Realist, not conformist analysis of the latest financial, business and political news

The Case Against Nationalising Pensions

The problem, generally, is staying in a home, not finding one

Chris Dillow tells us that there’s a good case for nationalising pensions:

The state, however, is much better placed than the private sector to bear these risks. It can obviously pool longevity risk. And tax revenues are more stable than investment returns: in the financial crisis they fell only 3.4 per cent peak-to trough whereas MSCI’s world index in sterling terms fell eight times as much*. In particular, there is one source of risk to equity returns that the state can pool whereas retirees cannot – distribution risk, the danger of a shift in incomes from profits to wages. This would clobber (pdf) share prices, but not tax revenues.

And then, of course, there are deadweight costs. A private pension fund manager might easily charge a management fee of 0.5 per cent per year. On a £100,000 pension pot invested over 20 years, that can add up to over £20,000. State pensions are cheaper to administer. Fund managers are rich, civil servants are not, That’s a clue.

Actually, we pay the State 34% of everything which looks rather expensive. However, the point is here:

It’s nonsense in theory too because, in a closed economy, all pensioners’ incomes must come from value-added created by current workers. The question is whether they pay pensioners via the tax system, or via the dividends and interest their employers pay**. For a given level of pensions, the burden is the same – only the name changes.

Quite so. Thus the absolute level of future pensions depends upon how rich the country is in that future when the pensions become payable. A tax financed pensions system means that the capital allocation currently done by market processes would have to be done by the State. The difference in growth over the decades between state allocation and market allocation being an experiment we’ve done, we call it the 20th century. Places that used the market allocation method increased total factor productivity over the years. The places that didn’t – the Soviet Union, according to one Krugman paper for example – improved it not one iota.

Thus pensioners in a market pensions system will be richer than those in a state pensions system. For we have indeed tried this out and that was the result.

That is, nationalise pensions if you want the future of them to be begging for rubles in the underpass.

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4 years ago

Apart from measuring real-world results, having one organization pay and another enforce that promise is a useful separation of powers. Whereas having the government take your money now and promise to pay it back later (also the basis of Keynesianism) has been the entrée for the US government’s most spectacular con jobs.

Michael van der Riet
Michael van der Riet
4 years ago

I used to put money in my pension pot. Most of it is still there and I draw a monthly pittance. That is my money which I invested, or took a salary sacrifice so that my employer could “contribute” or invest it for me. It is true that the fund managers drive Mercs and I do not. It is true that the money was not terribly well invested. However, the current generation of whiners, I mean workers, does not have to pay a penny towards my upkeep. How unlike the Ponzi Scheme outlined by Dillow whereby the state seizes all… Read more »

4 years ago

” ..And tax revenues are more stable than investment returns: in the financial crisis they fell only 3.4 per cent peak-to trough whereas MSCI’s world index in sterling terms fell eight times as much*. ..” And that’s bollocks. Tax revenues are a cashflow. The MCSI is a measure of capital value. That capital value can fall and rise and the underlying cashflow from the dividends may not decline, or rise, at all. He’s comparing apples with concrete mixers. And after that I lost interest in anything the twerp had to say.

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