Non-explicit effects of risk redistribution

Posted by – June 13, 2009

National (“socialised”) pension systems take money from people who are working and give it to people who don’t work anymore because they’re old. It’s a simple idea but inevitably it creates many biases and inequalities. Currently the best-known one is that the average baby boomer will end up getting more out of the system than they put into it. They were many and paid the pensions of few. The average person born in the immediately following generations will put more in the system than they get out, because they are few and pay the pensions of many.

So the pension system transfers wealth to baby boomers from people born later than them. On the other hand, there are other systems that transfer wealth in the opposite direction. Improved baby and student benefits are a governmental example, inheritance and financially supporting one’s children is a direct one. Perhaps the most important system is the improvement of everything with time. In a sense a thousand dollars was worth a lot more 40 years ago because of inflation, but in another sense it’s worth way more now because now you can buy an Internet-connected machine with it. Or: there’s no way for baby boomers to buy themselves a youth with Internet.

Of course, the world is also getting worse in some senses. Example: there is less cheap energy in the future now than there used to be. It’s quite difficult do judge fairness between generations, especially before all the news is in. Will the ecosystem turn out to be greatly damaged? Will the unemployed, un-needed masses of the future ever find meaning in life? Who knows. Suffice to say that almost everyone alive now is lucky with the perspective of the past.

But generations are just one pension bias. Another major one is sex bias. The pension system transfers wealth from men to women because women live longer. In addition, men make more money and thus pay more into the system, magnifying the effect. This is probably second only to marriage in wealth-transfers between the sexes.

There is a similar but opposite effect in the realm of insurance. Men have more risks from approximately everything, so insurance companies have to pay out policies on them more frequently. Interestingly, this is one biological inequality which is rebalanced by mechanism (there is nothing similar for pensions): insurance companies are allowed, and indeed do, charge men more for life and car insurance. What about other risk groups? Do insurance companies give discounts to unrisky ethnic groups? No, because that would be illegal.

In general, the more information insurance companies are allowed to use, the worse insurance works. If we had perfect information about the future, the fair price for anyone’s insurance would be the exact amount needed to cover their claims, plus bureaucratic overhead. Genetic profiling is a major step in this direction, and sex discrimination is a coarse kind of genetic profiling. Discrimination by ethnic groups is also a form of genetic profiling, one before which we currently draw the line.

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