Piketty and the pensions – take 1
Can we save enough for out future pensions? No, as there is not enough capital…
A) Superficial inspection of the graph above might suggest that Dutch pensions are safe. Aren´t the Dutch pension savings as a % of GDP the highest of the entire EU? And didn´t they increase quite a bit during the last two year, despite the fact that a considerable chunk of the baby boom generation number of baby boom generation already has retired? But they are not save. The pension age is increasing with four months a year and will pretty soon reach 68 and in all probability 69, making a cut of 4 years or almost 20% of remaining years after 65 (men) and an almost 35% cut of reaming healthy years after 65… At the same time (in fact: coming April) premiums will be increased, again. Why is this happening when pensions savings are so high and pension funds managed a hefty 8% return on investments between 1990 and 2015? The answer is simple. Margins are increased. The Dutch (more precisely: the Dutch central bank who for some undemocratic reason can enact such laws) now want 130% covering of future liabilities, the interest rate used to estimate future return on investment (technically the present value of future liabilities) is getting increasingly lower and for some reason pension funds are not providing cheap but macroprudential mortgages with at least a positive interest rate to the people but are investing in bonds with a negative yield therewith financing the German and French paygo pensions systems. Be that as it may – even pension wealth of more than 200% of GDP is not enough to fund the Dutch no defined contribution no defined benefit pensions.
B) The answer to this might be to increase pensions savings even more which is what the Dutch are trying to do. But that´s not a good answer. Increasing savings will be in vain – at least on an European scale. As there is not enough capital. Of course, saving more will also add to the global glut of savings and depress yields. But you have to save something. And there is not enough capital. Since the work of Piketty – no, since economic statisticians started to measure the stock of capital, which enabled Piketty to write about this, look here for some recent Irish data. And these data yield that, largely thanks to increases of house prices, or in fact largely thanks to the mistaken believe that when the implied price of land underlying houses increases for houses sold the value of houses not on the market also increases, the value of the stock of real assets is about 600 to 800% of GDP. Pension funds can only invest in part of this capital, as most of these houses are privately owned. Of course, pension funds can and do invest in financial assets and the value of these financial assets is not simply equal to the value of real assets underlying them, as yields can be propped up because of all kinds of reasons, ranging from ´market imperfections´ to ´surplus value´ (or are these the same thing?). But there is a limit to the value of these financial assets, too, while 2008 should have told us that the market value of such assets can go down. With a lot. Even with 100%. And do we really want pension funds to own 300% of GDP (that´s what we are talking about) in real and/or financial assets? Wouldn´t that make them too powerful? Aside – there is of course a ‘Ponzi element’ to financial assets as the government bonds owned by my pension fund were, to an extent emitted to refinance the banks whose shares are owned by the same funds. But a long story short – do we really want to own assets equal to 300% of GDP or do we find other ways to ensure that people have a decent pension, including a rise of the pension age but excluding the present strategy which will lead to massive expropriations of house owners by banks who, thanks to crises and deflation caused by these banks, are in arrears? (Look here for Greece, here for Cyprus, efforts to ease eviction in Italy seem are stepped up, too, but the IMF states that Italian banks should not evict and squeeze creditors but should write down and restructure debt and sell it, look here for Spain). Saving more clearly is not the solution. Raising the pension age is unavoidable, considering demographics. But if old people are going to cost us, they are going to cost us. Cutting pensions won’t make that problem go away. We’ll have to spend and use the un- and underemployed, and some redundant bankers too, to care for the elderly. And leave people in their homes – using solutions like ‘the right to rent’. And oh, productivity is rising at an about 1% a year rate which, surely as this is partly caused by robotized washing of hospital beds, does solve part of the problem. There is not enough capital. But there are enough people and technological possibilities.