Monday, 4 September 2017

Economic Myths: Compulsory pensions saving

From medium.com: "There is no economic rational for compulsory superannuation".

He explains that forcing people to buy financial assets instead of funding old age pensions directly (via the tax system) is just another Ponzi scheme that will collapse under its own weight soon enough. Using the tax system at least has the advantages of predictability and low transaction costs.

I would add that the total return on financial assets is simply not enough to give all pensioners a predictable and adequate income in retirement. For sure, some people could, but that just reduces the pool of available assets/income for all other potential pensioners.

Somebody on Twitter followed it up with this from The Monthly: "Why compulsory superannuation benefits the financial industry and the rich at the expense of everyone else".

11 comments:

Lola said...

Very interesting. Several fallacies and confusions in the second linked article and a couple in the first one. Your post deserves a considered response - but not now - busy.

Lola said...

meant to say that I agree with the compulsion to save into funded schemes a Very Bad Idea.

Graeme said...

So saving is a bad thing because taxes on other people will support you, regardless of whether the population is growing or shrinking. Was this written by DBCR? Without any reference to Enoch Powell, LVT, the mixed economy and shoe shops in Northampton in 1965, I presume DBCR has cloned himself

blissex said...

«So saving is a bad thing because taxes on other people will support you»

That I think is a completely made up argument because the argument used by our blogger was completely different.
Your argument seems to me that saving in government bonds is a bad thing because that means being paid interest out of other people's taxes.
Indeed there are compelling arguments that the state can finance themselves to a certain (low) limit via seignorage, and indeed currently a large percentage of UK and USA state bonds are owned by central banks that pass back the interest to the state budget.

blissex said...

«Using the tax system at least has the advantages of predictability and low transaction costs.»

It is not quite the "tax system", it is the government bond system. Effectively state pensions are a way to invest in "GDP-linked bonds", which is indeed very low cost and quite safe on a large scale.

«the total return on financial assets is simply not enough to give all pensioners a predictable and adequate income in retirement.»

Well, the fundamental premise of putting pension funds in "the markets" is that "the markets" can give a much higher "real" return of 8% per year than "real" GDP growth of 2% a year.

The way to achieve this would be that future pensioners would vote to make the "total return on financial assets" much bigger, just as they have voted to make the total return on property assets much bigger.
This would certainly work for the first batches of pensioners, who also would benefit from huge returns from capital gains from a huge expansion of multiples as pension savings flooded into "the markets". Then it would be indeed "just another Ponzi scheme", but voters love them.

The real objection to that anyhow is indeed simply the colossal cut taken by the finance industry. In many first-world countries that is 7-8% of GDP, or a cost of around £3,500-4,000 a year, directly or indirectly after-tax for a pre-tax family income of £50,000. It is hard for me to imagine what those £4,000 a year achieve other than mostly luxury lifestyles for finance industry executive and traders. To pay out all pensions via investments in "the markets" would probably double that.

Anyhow the real issue of retirement is that if we assume people work for 40 years and are retired for 20 years, and their retirement income is average lifetime income, that means that 33% of GDP, one way or another, whether via state pensions or via returns on investments in "the markets" or in property, must go into giving an income to non-working people over 65.

Even worse, pensioners don't merely want 33% of GDP, whatever the level of GDP happens to be, they want their income to be fixed, guaranteed in its level, even when GDP does not grow as much, which means in practice adding on top the cost of taking GDP volatility out of pension payments.

That is the real political problem: that nobody wants to confront that 33%+ of GDP figure to go to retired rentiers.
Also women still have rather shorter working careers and rather longer retired lives than men, so a significant majority of that 33%-plus of GDP would go to retired women, while a significant majority of payments into the system would be made by working men. This would give an even bigger financial incentive to women to not have children, and in particular to not have sons.

There are countries where total state pension contributions are around 40% of gross wages, and they do provide good-ish state pensions, but that is not the thatcherite way, and those also happen to be the countries where women's fertility rates have also fallen 1 child or less per woman.

Mark Wadsworth said...

G, I suspect you are confusing saving with investing, and in turn confusing investing in monopoly rents with investing in real productive capital. These are very distinct things. Saving is a good thing on a personal level and investing in productive capital is a good thing, full stop. a share based Ponzi scheme is none of the above.

Mark Wadsworth said...

B, good stuff!

Mark Wadsworth said...

G, full explanation here

mombers said...

LVT and CI would, as always sort this out of course. Eliminates the deadly mathematics of long term discounting that has stuffed up pensions so badly. Adjustments to account for an ageing population would be able to be done in a much more gradual fashion - the age threshold of the citizens pension of double the citizens income can just be adjusted. If it goes up a year, those who couldn't be arsed to work can just subsist on a CI for a year instead, those not well enough to work can be covered by an enhanced CD.

There are advantages to the Aussie model though in my opinion. The pay as you go model is clearly a Ponzi scheme, and the funded one has very similar characteristics. HOWEVER, it does at least ensure that ceteris paribus more capital stays in the hands of residents vs being shipped off overseas. In the UK, an enormous amount of dividends and interest payments flow offshore, hurting the balance of payments and worst of all a lot of this is rent.
It's also a little easier to see the perilous state of long term liabilities. The UK state pension has a £3.8tn deficit if you treat it like a corporate pension scheme - and there's no Philip Green to go after to make good. With a funded model you can at least say OK we have x and liabilities of y and start a discussion about how the burden is shared.

A related topic is how do you share the burden of raising children fairly? It costs an average of £250k to raise a child to 18, which I do gladly. However, when my kids are grown, they will be handing over a large portion of their private property to pay for the old age of people who really should be able to take care of themselves by working longer and/or accumulating private savings. This will severely crimp their standard of living - how do you raise a family and enjoy life when so much of what you earn is taken for old age care? If there was a decent redistribution of resources to children (ideally through a citizen's income of 50% for under 18s) then it would make sense for such an enormous redistribution of resources to old people. But the direction of travel is cuts to redistribution to children and increases in redistribution to the grey vote...

Mark Wadsworth said...

M agreed on CI, ones.

Does this sort of nonsense improve balance of payments? Maybe slightly, but only very marginally, and I'm not sure that that result justifies all the other costs and distortions.

I don't take the £3.8 trillion deficit too seriously - it is matched with £3.8 trillion of future tax receipts out of which it will be paid.

Re your last para, it pisses me off too that you bring your kids up to be cattle to be slaughtered on the altar of home-owner-ism. Like you said, LVT will sort that out. I don;t mind if my kids have to pay extra if they want to live somewhere nice, as long as they don't have to pay all those taxes on their earnings as well.

Lola said...

M and MW. In the UK funded DB schemes have been undermined by various factors, the main ones being failed government and bureaucratic interventions, and change in working patterns (not having jobs for life) and longevity increases. In recent times these have been compounded by ZIRP and QE both of which have distorted CETV calculations and pension fund surplus/deficit calcs. (I know a pensions actuary who reckoned that the BHS pension schemes was a victim of ZIRP/QE rather than P Green mismanagement.)

There is nothing intrinsically wrong with 'investing' into collective investment schemes (which is what DC pensions actually are). It's the tax subsidy that's the problem. However less of that subsidy ends up as rent than it does in schemes like EIS or VCT's. You can now buy suitable collectives funds which have OCR of less than 0.25% p.a., so the charges are not out of court. We can argue the toss about saving v investing, but the truth is that the returns on a typical equity based collective global tracker have exceeded the return on a cash fund - at the price of more risk, which is exactly correct.

The problem in my view is that the Common Man is indoctrinated to think of stocks as a capital appreciation opportunity. They aren't. They are 'an increasing income over time' opportunity. Largely this capital gain mindset has been driven by the inflationism from 1945 to now, which accelerated markedly from 1971, meaning that stock prices acted as a partial inflation hedge. But in times of low real inflation (let's ignore the potential pernicious effects of QE and ZIRP pro tem) cash yield on investments will become King again. And it is the reinvested dividend stream that really turbo charges returns.

All this has to be considered against a background of epically unsound money and all that that implies. Unless we can get to sound money, all best are off.