In regards to healthcare insurance is this statement true for the United States of America “insurance is a Ponzi scheme”?

kumaranish 0

No, it’s not at all true.

That’s just something people say when they are opposed to insurance because they think it’s too socialist. You can make an argument that it’s too socialist – although that would sound crazy to me and anybody else in the developed world outside of the USA – but that’s a moral decision that you guys have to argue about.

But in any case it’s quantifiably different from a ponzi scheme.

Insurance schemes work all around the world, in all manner of things not just government-run schemes. I’m sure you have some sort of car insurance or home & contents insurance or something?

Insurance is about risk management. It’s taking us back to the pre-modern days when the whole tribe would store away some resources, and if someone got into hardship the tribe would dip into their store to help that person.

So most people don’t expect to claim on insurance. It’s there for peace of mind if something unfortunate happens. It really only works because most people never have to claim.

On the other hand, people who pay into a Ponzi scheme often don’t understand the scheme, and expect to get back more than what they put in. They all expect that, they don’t just expect it if something unfortunate happens. Nor if something fortunate happens.

Note that a lottery is also not a Ponzi scheme.

In a lottery a lot of people pay into it (pool their resources) as with insurance, but the payout goes to one person (or a small group of people), kind of like with insurance, but of course in the lottery the winner is chosen by luck, whereas in an insurance scheme the “winner” is chosen by circumstance.

So both a well-managed lottery and a well- managed insurance scheme can run forever.

A Ponzi scheme on the other hand is inherently unstable, because it attempts to pay out more than was put in.

Ponzi schemes are illegal in the USA and most other developed countries. People do go to prison for running them. You might understand it better if you imagine a small community, like a remote town, where everybody knows each other and is friendly.

scenario 1: Somebody in the town has a car accident. He spends months in hospital, which runs up to hundreds of thousands of dollars. He can’t pay this, so he goes bankrupt and loses everything. Seeing this, the townsfolk get together and all agree that they will all put aside some money every week, which the mayor will keep, so that if something like this happens again the money can be distributed to help the unfortunate person. Congratulations to them, they have just invented insurance.

scenario 2: Fred tells his friend Amy that he has discovered amazing investment opportunity but he can’t tell her what it He asks her for $100. She’s reluctant, but gives it to him. He takes it and then unbeknownst to Amy goes and asks his other friend Jonathan the same thing. Jonathan gives Fred another $100. So then Fred has $200. He goes back to Amy and gives her $150, telling her that his investment is doing great. She tells her friend Clara, who also gives him $100. Now Fred has $150, which he gives to Jonathan. Now Jonathan and Amy are all impressed by Fred’s great scheme, not knowing it is based on nothing, so they tell all their friends. Fred continues doing the same thing – paying the Clara and the other old “investors” with their money plus a premium he gets from new investors. This looks really good while the number of people invested in him is growing. But pretty soon the whole town is invested in him and Fred can’t find any new investors, and he can’t pay out more money than he has. So the later investors lose everything. Congratulations to Fred, he has just invented a Ponzi scheme. If he’s smart he realises what will happen before he runs out of money and he goes off to another town.

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