Chain Letters, and Generation Hand-offs

There is a form of chain letter where you add your name to the bottom of a list, remove the top name from the list, and send that lucky top address an amount of cash or cheque. Generally the list is at least four levels deep, and generally you are instructed not to break the chain, not to send less than X$, and to send out at least ten copies to ten new addresses.

You are assured that, in a few weeks, riches will accrue to your mailbox.

This could actually work forever if the growth of population of naive people was faster than the delivery of the required number of letters. There could always be a supply of fresh participants to pay the earlier ones.

In the real world, chain letters must fail because of saturation: there aren’t enough (naive) people alive to keep it going. This should be obvious given the math; even with only two respondents per level on the letter, the number involved adds by doubling. This does grow exponentially, eh?

Moving on to inter-generation hand-offs. If a population is growing, it is possible to arrange retirement funding so that the young are supporting the old out of proportion to their own later needs. The assumption is that, when time passes and they are now the old, there will be enough extra young to keep the system going. It is like a chain letter.

Everything in a system should support itself. There should not be dependencies on growth; there are limits to growth. Pensions should be funded by the workers for those workers, not the previous or next generation. Governments should put stopgap measures in place to allow this equilibrium to be reached.

I will agree that there are some “charitable” or “cultural” things that may not support themselves, and I agree that as a society we can afford the explicit taxation of corporations and citizens to support those things. They are not expected to support themselves in the same way pension funds are.

It is easy for a city to depend on fees that come from growth; I think Mississauga is in this trap. Fees insufficient to maintain infrastructure look very nice when the infrastructure is new and maintenance cost is low. But the failure to bank funds against the ongoing growth of maintenance costs makes the price of a building lot artificially low, and the later taxes to fix things up, unfortunately higher than they could have been.

The situations are quite comparable: new housing funding older (and less) infrastructure, young workers funding older (and fewer) retirements, chain letters funding earlier participants.

In all cases there will eventually be a generation that is short-changed. This will be because the mathematics of the funding are incorrect. A false assumption was made: of perpetual growth sufficient to cover the unevenness of the inter-generation hand-off.

It can’t work that way forever. It can’t work that way for very long.

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