by reader coberly


for Aaron

In a recent thread reader Aaron asserts in his confident way that “if Trump, Soros, and Redstone get Social Security “then in can’t be an insurance policy for poverty in old age. These three are not poor yet they qualify for social security.”

To see where Aaron has gone wrong, we need to return through time to the golden days of yore when Bill Gates was still a very young man.

Young Bill was not yet rich, but he was sure he would be. Still, being a nerdy kind of guy, Bill liked to think things through. Certainly it was very likely he would be rich, but not absolutely certain. He could have an accident, or get sick, or Apple could drive him out of business. So, yes, unlikely, but he COULD end up poor. And Bill was not the kind of guy who would enjoy living under bridges and eating out of the dumpster behind the Safeway, so he needed a fallback plan… just in case.

He could do like Coberly’s gramma said: put 10% of everything he made in the bank so he’d have something to retire on. But he’d have to hope that 10% wouldn’t be eaten up by inflation… so, maybe, but still not as sure a thing as he’d like. He looked at the stock market and thought, yeah, I could probably stay ahead of inflation there, but if my luck went bad, the Stock Market turned down the day I decided to retire, or if i got sick or had that accident early in life, I wouldn’t have enough to put into the stock market. It’s hard to find a lot of investment money when you are making just barely enough to buy groceries and shoes for the kids..

So, Insurance!, I’ll buy an insurance policy. He goes to Providential Insurance company and asks, “how much will the premiums be to guarantee me an income of a thousand a month after I turn 65?” The Providential man tells him. But Bill is a smart guy, remember, so he asks… “is that thousand going to be adjusted for inflation?” Well, no, says the agent. “How much to buy a policy adjusted for inflation?” The man either says he can’t insure for inflation, because he as no idea how much inflation could be in the next forty years, or he quotes a figure like 2000 a month. Bill says, “so I give you two thousand a month for forty years and you guarantee me a thousand a month for a life expectancy of less than 20 years after age 65?” Something like that.

“Oh, by the way, how do I know Providential will still be in business in 40 years?” Oh, ahem, we’re a very solid company. Nothing ever goes wrong like that.

Bill is not convinced, and he is not happy. He has another idea:

“How much if you pay off only if I am poor when I reach 65?” No can do, says the man. “Why not?” Because we would have no way to check to be sure whether you were really poor or just hiding your assets. Anyway, the probability of you being poor… not you, of course, but the general population… is much higher than you would suppose. More than 50%, so you wouldn’t really save that much.

So Bill says, I’ll think about it.

On the way home, he meets a Tall Man in a striped suit with a tall hat, and, oddly, a cigarette holder cocked jauntily in his teeth. The Tall Man says, I hear you are looking for an Old Age Insurance policy. Have I got a deal for you.

The Tall Man say, I can guarantee you against inflation using something I call pay as you go financing with wage indexing. But it only works if everybody in the country joins the insurance pool. And no, I can’t insure for just the possibility that you are poor. By the time we set up a government proctology bureaucracy that would cost as much as just paying you the money when you reach 65 whether or not you are poor. We would need to collect about 12% of your first hundred thousand a year, and we would pay about 40% of your average monthly pay, up to that hundred thousand, each month when you retire.

“What do you mean “about”?” asks Bill. Well, says the Tall Man. In order to make this work for everyone, we do need to adjust the returns so that the very poorest people get enough to live on, a little more than 40%. And the only place to get the money would be to reduce the return on the richest to about 30%. “So I only get 30%?” asks Bill. Only if you retire rich, says the Tall Man, if your luck goes bad, you could get 50% or more. That’s why it’s insurance.
by reader coberly