linked to production, the constantly increasing size of production internationally will insure this scheme. You know, kind of like the financial crisis bet that house prices will go up forever - ignoring that, such a thought totally ignores the fact that as baby boomers start retiring, the size of our human capital (the workforce) in fact decreases with them. Of working age people alive today, the majority are in the baby boomers’ age bracket, and the echo coming behind them is no where near it’s size - at least in North America.

So, is a system which is dependent on infinite growth, and infinite growth of an infinitely compounding size truly sustainable? Governments say yes - though, in recent years, a focus on the sustainability of such schemes has been criticized by many politicians. Clearly those citizens who have grown dependent on the system - an estimated 40 per cent of retirees - cannot be denied their benefits, but perhaps we should just come clean, and cease benefits for future employees (many, if not most of whom likely will never be able to collect on their investments due to absolute insolvency of the system) while still forcing them to pay their contributions to meet the current liabilities. Maybe.

This will mark the introduction of Politonomist’s Op/Ed section - a section where editors and contributors express opinions on specific, previously covered news items. Many of the Op/Ed posts will target a specific economic or political theory and analyze it on both its merits and from the perspective of other other theories from a mostly critical perspective. We’d love to hear your comments.

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