The pyramids of Egypt were one of the seven wonders of the ancient world: the pyramids of state pension schemes are more modern, though no less impressive. Philip Coggan in the FT draws our attention to a new book, Ponzi's Scheme: The True Story of a Financial Legend, by Mitchell Zuckoff. A Ponzi scheme is the American name for a pyramid scheme.

Charles Ponzi invited people to invest in International Reply (postal) Coupons, promising fantastic rates of return. In reality there were no real returns, only money from later investors to redeem the promises made to earlier ones. Such schemes can only be sustained while there are enough willing dupes to provide the rewards promised to previous dupes. It is rather like a chain letter, benefiting only those high up the chain.

Coggan makes a point we have often made, that state pension schemes are modern pyramid schemes. There is no fund, no investments and no returns. Instead there are payouts funded from those currently paying in, and who do so because they are promised their own payouts in turn. These unfunded schemes are called 'pay-as-you-go' schemes because money paid into them today is paid out today to current pensioners.

They are fatally attractive to politicians because of a Public Choice Theory imbalance. The politician who enacts benefit increases earns the gratitude of today's pensioners (and voters), but the payment is made at the expense of future generations (who lack political clout today). In essence people who pay into such schemes today do so in the assurance that there will be more mugs coming along tomorrow to support them in their turn.

This is fine so long as nothing important changes. However, if people start to live longer, or if the birth rate declines, then the balance of young people paying taxes to older people consuming benefits changes adversely. In fact both are happening, bringing the real possibility that tomorrow's contributors will be either unable or unwilling to bear the burden which today's politicians have imposed upon them. Atlas might just shrug and refuse to carry the world; or he might emigrate.

Funded pension schemes provide investment which can raise productivity, making tomorrow's earners quite ready to pay dividends from their enhanced earning power. This is not true of unfunded state schemes. They promise, like Ponzi, more than they can perform. The difference is that the governments which perpetrate these pyramid schemes will probably not end up, like Charles Ponzi, behind bars.