Intergenerational justice is in the news this morning, and rightly so. As the Observer notes, The Resolution Foundation has a report coming soon on the issue. Their research has found that the number of households headed by a 25 to 34 year old that own their own home (even with the help of a mortgage) has more than halved in some areas over the last 35 years. The hint is that they are going to suggest tax reform to address this issue.
Let me be clear: I have no problems with having wealth taxes, land value taxes, and higher rates of income tax on rental income to tackle the fact that this income source is not subject to NIC. In fact, I would welcome them all, most especially if used to reduce taxes that are an impediment to stable and fair employment prospects. But, they are not the solution to this problem. The intergenerational problem is about the failure of society to create a model for pensions that reflects both the sheer number of baby boomers and the fact that there is a fundamental pension contract that our whole model of private sector based pension provision simply fails to recognise.
I explained the essence of this in a short publication I wrote in 2010 called ‘Making Pensions Work'. A lot of what I wrote then does, I think, remain completely relevant today. At the heart of my concern was the failure of what I called the ‘fundamental pension contract':
This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.
As I then argued of private pensions:
This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.
If anything matters are now worse than I envisaged at the time. George Osborne's pension reforms are turning what was meant to be a pension system into a tax subsidised short-term savings arrangement for those already well off. As the Telegraph has reported this weekend:
The number of people making use of the “pension freedoms” soared to record levels in the first few months of 2018, according to figures released today.
A total of 222,000 pensioners made half a million withdrawals from their pots in the first three months of the year — 20,000 more than the previous quarter. The total amount withdrawn in the 2017-18 financial year was £6.7bn, the highest figure since the reforms were introduced in 2015.
And remember. this is a "freedom" that comes at a considerable price. This is the latest estimated data on the cost of pension tax relief from HMRC:
In 2016/17 the income tax cost was £38.6 billion and the NIC cost £16.2 billion, or £54.8 billion in all. In 2016/17 total government spending was about £770 billion. And let me be clear, the taxes on past pensions would have been received in that year in almost exactly the amount noted above if no new tax relief had been given. So, the net effect was that a subsidy was given to the pension sector equivalent to 7.2% of all public spending. To put this in context, defence spending in the year was £46 billion, housing and environment spending was £34 billion and public order and safety also cost £34 billion. We are spending more on subsidising pensions than we are many things most people would think a lot more important.
The latest reliable data I can find on the allocation of these sums comes, somewhat surprisngly, from the ONS in Pension Trends — Chapter 9: Pension Scheme Funding and Investment, 2013 Edition. They report that the mix of assets invested in the largest category of pension funds is as follows:
There was a flattening in corporate exposure post 2009, and this figure includes bonds and equity with overseas holdings growing significantly over time:
This is a trend seemingly associated with a growing use of mutual fund investment:
Now I stress that I know that this is not the whole picture on pension fund investment, but what seems to be fairly obvious is that the trends that are occurring are broadly towards increasing financialisation, less direct engagement with UK corporates and an increasing international diversification to the point that the obvious question has to be asked, which is what is in this for the UK government and what now justifies its massive spending on pension subsidies? More recent data for the pension and insurance sectors as a whole confirms that the value of much of this tax relief leaks from the UK, although I stress that this chart is for more than pension assets:
In essence, however looked at, the question has to be asked as to why are we willing to spend £54 billion a year subsidising the financial services sector in the UK and abroad when doing so is not resulting in funds being used to, in almost any way, fulfil that fundamental pension contract that I outline above because the majority of funds are being used to invest in financial assets and not those tangible assets that might induce the next generation to forego their income to look after us in old age. Whilst we're at it we might also ask why we are also tolerating the use of those funds to a) support the increasing financialisation of our society b) support activity largely based in the south-east of England c) increase wealth divides in society, which is what this process, inevitably, does?
If the answer was 'because it works' it may just be worth putting up with this situation. But what we also know is it does not. The return on pensions is paltry, and not just because of low-interest rates and other low investment yields: the UKL pensions system makes half the rate of return of the Dutch system because it eats away returns with massive charges. And pensioners now know that. And that's why they are buying property. It's rational to do so as far as they are concerned. But as Keynes long ago pointed out, what is rational for an individual can, when aggregated, result in wholly irrational behaviour for society as a whole, and that is what is happening with pensions.
Let me name the basic problem. It is exactly the same one that plagues our macroeconomic management as a whole. We think about pensions in the macro sense as if we are a household, but as a nation we're not. Because this is what we do we think we can save our way as a natio0n into pension prosperity. And that is as wrong as thinking cuts could balance the government's budget. Only spending could balance the government's budget. And it's only investment, and not saving, that can solve the pension problem. And for the sake of the record (and getting back to the theme of national income accounting that has bugged my blogging this weekend) S ≠I. which means savings do not equal investment in any shape or form.
The fact is that as a result of the failure of governments to, yet again, understand the difference between micro and macroeconomics a massive game of deception has been played on millions of people and the consequences are becoming clear: the pretence that we were providing for anything with our savings was just that, a pretence. And it all happened to ensure that the financial services sector got rich in real time.
It was for this reason that I suggested People's Pensions along with Colin Hines and Alan Simpson (then an MP) in 2003. The idea was simple. The government would create a pension fund, or funds, in which people could invest. This fund would then fund the creation of the assets that the nation needs to ensure that the fundamental pension contract was fulfilled. So, it would finance the building of hospitals, schools, broadband for rural locations, insulated properties and invest in small business and high tech and so much more. The fund would attract tax reliefs: an ISA wrapper may work for investments in it. Alternatively, capital gains and income received from it, to a limit, could be considered tax free. And the fund would then work in partnership with (let's call it) a National Investment Bank, whose bonds it would buy and who would actually deliver the projects. The same National Investment Bank would also issue those bonds into the broader market for those who wanted to buy them: they would also be available for the purposes of People's Quantitative Easing when the government, via the Bank of England, believed it needed to stimulate the economy by increasing investment in these assets.
How would returns be paid? Three ways. First, by way of interest payment: that's hardly surprising. The government is used to paying interest on its borrowing.
Second, there would be a real current return on the investment: I think it would be entirely appropriate to designate local funds or sector funds so people could see that the money they were investing was linked to a real economic output. Nothing could make investment more comprehensible than that.
Third, there is, of course, in the long term a return to be paid as a state-backed pension based on contributions. The mechanisms would need refinement, but given that government bonds have for decades underpinned the annuities used by private pension funds such an arrangement is completely normal. The important point to make though is that this pension could be economically justified precisely because the assets underpinning it would still be in use: this is a pension contract that reflects the inter-generational agreement that must underpin such arrangements with real assets.
How much could be spent a year on new investments? Well, let's start with most of that £54 billion, shall we?
The gains are obvious. The fundamental pension contract would be recognised and be the basis for pension provision, for maybe the first time ever. And the savings mechanism would be readily comprehensible, have low risk and be secure. Whilst at the same time a mechanism for increasing the flow of funds into the productive economy and away from the financial services sector - an essential part of rebalancing the economy - would have been created.
What's not to like? Ask the City. But for the rest of us this is all gain.
First this is a programme to deliver real investment.
Second, it redirects pension subsidy to public gain.
Third, it rebalances the economy.
Fourth it creates jobs in every constituency in the UK.
Fifth it creates an understandable savings mechanism.
Sixth, that mechanism reflects the fundamental pension contract that must exist in the macro economy.
Seventh, this provides a mechanism for enduring quantitative easing (call it PQE or otherwise; as I have now shown they're really the same thing) when it is needed.
Eighth, this is clear economic narrative that is straightforward to explain both as to the reason for its creation and as to its long term benefit.
This is how to tackle the inter-generational crisis. On this occassion tax plays second fiddle.
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We now have private firms like l&g going seriously into property investment/build to rent. Obviously the demand is there, as are the returns. No reason why we can’t cut out these private middlemen.
Excellent reading. Should be required reading for every economics, social and political studies student and every aspiring politician. We live in a critical time facing combined ecological, economic, social and political melt downs. To prevent mass global poverty, resource depletion, irreversible global warming and major social unrest we must get to grips with alternative thinking that you advocate.
Investing in government-backed infrastructure would produce gilt-like returns – i.e. basically nothing. What will that do to pensioners’ returns?
Have you noticed the return in most pension funds?
Well, my wifes’ SIPP shows IRR of +25% over the last (nearly) 3 years. Simple return of 40%. There is, of course no guarantee of income if the fund crashes.
Quite
J A Rank says:
“Well, my wifes’ SIPP shows …… no guarantee of income if the fund crashes.”
It will crash. Sooner or later. If it doesn’t collapse on your wife it will crash on somebody else later.
It’s a high risk strategy, against a high likelihood of getting old enough to need the payout.
Dying young so as not to need the pension is difficult to interpret as getting a lucky break. !!
“Investing in government-backed infrastructure would produce gilt-like returns — i.e. basically nothing.”
The taxpayers of other countries – France, China, Germany, Sweden – are making excellent returns on investments in UK infrastructure – particularly energy. We are just seeing a failure of leadership from the UK government.
Richard,
Suppose we remove the tax breaks on people saving for their old age. Would we still continue to levy tax on the pensioner when they start living on their savings, as we currently do? ie, are you suggesting that we tax them twice?
The contract you refer to is a valid description of the government unfunded pension scheme ( essentially a pyramid selling scheme) where older generations have paid in, and younger generations shoulder the obligation to pay out. The whole point of personal pension schemes is precisely that the private pension places no obligations whatever on anyone else (except to recognise the saver’s property rights).
Attacking encouraging saving for old age would be much stronger if you challenged the 25% tax free lump sum pensioners can take. I am not sure I see the justification for that.
As always though, what we subsidise we get more of, what we tax we get less of. So should we tax, or subsidise, saving? That is the key question.
We could not, of course, charge tax on savings that had nit had tax relief
I have never suggested we should
In that case, you seem very confused – you deliberately take a gross number (pension relief) and ignore the tax that will be paid in due course – the cost is the net number, not the gross.
Secondly, you seem entirely confused between how DC pensions funds are invested for retirement (mainly Equities) and how assets supporting pensions in payment (DB) and annuities (DC) are invested (mainly government and corporate bonds).
No actually, I”0’m the one who is not confused
If we abolish tax relief now we still get the tax on past pension contributions; the two are not related then. You are wrong in that case and I am right
And I am wholly aware how pensions are funded now. I am saying we have that fundamentally wrong for the reasons noted
Plenty of precedent for taxing twice – a 40% tax rate is twice a 20% rate.
If you believe in progressive taxation – and you have to ensure that the economy is stable – then you should also believe that this should not be undermined by the pensions system.
You ask if I have noticed the return in most pension funds. I have, and the average return has been acceptably good. See https://www.moneywise.co.uk/news/2018-01-11/pension-funds-grow-sixth-consecutive-year
There is plenty of room for improvement, and reducing fees and increasing efficiency is a good objective. However guaranteeing a real return of zero is a very strange proposal. Have you calculated how much larger pension contributions would need to be if equities are to be replaced significantly by gilts?
I do nit believe equities can return 0% in the future
What point are you trying to make?
The one I have made
Richard, suggesting equities will have a long term return (dividends and growth) of less than zero is a very dramatic claim. If your pension proposals only make sense in that light then that significantly undercuts their credibility.
If you really think markets will stay at current levels then you are sorely mistaken
And my proposals are based on the economic reality that this Ponzi scheme – which only exists because of state subsidiy – will fail
I have nothing against saving but I cannot see a good case for tax relief on savings or tax relief on deferred income. This creates the kind of market distortions that the so-called ‘free’ marketeers tell us are so wrong.
Precisely
My argument in a couple of sentences
Richard, I find your answers somewhat disappointing, as you do not appear to have thought about these points very deeply. The question is not whether markets will stay at their current levels, it is whether the long term return from equity will continue to exceed the return from gilts. Given the additional risk equities carry, that should always be the case in the long term. In a protracted bear-market where equities were to provide a zero real return over a long period, the demand for gilts would increase – and so the yield from gilts would drop.
I have thought about these issues for years. That is precisely why I have written about them
What you are trotting out is very basic A level economics – and in the process you are ignoring a) pensions are not working for most people B) it is only the subsidy that lutes money yunto markets month in month out c) this subsidy bubble will end d) markets are already over valued
I have done the thinking
You ought to try it
Your four points are nothing to do with your claim that gilts will, over the long-term, out-perform equities. That is a quite astonishing claim. The fact that you don’t appreciate that you are making an astonishing claim is surprising.
I have explained why equities will not in practice beat gilts
You may disagree
But that I can present reasoned argument that might challenge your fixed belief is not surprising at all
Equities have always beaten gilts. For over 100 years at least.
http://monevator.com/uk-historical-asset-class-returns/
Suggesting people should invest in low yielding government bonds is very bad for their long term savings and pension plans.
It is also worth noting that given how low yields are on Gilts and other government bonds, there is a clear case to be made that the bubble is much bigger in the bond market than it is in the equity market at the moment.
So what?
It was also said that markets could not crash as they did in 2008
And jumping off a 100 storey building is pretty thrilling for the first 99 storeys on the way down I suspect
I know the data
And I am saying the Ponzi of tax subsidy will have to end and when it does the markets will go puff
As they will on GFC2 and when it is realised most oil really cannot be taken out of the ground
Do you really not know that the past is not a good indicator of the future?
If you know the data, why are you ignoring it? Or are you just ignorant to it?
Even with the various financial crisis of the past 100 years equities have dramatically outperformed bonds. Even after 2008. The data I provided shows this. Can you provide data to show otherwise? The past might not be a good indicator of the future, but it is a better one than your (rather cloudy, given the number of times you’ve predicted crashes) crystal ball.
There is also no chance of what you call the “ponzi of tax subsidy” ending for pensions. Unless of course you are looking to destroy the whole pensions industry and shift the entire burden onto the state. Why would people save for retirement if they are going to get taxed twice on it? They certainly aren’t going to stick it into ultra low yielding bonds.
Sarah
As I have pointed out, the past provides a poor basis for predicting the future
You ignore QE, the fact that private pensions are not delivering, that there is growing inter-generational inequality, a changing age profile, and the simple fact that business is so bereft of ideas for creating value it keeps share prices up by buy backs that cannot last forever.
And yes, there is a chance we will end pension subsidy. I would say there is a very good one. Just as a long time ago I thought, against the odds, that mortgage interest relief would go and everyone said it would be impossible.
With respect, why not think about things rather than shout for the status quo? Or do you simply have too much many in maintaining it to do anything else?
Richard
Sarah says:
“Equities have always beaten gilts. For over 100 years at least.”
Past performance is no guarantee….. you know the form.
Over the past 100 years equities have reflected the value of investment in the productive economy. Current fantasy valuations are based on the free or very cheap (government) money injected via the bank bailout and QE. (Still active at the ECB, I think (?) for longer than even I expected after the ‘Wooky Hole’ central bankers agreement of last year).
Orhtodox fundamentals don’t any longer apply to equities in the way they did. For example, over the past century a hike in base rate would be expected to lift bank share prices. A hike now will put immense pressure on bank profits because their over-leveraged customers (corporate and domestic) will be struggling to meet repayments. Consequent bank liquidity demands will then make matters worse.
The past is another country. They do do things differently there. They didn’t have tracker funds. How are they going to behave ? There’s no precedent.
How bonds behave is somewhat mysterious to me, but an assured low return is safer than a stonking, high probability loss.
I’d say all bets are off on relative future performance of equities and bonds (and property).
But, you pays your money and you places your bets.
Good luck. If you think you don’t need it, you are possibly a fool. It’s a jungle out there; stay safe.
Agreed Andy
I will be blogging on this
Probably not today
There are 50 3,000 word essays to mark….
“There are 50 3,000 word essays to mark….”
Sybarite 🙂
Richard,
The past might provide a poor basis for predicting the future, but you have no basis for predicting bonds will outperform equities.
I have not ignored QE (which has helped bonds) – bonds performance is not independent of it.
Regardless equities have still performed better. Here is some more data for you:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Private pensions might not be delivering, but that is mostly because the annuities on offer at the moment are so low – because bond yields are so low. I could also ask how taxing pensions on the way in, by removing the “subsidy” as you call it, would help this situation?
Have you any evidence pension tax reliefs will end? I can see no notice of this.
My comments were directed at your poorly thought out ideas, which encourage people into assets with bad rates of return, offer terrible advice and quite simply ignore the facts for many of your claims.
Andy,
Equities still trade on fundamentals. Valuations are high now, but not dramatically higher than they have been historically. Low interest rates and QE have helped, but are not the defining factor in equity valuations. P/E ratios are around 20 now, which is only marginally above the long term trend.
Banks are looking forward to rate rises – because it will make them much more profitable. bank funding costs and bank liquidity are two different things.
The past might be a different country but there is no reason to believe the future will be wholly different, and certainly not on the word of one man on the internet. Tracker funds have been around for decades. Many many years.
It is a little worrying to hear you say that bonds are mysterious to you, then claim that they will outperform equities.
I would argue bonds have an almost guaranteed loss built into them right now. Their yields are below inflation (so you are locking in a negative real rate of return) but the capital value is the more concerning part. If bond yields move higher you are going to suffer large capital losses. Roughly speaking for a 1% move higher in the 10y bond you are going to suffer an 8% capital loss at the moment. And of course central banks are cutting QE and raising rates, so bonds are more than likely to move higher, as they have done in the US with 10y yields now around the 3% mark.
And of course, it is very important to note here that bonds aren’t an “assured” return. Just because the coupons are fixed does not mean the value of the whole bond is – bonds lose value when interest rates rise.
By all means call me a fool – but please allow me to return the compliment. It is clear you know little about financial markets, but I would call it foolish to pin your colours to someone on the internet like Richard Murphy who has been proved wrong again and again, doesn’t have any financial markets experience and whose sole argument for bond investing is a claim on being able to predict the future. The evidence is against him, but you seem unable to see it.
I’ll keep investing my own SIPPs though – in equities.
Sarah
You are free to invest in equities
All I a saying is that if you think equities are not influenced by QE you are even more out on a limb than I thought
Still, folks and their money have long been parted, and you seem to like using the term of others
But what is really depressing is that all you can say is ‘it’s worked to date for me’ without thinking about the consequences and being apparently wholly indifferent to them. Indeed your last comment says it all – self interest is clearly all that matters to you
I hope you enjoy the downside in due course
I suggest you spread your risk
Richard
Muhammed Al-Arian says:
“… claim that gilts will, over the long-term, out-perform equities. ….”
I read somewhere just recently that equities were at the same level they were 18 years ago.
Is that so ? Or did I misunderstand what was being commented on ? There will have been some dividend income admittedly, but I don’t think the inflation adjusted growth is going to look impressive. I don’t know what gilts have been doing meanwhile, but they won’t have had they same roller coaster ride which will have disadvantaged any investors needing liquidity at an unfortunate time.
I think that direct comparison rather misses the point of what Richard was saying anyway. It’s not just the money that matters; it’s what you do with it that counts and much of the equity gains are siphoned off into private profit and do bugger all to support the economy.
Or am I missing the point ?
The return on equities on the FTSE is just under 4% dividend yield only on average over the last 7 years whereas the return on gilts is approx 2%. Data is here:
http://siblisresearch.com/data/ftse-all-total-return-dividend/
https://www.sharingpensions.co.uk/gilt-yields-chart-latest.htm
Sure
See my answer to Sarah
They were great in 1999 and 2007 too
J A Rank says:
The return on equities on the FTSE is just under 4% dividend yield only on average over the last 7 years whereas the return on gilts is approx 2%. Data is here:
“over the last 7 years” !!!
Seven years unlike any in the history of human economic activity ? Is that the seven years you mean ? When interest rates have been lower than at any time in the past five thousand years. The seven years when banks having taken the biggest bailout in the history of the world, just to prevent them disintegrating, have done doodleye squat to prevent it happening again on a grander scale.
Seven years of a bull equity market where profits have been taken and not reinvested. When austerity policy has shut down the productive economy.
Past performance is…..? Even over the longterm, past performance is a poor pilot, but going into uncharted waters where the sandbars are moving like they never did before …high risk of running aground I think.
And there may be hidden rocks down there too.
Ga canny, J Arthur.
As statistical analysis goes his is rank
You are evading my questions and saying things I have not said.
At no point did I say QE had no effect on equities.
You fail to answer how equities have always outperformed bonds, then go on to say that this will somehow miraculously change in the long term, and the suggest people put all their pensions into bonds – hardly spreading risk – which are likely in due course to underperform equities and suffer their own capital losses in due course as rates rise. Anyone who has followed your advice would be doing far worse than someone who has invested in equities, and I am fairly confident that anyone who does now invest the bulk of their portfolio in bonds now will suffer going forward in comparison.
This is nothing to do with self interest. Though to say I have been parted with my money is a bit of a stretch – given my own portfolio has done well, and bond portfolios have barely broken even over the last 5 years.
It has everything to do with what you are saying being nonsense. You are making claims you have no evidence for, and the data we do have points out very clearly the fallacy of your suggestion.
I assume you have your entire pension portfolio in bonds, and none in equities? If you aren’t following your own advice then why should anyone else do the same?
I confirm my pension is in cash and bonds
And I will write a blog on the issue
But my nonsensical beliefs shifted the world on its axis a little today and, respectfully, I am going to give that attention and not you
And how is your pension doing? If it is in cash and bonds it has barely grown at all, whilst those in equities have enjoyed large returns.
And it’s not like you to take all the credit for public registries given it looks like you had very little to actually do with it, other that writing a blog.
Sarah
You really are a very bitter person
If you read here you’ll see John and I were the first to call for this http://www.taxjustice.net/cms/upload/pdf/tuiyc_-_eng_-_web_file.pdf
Nothing to do with me at all then
I really think your time trolling here is over
My readers can be spared your time wasting
Richard
Mr Murphy,
I have been pointed towards this article of yours and must admit what you have said leaves me quite concerned. I see a number of problems with what you have said. Whilst my list is extensive, the quite alarming and rather incoherent nature of what you have said leaves many questions I would ask you to make very clear your answers and positions on.
1. As other have pointed out, bonds have historically underperformed equities, even through times of crisis. I doubt you have any explanation why this will cease to be the case going forward, with bonds suddenly becoming the asset class with better long term returns.
2. Your “People’s Pensions” idea might sound nice in isolation, but many of the projects you suggest the money be spent on have no intrinsic rate of return – so the money to repay bondholders would have to come out of general taxation. At which point “People’s Pensions” simply become laws proscribing asset holding requirements for pension funds, forcing people to invest in government bonds.
3. You claim that tax relief “leaks” from the UK. You are making an error here, as UK owners of foreign assets are still liable for tax. As such there is no leakage.
4. I see elsewhere that you are a proponent of MMT. This leads to various problems with the idea of forcing people to hold large quantities of Gilts, as MMT essentially sets monetary policy to zero, whilst allowing inflation to increase. You yourself have argued for a 4% inflation target. Given 10y Gilt yields are currently 1.42%, which in itself offers a low (negative real) rate of return, if inflation rises to where you want it to be you are either going to lock people into even larger negative real rates of return or bond yields will rise as the bond market sells off – creating large capital losses for investors.
5. You are conflating a relief with a subsidy. They are very different things. One would hope an accountant would understand this.
6. I assume that given you argue for the removal of private sector tax reliefs on pensions, you would also want this to occur for public sector pensioners?
7. Have you considered what the effect on pensions and long term saving would be if you removed tax reliefs on pension investment? If so, what exactly would they be?
8. I believe you are suggesting that pensions should be invested from post-tax income. Then once the pension is drawn, that money would be taxed again. Are you seriously suggesting double taxation of pension investments?
9. I am unaware that you have any experience as an investor, and am surprised you are giving qualified investment advice. What practical experience are you drawing on, and are you licensed to give this advice?
I also notice that you have repeatedly written articles claiming there will be another equity market crash (in March 2013, Nov 2013, Aug 2015, Jan 2016, Dec 2017) yet equities are still near all time highs, have provided excellent dividend yields and have dramatically outperformed bonds (in both nominal and real terms) over the period. Given you seem to habitually predict a crash, is this what you are basing your claim that bonds will somehow outperform equities on?
Wow, you really are one of Worstall’s babes aren’t you?
I just checked and can see where all you sycophants are coming from now
I have some advice: try thinking for yourselves
Re your points
1) I know: see comment to Sarah, just made. So what, that proves nothing
2) You mean schools, housing, education, transport and energy have no intrinsic rate of return. Now that’s an interesting idea
3) The relief subsidises non-UK assets. Why would we ant to do that? That was my point. You missed it
4) Do you think all variables are independent of each other? What a strange idea. Meanwhile, read some MMT
5) Tell me what the difference is in your opinion so we can spot it
6) Of course
7) Yes: I think they would be profoundly positive because people would look for real value and stop being conned by the financial services industry, for which I suspect you work. I have explained how.
8) Of course I am not saying it should be taxed twice. Please do not make stuff up
9) I am not giving investment advice. I am suggesting systemic reform to the pension system. They’re somewhat different. Perhaps you should know.
10) I also predicted 2008, on time. I bet you did not.
Please do not waste my time again
I am not sure who Worstall is. Your article was pointed out to me by someone in the pensions industry.
1. Likewise you claiming with no evidence that in the future bonds will outperform equities. Historically equities have outperformed bonds and there is little reason to suspect this will change. Yours is a non-answer.
2. Schools, housing, education, hospitals have no intrinsic rate of return. They have no cash flow produced to pay investors (I am assuming here that these are state run). That is different to say they have no value, but that value is not directly monetized. Which is why I made my point about general taxation having to be used to pay bondholders.
Transport and energy can have an intrinsic rate of return. Both are already heavily privatized. Equity holders share the profits but also the assets of the company.
You are saying that these “People’s pensions” would essentially be invested in state owned assets. Bondholders regardless take no share in the underlying assets, and state owned assets typically have no external equity holders. Which means again that the only cashflow you are talking about is net profits. Either way, these would be unattractive investments unless fully backed by general taxation.
3. The relief subsidies UK pensions. UK pensions own assets, both UK and foreign. When the pension is drawn or liquidated the pension is taxed – in the UK. There is no external subsidy.
4. You have provided another non-answer. In MMT you are either locking Gilt yields to near zero levels, or letting inflation run higher with the resultant effect on Gilt yields. Either way Gilts would prove horrible assets to hold. This is nothing to do with variables – you are dissembling to avoid the question I posed as far as I can tell.
5. Reliefs are specifically not taxed by design. Subsidies refer to specific redistribution through targeted government spending.
By your logic tax cuts would also be subsidies – they are not. Tax not collected by design is not a subsidy, it is a relief (in this case a relief from a higher tax rate).
6. Would you also then want the removal of public sector DB/Final salary pensions, which are already far more generous than private sector schemes?
7. You have answered a different question. What incentive would people have to invest long term if they must do it out of post tax income, then when they draw that investment it will be taxed once again? This is a general point, given most people would simply spend the money instead of saving, but also incredibly pertinent given what you are suggesting would force those people who do choose to save to invest in the most risky, highest yielding assets to generate a suitable return (in essence, to beat the loss to tax the will suffer twice). Which by default means they will not be investing in low-yielding bonds, where their rate of return simply can’t beat the taxman by any great margin.
Your answer to me suggests to me that you haven’t thought about this in any depth.
8. You seem to be arguing for the removal of pensions tax relief. Are you indeed asking for this? Are you then also saying that the sums invested would thereafter be tax free?
If so, fine, but you seem to be saying pension tax reliefs should be cut but pensions should also be taxed as income when drawn. Which by definition means they are being taxed twice.
9. Whilst you might be suggesting systematic reform to the system, you are also telling people equities are over-valued and the market is going to crash. This would constitute specific advice.
Regardless, I am unsure what in your background qualifies you to give advice on the markets, or indeed pensions?
10. I suppose if you predict a crash every year you will be right once in a while. However, that was once, ten years ago, and your track record thereafter happens to be somewhat spotty.
I, however, am not making claims and predictions about the markets, unlike yourself. Your main claim being that bonds are going to outperform equities in the long term, because of an upcoming market crash – a crash which you seem to have predicted at least annually, but often more so. The problem of course being that even when considering 2008, bonds have underperformed equities.
Please accept my apologies for the delay in moderating your comment. I read:
Schools, housing, education, hospitals have no intrinsic rate of return.
I am concerned you are willfully misconstruing what I had said, or simply do not comprehend what I mean by intrinsic. I will clarify and hopefully you can answer the question I put to you.
In the state sector, schools, housing, education and healthcare have no intrinsic rate of return. When I say this I am not debating the fact that they have some value, both in economic and social terms.
I am though saying that these things don’t tend to generate positive cash flows, or often any cash flows at all. Government spending would look very different if they did. As an investor, one needs to know what you own and how you will be paid a rate of return and how you can sell the asset you own as and when necessary.
You state that these “People’s Pensions” will be bond based. Fair enough, and I assume that ownership of these assets will stay in the hands of the state. What I want to know is how the assets these bonds will pay for will in turn generate revenue to repay those said same bonds. Given the lack of direct revenue generation from most of these assets, I am asking you if the repayments will simply come out of general taxation.
If so, these bonds are simply regular government bonds, and will yield the same. If not, and they are tied to the specific assets, they would be incredibly risky, incredibly illiquid high yield or even junk bonds and would not be suitable for pension fund investors.
I am interested in your qualifications as you don’t really seem to have any. You have an undergraduate degree, and an accounting qualification, followed by a period as an accountant and then as a blogger on tax justice subjects. I can’t see any finance industry or pensions experience. You certainly are not on the FCA register and are therefore not qualified to give investment advice. Nor can I see any real economic background to your experience prior to you suddenly becoming a Professor (surprising given your lack of further education), though not a full Professor. I only bring this up as you seem to claim expert knowledge in a variety of fields you have no training or experience in and seem unable to admit when your knowledge, or lack thereof, is exposed. In this case, simply by the return on bonds being historically significantly worse than that of equities.
I am also still waiting for a reason why you think that bonds will suddenly out perform equities on a longer term horizon – in your expert opinion as a Professor of political economy.
You really don’t help yourself do you?
Apparently having a degree and being an FCA is ‘no real qualifications’? Wow, I’d love to know what you’ve got.
And being a full professor is not. You clearly do not know what a full professor is: I am appointed in the same way as any other professor
And I have said I will explain why you are wrong, but not today
But please note, for fifteen years I was told I was wrong and that I could not crack tax haven secrecy. Today we did
I’m used to being told I am wrong and others then finding out I am right
Firstly, I notice once again that you have not answered the questions regarding “People’s Pension” bonds I put to you. Please do so, lest I start to think that you simply are incapable of doing so.
Having a degree doesn’t make you an expert. Lots of people have degrees. Being an accountant doesn’t make you an expert either. Again, there are lots of accountants out there and few would claim to be experts on tax, accounting, economics, finance, politics and the range of other topics you pontificate on whilst remaining infallible and remarkably error free.
For you guide, I have two degrees, in mathematics then economics, and a PhD in financial modelling with economics. I also have 25 years of experience in the finance and pensions industry. So real world experience, I would call it. Even then, i wouldn’t claim to know everything there is to know about the finance and pensions industry – but it is fairly obvious I know a bit more than you.
I am sure at this point you will simply tell me that I am part of the economic and financial mainstream and thus can be ignored, whilst you are isolated in speaking the truth no one wants to hear. Of course, the corollary to that is that what you are saying is pure nonsense and totally unworkable, which is why you remain so isolated in your opinions.
You are a Professor of practice. Which is not a tenured position, as it is a title given to people without the required academic background to attain a full readership. It is the US equivalent of assistant professor, or in the UK at red-brick universities it holds the same rank as lecturer (something I have also done). It is most definitely not a full Professorship, and I assume that the position is not permanent and relies on funding from some source.
I am not sure why you would want to claim you are a full Professor, or that you are equivalent to one when the information to the contrary is so obviously available. Are you being deliberately misleading or is this you promoting your own self-importance?
First, I don’t believe you
Tell us who you are
Where you work
Where those degrees are from
Then tell me why my degree from forty years ago now matters that much anyway
And likewise yours
And then just admit you’re clueless on professors of practice. In the UK (this is not the US: you may not have noticed) professors of practice are full professors paid as such but admittedly without tenure. But then ample numbers of professors do not have tenure either. But perhaps you did not also know that
And I assure you it’s not the same rank as a lecturer – or I am by far the best paid lecturer in the UK
So, with respect, I think you’re just a troll, as I always suspected
And trolls all head the same way here in the end…..
Did you predict the GFC? When?
The whole Green NewDeal predicted it
As I did on this blog in 2007 / 08