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 09/09/2011


Is Social Security a Ponzi Scheme?

There is a lot of political rhetoric of whether social security is or is not a Ponzi scheme. It is as if the emperor has no clothes, but no one is willing to say so for fear of imperial execution. If it is a Ponzi scheme, why should we not acknowledge it unless we, those of us who are closer to retirement, are too vested to give up our “entitlement”?


What is a Ponzi scheme?

According to the Securities and Exchange Commission (SEC) who is charged with prosecuting such things, “a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.”

The social security “fraudsters” assure an increasing flow of money by legally requiring most U.S. workers and the self-employed people (there are a few political exemptions, like Congress, federal employees, railroad workers, Amish, etc.)  to pay the FICA contribution. To be accurate, the federal government has at times called the FICA payment a tax and sometimes an insurance premium depending upon the case. Like a Ponzi scheme, social security is very popular among the earlier investors (current retirees) who receive benefits much in excess of what they contributed or a similar private investment could have made on average.

Why do Ponzi schemes collapse?

With little or no legitimate earnings, private Ponzi schemes require a increasing flow of money from new participants to continue distribute to earlier participants to perpetuate the allusion of the scam. Private Ponzi schemes tend to collapse when it becomes too difficult to recruit an expanding pyramid of new investors (participants) and when a number of participants (retirees) begin cashing out or begin to suspect the scam.

Proponents say that Social Security is different because it has enough money (including current and future contributors who are forced to participate) to payout for another 15 years or so.  Even then, they say, all that needs to be done is raising the contribution (by making more income subject to the tax) and raising the cash out age. Yep, social security is a Ponzi scheme clearly.  In essence, a Ponzi scheme is not a scam unless it collapses.

The social security Ponzi scheme is just currently legal. It is just a compassionate, giant transfer of wealth from the productive generation to an older unproductive, but voting, older one. Unfortunately, declining birth rates and the aging Baby Boom generation means the forced burden falls on fewer and fewer productive workers.  

How did Ponzi schemes get their name?

The schemes are named after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. Ponzi initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors. Charles Ponzi was convicted of fraud and sent to prison.


It is unlikely that current or past administrators and trustees of Social Security will face the same sentence as Charles Ponzi. After all, we who are worried most will soon age and reap our grand reward. We got ours, let future generations bite the bullet.

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An you thought having a car wreck is bad for your auto insurance!

 

From the USDA-Risk Management Agency website:

Q: Will there be significant rate increases for the 2012 crop year because of the flooding in 2011?
A:
In general, premium rates reflect historical experience over an extended period of time and any losses from the 2011 crop year will not likely be reflected in any premium rate adjustments until the 2013 crop year or later. The amount of any loss within the county will be considered in the context of historical losses over the long term, often 20 to 30 years or longer, which generally reduces the premium rate impacts of any one year. However, land that was flooded in 2011 due to the breaching or breaking of a levee will likely be considered high-risk land with potential premium rate increases for the 2012 crop year until the levee is repaired and the land is brought back to its former level of productivity.

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Make those last 40 planted acres (actually two 20s) of corn or soybeans count!

 

by Steve Griffin

 

This has been a difficult planting season for many, particularly in the eastern Cornbelt and the Northern Plains.  The final planting date (for full coverage) has arrived in some areas or will arrive very soon in others.  “For those farmers who chose the enterprise unit (EU) discount, it is very important that at least 20 acres are planted in two different sections (i.e., in tracts eligible for optional units) in order to preserve the enterprise unit discount,” recommends Steve Griffin, a West Des Moines-based crop insurance consultant.  “If you do not have planted acres in two separate sections, your enterprise discount will be disqualified and your crop insurance premium will approximately double.” advises Griffin.

 

In order to qualify for the enterprise unit, two or more “optional” units of at lease 20 acres for each crop must be pooled together.  Prevented planting acres do not meet this “planted” requirement.  "Some farmers might be wise to late-plant enough acres of corn in qualifying locations in order to keep the keep the discount, which may be worth thousands of dollars to them in the fall," Griffin concludes.

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IN MY OPINION:

Lucky is Better than Smart, but you can't count on always being Lucky

If you could choose to be lucky or smart, lucky is always the best choice. Being smart does not guarantee success. But, being smart does improve the odds that may seem to be against you.

 

People who are lucky can fall into the trap of thinking they are smart. One of my least rewarded jobs was telling senior managers of a crop insurance company that they had been lucky, not smart, in their previous successes. They wanted to stay the course with even bigger bets. The luck soon ran its course and no one was left to reward the "I told you so." including me.

 

But good odds aren't the only criteria. You have to be able to stay in the game long enough for the odds to work in your favor. That means you can only make bets you can survive the worst possible outcome (not the average).  Russian roulette can be a very profitable game, if you survive that one bad outcome. Had I been a better teacher of that principle, a great company with wonderful people would not have crashed and burned.

  

Aggiexpert consultants provide expertise in negotiating the ways and means of managing the risks of production agriculture--either on the farm or beyond the farm gate. We can also diagnose what went wrong when the outcome of these strategies fail or project what can happen both good and bad.

 

Years of experience, education, and hands-on application make us a valuable partner in evaluating whatever problem you may have or whatever challenge you have to master.

 

Initial consultations are free.  Call us.

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"Statistical Bargin to Buy Crop-Hail Insuranace"
 
See this news highlighted on WHO-TV Agribusiness News Report 6/15/11 with Ken Root (advance to time 2:40):
 
As Published on

Odds Favor Adding Crop-Hail Insurance
Storms have pounded a number of Midwest areas already this young season with large hail, damaging winds and fierce tornadoes. Now, with 2011 corn up and growing, farmers wonder: Is this the year to buy add-on crop hail coverage?
Compiled by WF staff 
Published: Jun 3, 2011

Fierce thunderstorms have crossed the nation's heartland with numerous tornadoes, large hail and damaging winds. Now with the 2011 corn crop emerging from the ground, farmers who may have not purchased crop-hail as an annual ritual, are thinking "Is this the year to add crop-hail insurance?"

 

The answer could be a resounding "Yes" for several reasons, explains Steve Griffin, a West Des Moines, Iowa, based crop insurance consultant.

 

Reasons to consider buying add-on crop hail coverage this year

 

* "First, we have never had as much crop value vulnerable to hail damage," he points out. "The 15% to 35% deductible on federal crop insurance has never represented more cash. Net returns to a harvested crop are at their highest. With net return, twice to three times average, it could be devastating to a farm's long term future to lose a crop this year more than usual."

 

* Second, many farmers may have upped their overall multi-peril crop insurance or MPCI coverage, but have also taken the "enterprise" unit discount that cuts MPCI farmer paid premiums approximately 50%. Rather than limiting the deductible to cropland in a single section or basic unit (determined by ownership split), the use of enterprise units potentially exposes such tracts to the full force of a hailstorm while the rest of the unit is untouched. "Protection from spotty loss events like hail is more important with this large pool of uninsured risk (the deductible) of enterprise units," advises Griffin.

 

* Third, crop insurance companies are providing hail insurance at historically low rates, he says. According to filings made to state insurance departments, crop-hail rates are significantly less than their expected losses based on 60 years of experience. Current crop-hail rates would have to be twice as high as current rates to cover claims and expenses in an "average" year.

 

Odds of coming out ahead with hail insurance favor farmers in 2011

 

Griffin, a quantitative economist himself, says "The 'odds' of coming out ahead with hail insurance this year favors the farmers instead of the insurance companies and that does not even count in the possible continuing effect of this year's beginning turbulent weather."

 

Griffin thinks crop insurers this year are using such teaser or fire-sale rates on crop-hail coverage in order to gain more multiple peril crop insurance business. Some insurers require farmers to transfer the MPCI policies to the insurer in order for the farmer to buy the insurer's crop-hail insurance coverage.

 

Sort various crop-hail insurance coverage choices before you decide

 

There are a number of choices in crop-hail insurance coverage, particularly for those farmers interested in dove-tailing coverage with their multiple peril crop insurance, he explains. Some companions call the products by different names, but traditional "companion" hail offers spot loss, top-down coverage of 25%, 35% and 50% of the expected crop with accelerated payouts. Note the expected crop may be greater than the APH yield so the coverage is not necessarily one minus the APH coverage level (50% to 85%).

 

"Production Plan" crop-hail offers coverage more precisely tied to the MPCI deductible, but with MPCI units (versus per acre coverage) and less payout if the unit production exceeds the estimated hail losses. Some companies allow coverage for crops expected to produce yields greater than the unit's actual production history by 10% to 20%. Deductibles and qualifying losses also vary by insurer.

 

In all cases, if this is the year to add crop-hail insurance to your risk management plan, consult a knowledgeable insurance agent to determine the best option and risk management value for you. Remember most crop-hail policies require a 24-hour waiting period before coverage begins so you can not wait until the thunderhead appears on the horizon.

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Quotes are by IDC Comstock and are delayed 20 minutes.
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West Des Moines, IA
Updated Saturday, January 28, 2012 10:54 AM
Mostly Sunny
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34°FHigh: 39°F
Low: 25°F
Wind: 17 mph
Humidity: 55%
MSN WeatherData provided by iMap