Is a pension scheme a Ponzi scheme?

In some countries, the pension schemes are likely to fail in next few decades; in order to avoid such situation from happening, these countries are planning to lift up individuals and employers’ pension contribution levels and delay retirement ages. It feels like that the current working generation is paying for the current retired generation. As the later generation is paying for the earlier generation, it feels to meet some characteristics of a Ponzi scheme. However, my argument is that healthy pension schemes should not be a Ponzi scheme and do not have any similar characteristics of a Ponzi scheme.

If an insurance company only has one pension scheme client, then the company uses this client’s current payment as the initial assets to invest, with a good investment strategy and action, the investment generates an accumulated positive return for the pensioner and the insurance company gets some of the return as its revenue. In this case, it does not have any characteristics of a Ponzi scheme. Such pension strategy should be followed by all private pension providers. However, it may not be suitable for many state pension schemes. As in some countries, state pension schemes are only started in the late 20^th century, some of the populations did not contribute to their pensions from the beginning of their employment, the governments need to fill in the missing contributions in order to give all individuals equal pension benefits. Once the governments do not have the ability to provide sufficient financial support for their state pension schemes, they have to use the younger generation’s contribution to pay the older generation’s pension benefits, then it looks like a Ponzi scheme. However, unlike a Ponzi scheme, a government can fill in the shortage part with several payments, once the government fills the gap, there should be no need for any future payments to the scheme from the government and the pension scheme can be sustainable if it has good management and investment strategies. Once the pension scheme is run in an effective way, there is only one possible situation that the pension scheme will not be able to generate sufficient funds to pay out pension benefits. This situation is that the whole society and economy are in a long term negative condition that there is a high unemployment rate and the economy is shrinking without any growth. In this case, there is likely a deflation existing in the economy so lower pension benefits could still give the retired population some life security. And the most priority of the government is to rescue the society and the economy instead of giving more money to the state pension schemes. Once the society and the economy is picking, the returns of these pension schemes will also be picking up, so they can then provide sufficient pension benefits.

Overall, pension schemes are definitely not a Ponzi scheme when they are using a good management and investment strategies and they should be sustainable with some limited external support that may come from the governments.