This is not the mere abuse that we so delight in around here, this is actually a serious question. Just how damn stupid do you have to be to get pensions saving this wrong? The assertion is that all the savings that go into pensions just go into savings. They don’t create any new investment, are therefore economically valueless. We must therefore insist that pensions savings – or at least the tax privileged forms – can only go into new investment, not just into savings.
Notably, not one commentator addressed the macroeconomic concerns I raised in my piece, which was that these funds actually invest in nothing at all, and are mere extractions of cash from the economy to promote saving largely using second-hand quotes shares or commercial property as the medium for doing so.
Sigh. It’s as if he’s never heard of the lifetime savings hypothesis. Which from a man who insists that inheritance tax should be very much higher than it is is truly weird. The justification for that, of course, being that once you’re dead you can’t consume it and why should you be allowed to pass on economic privilege to your children? Well, quite so. Given that’s true therefore you want to consume your capital before you die, don’t you?
The way most of us do consume our capital being by having a pension.
For, what actually happens when we save? It goes into that big pot which will pay us that pension. Great. And what happens when we start taking that pension? That capital pot gets run down. We sell our savings in return for the income.
This is why annuities for example. We swap the capital sum for a guaranteed lifetime income. That income being derived from both the income from the capital itself plus some amount of liquidating the capital. Sure, we add in pools of such, actuarial calculations on lifespans and all that but this is still what happens. Our savings are liquidated in order to produce the income.
So, when we save and don’t invest, when we just buy second hand assets with our pensions contributions, what else are we doing? We’re allowing those liquidating their pension capital to do so.
In a mature system – not far off where the UK is now – then the outflow of capital will be roughly equivalent to the inflow. As individuals we’re saving into the societal pension pot while the generation one or two ahead of us is extracting from that same pension pot.
The bit that’s been entirely missed is that a pension consumes the capital within the pension fund. That’s what it’s designed to do, that’s what it’s for – to smooth our lifetime income and consumption patterns even, as the standard theory on the point makes clear.
And to make it obvious how stupid the original assertion is. OK, say we do indeed insist that everyone save into only new investment. OK. We build up our pension pots, we hit retirement age and then what?
Well, we still want to gradually liquidate our capital assets, don’t we? Because we want to consume not just the income from our investments but also the capital value of them in our Golden Years. Which means that there has to be someone out there willing to buy our second hand assets.
No, calling all of this a Green New Deal with bonds issued by a Green Investment Bank doesn’t change this in the slightest. We save then invest to build new assets. Great. But we still need to be able to consume our capital as part of our retirement income. There must therefore be a market in second hand assets. Whether we call those insulated houses, bonds or equities. Someone, somewhere, still has to be buying our second hand assets.
So, the net effect, after a generation, of the change is nothing, isn’t it? Because to make the Green New Deal investment plan work we’ve got to go recreate those markets in second hand assets, don’t we? At which point why in buggery are we bothering to do so?
Of course, this isn’t the only silliness here. Try this:
Which is why I do think green bonds are vital to the future of pension funds. They will preserve value, because they will be government backed.
Government bonds currently have negative yields. And it’s not exactly unusual for government bonds to have negative real yields.
There is a reason why this man is employed in a British university to teach economics but I have to admit I’m finding it difficult to quite put my finger on what that reason is.