I spent last night in the pub. I do on occasion. The Trip Advisor review for the pub in question says something like 'nice food if you can get past the old gits who sit in the bar area'. I take offence. But the pub in question is chosen for a reason: the debate is usually good.
I went quite specifically last night to share views with a friend with whom I do not hold many political views in common: I think we have a mutual feeling that's it good to bounce ideas off those we quite definitely do not agree with. And when all is said and done, I also enjoy his company.
So I put out for discussion an idea he put to me last night, which is that the rise of rentier capital is entirely due to the need to fund pensions - and that the whole private pension sector is made up of people who are just rentiers, and the market has responded. The idea has never been put to me like that before.
I do not agree. Firstly, that's because I think we have the pension funding model wrong in any event: we should not be using shares as a savings medium, for which task they are wholly unsuited precisely because capitalism has a short term view, and because they do not, in any event, have much to do with the model of capitalism run by the companies whose ownership they supposedly represent. Alternatives are available.
Second, that's because rentierism clearly pre-dated the era of more widespread pensions.
Third, the reality is that supposedly widespread pensions are only actually available to a relatively small part of society in any meaningful sense, and to model the whole economy so destructively for these few makes no sense, at all.
Fourth, I simply do not think companies are run for their shareholders in the way that this implies.
In other words, I think this based on false assumptions, flawed thinking on pensions and naive interpretation of the causes of corporate behaviour. But as excuses go it's smart.
Thoughts?
PS Moderation may be a bit sporadic as I am heavily 'otherwise engaged' much of today and am then supporting work experience for a son over the weekend, but it will happen; just please don't be surprised if it is not instant.
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Your discussion resonates with a question I often ask and relates to your discussion. That being what happens when the generation/s of renters reach retirement and don’t have the means to pay the rent? Who pays ?
An excellent question
No one knows the answer
The whole issue is a confection of problems (and I agree with your points above).
It has always struck me that pension fund involvement in current financial capitalism is like holding a loaded gun to the heads of Governments.
Bail outs happen because the State does not want to pick up the pension liabilities of all those people who would be affected in a crash (even though it could probably run the pensions more cheaply and effectively than the private sector whom it keeps propping up). Pension provision through speculation is just another form of leverage for the finance sector over the legislature. It’s like holding retirees hostage – a human shield.
There is also a causal link between pensions and de-industrialisation/low wage in work poverty in that keeping the value of pension pots means bearing down on the workers even more to extract the value of their work into the fund. If this keeps happening, there will over time be no new workers being cared for by the schemes because they will all eventually get fired as their jobs move abroad. It sets up a cascade of the worst sort of capitalist vampirism where companies are bought and then their assets turned into liquidity (cash) and have the value sucked out of them for good.
Maybe the place to start is with the actuaries and the law around their role which is too narrowly defined and becomes short termist itself?
And also the State attitudes and provision towards pensions and the false notion that ‘we can’t afford it’. They need to be tackled too.
PSR
My comment of the day, if you don’t mind me saying so
Much to think on
Richard
Why, thank you Richard!
Probably true that buying shares as a one off long term investment is a bad savings idea — in a capatalist society we want older companies to be replaced by young more efficient upstarts. Buying shares in a company and expecting them still to have value in 50 years time would be a risky decision.
Investing in a managed portfolio of shares on the other hand seems wise to me
Why?
They’ll all display the same trait in the end
I’ve had similar thoughts on the links between the explosion in wealth inequality, fund manager and corporate behaviour.
Assume that most of that concentrated wealth is being managed by fund managers one way or another. All the owners of that wealth are looking for is maximum return (plus minimum tax). There are rare exceptions who use their wealth more productively, by real investment or philanthropy in some form.
Then the fund managers as the major holders of shares, drive companies to maximise short to medium return with little interest in the consequences for those companies for their other stakeholders (including employees or the climate) or the longer term. In practice that means wealth extraction – rentierism.
Key difference is that pension funds should be looking for long term, safe returns, though I’m not sure that’s how they all behave. Changing fund manager behaviour is part of the jigsaw.
I entirely agree with your conclusion
Interesting. Some of the worst practices in investing have been led by pension funds in the US -such as supporting high hedge fund/private equity fees. A lot could probably be explained by the fees the managers were able to generate.
In previous eras companies issued debenture stock – tradeable debt rather than equity shares. Shareholding and portfolio theory has held sway for a generation however.
For once I agree with you
Companies still issue debt/ debentures, there are an absolute mountain of them you could own
I sincerely hope the short termism of capitalism may be its undoing because I believe that, left to itself, the 1% will inevitably become the 0.1% and society become ever more fractured.
If shares were only purchasable for fixed periods – or taxed progressively on the basis of time held – I believe the casino could be closed and the market go back to financing real business development. Smaller markets certainly but investment would be of more use to society.
Perhaps at the next global crash governments will recognise global regulation as being necessary to global stability.
Yeah, right. Just kidding.
Apparently according to the article, rather than investing in shares, it points to ‘investing’ in the following:
1. government department
2. local authority
3. other statutory authority e.g. an NHS Trust or an
education authority
4. charity or other public not for profit body undertaking
public work e.g. housing trusts
Apparently these often underfunded organisations with a history of large scale misallocation of funds and enormous waste will be best placed to fund the retirement of the general populace.
As ideas go, this is on a par with the most idiotic I have ever encountered.
If you make up facts to support your prejudice I suppose that is true
When did the U.K. last fail to honour its debts? Might you tell me?
The rise of rentier capital therefore has nothing to do with funding pensions, it is the opposite: the rise in pension funds is to help feed Finance Capitalism. If anyone has paid attention, they would have noticed that pensions funds are not doing too well. Many have closed and many have converted away from defined benefit schemes into money purchase ones. Here is how they are robbed.
During the early 80’s I took out an endowment mortgage which the salesman assured me would pay off my £40k loan and provide a surplus. As time went on it became obvious that this nest egg would never see the light of day. By this time, I had already paid off the mortgage, so its maturity value was academic. Near maturity I decided to cash it in and went to the website to obtain the value. At once I gave the instruction to sell. By the time I received back the confirmation the value had dropped by over £2k. Call me an old cynic if you wish, but I strongly believe I had been front run by a hedge fund; who between me giving my instructions and receiving value had borrowed my shares and sold them in the market. Meanwhile put fictitious sale offers on the market in order to depress the share price. Then bought back the shares at the lower price and replaced them in my investment. The offers to sell would be withdrawn as soon as my shares were sold, thereby raising the price. Meanwhile having bought shares at the lower price the fund could now sell for more and pocket the difference. All this has only taken milliseconds to complete. This is done the aid of high frequency trading and the use of gallium computer chips which run much faster than the normal silicon ones enabling such scams to be executed risk free. This goes on 24/7 front running any trade of their choice. It is how the investment banks and the like make their phenomenal profits.
This was why one of the leading Hedge funds was able to pay its top 4 traders a bonus of $600m each in 2010. They wont of course reveal their trading practices as that would breach commercial confidentiality. Apparently, such confidentiality is sacred and highly regarded in the City. The genius of their wealth creation rewarded in the Honours list and elevations to the nobility. The same excuse does not wash with the old bill in respect to the traditional bank robber. He would be required to tell where his tunnel under the bank was dug.
Bring back the old-fashioned bank robber I say — poor but honestly dishonest.
I think your cynicism justified
Two questions.
What is the issue of successive governments failing to pay money, gathered from individuals, into the pot for state pensions? I understand that GB state pensions are among the lowest in Europe.
Rentier capitalism?
There has never been a pot for U.K. state pensions
There is a social contract
The average age of the FTSE 100 [companies] in 1984? 99.1 years, with a median age of 91 years. The average age of the companies in the 2012 index? 98.4 with a median of 88 years..
what’s short term there?
And now, how long have they been in the FTSE 100? That is the relevant question
Results in 2012, won’t be materially different to today in my opinion. That said the research was conducted in these two years.
But you have not understood my question
Try again
So, during my working life when my body allows me to exchange my labour for value, where do I put that value so that I can draw on it in the future when my body prevents me from exchanging my labour for value, but my body still requires a source of value in order to afford to stay alive?
I suggested another model in the link in that post
Investors can progressively go up the risk /reward curve as they see fit…Cash, gilts, corporate bonds, property, commodities, equities with the sector and country choice e.g emerging markets etc. Let investors choose. Certainly offer further choice but don’t restrict choice.
Have you actually understood the question I am raising?
You seem to think savings should be directed towards state sponsored activity for the public good? Perhaps think that equity and private equity investment don’t benefit the economy? That’s fine if that’s the line, as I say I have no problem if more choice is made available..
Many do however believe that equity investing is a positive thing and that choice should be respected.
I have no problem with enquity investment
I question its use for pensions in the structure we now use
And for good reason: it has not and is not working
Well there are state pensions where the retirement age is been pushed back and will a rising population living longer it becomes a greater strain on the state..that is one issue. The other is final salary schemes which are a fantastic gravy train if you have one, a pipe dream for those that don’t. No surprise they are being phased out. Which moves on to defined benefit & personal pensions (sipps) where the onus is on the individual to save from an early age when earning power is good to fund later life when earning power isn’t…this is the crux of the discussion..here equity is a staple long term proposition where you can take a 25-30yr view and you really arnt too concerned by the short term…that said in the past 30yrs if i had invested solely in Gilts then i would have had to have saved more than £100 nominal to have £100 in real terms today. So not a great investment. Equities have served served investors significantly better.
So your answers is ‘you’re on your own’
And how will you deal with the very large number who will not be able to afford their rents in old age?
Genuine question
Ah, you’ve formatted your article so that links don’t look like links so there’s no hint that there’s a link.
Sorry – done in haste…..
Equities pay dividends and bonds pay interest. You call it rent. This is the best form of saving. Looking forward I can see the state pension being means tested on some way. Those with other sources of income (SIPP etc) probably won’t get much if anything regardless of how much NI has been paid and those with without other sources of income will get a full state pension…
Wait for the revolution then
There certainly would be a revolution if we went along with your totalitarian ideology. Indeed freedom and choice was behind the collapse of the iron curtain.
Right wing extremists always reveal themselves in the end, and you have
My totalitarian thinking is social democracy: and let’s be clear, that’s pretty much what the Tories offered this country from 1950 to 1975
And you think that totalitarian? Very politely: you are the definition of the problem we face
“Investors can progressively go up the risk/reward curve as they see fit”.
30-40 years ahead? I suspect that is not a risk/reward curve; that is prophecy. The world looked very different forty years ago; was very different forty years ago; including fund management. Whether or not a forty year investment paid-off is one thing; whether the original risk/reward curve had much to do with it, is quite another.
Property has benefited non-professional investors generally much more either than work or other forms of investment; land is fixed (it isn’t manufactured anywhere, although building on flood plains may be a foolish attempt to do so). At the same time property has been very, very tightly managed by the state to serve and maintain private-sector property price rises in a rising population, through very limited levels of new building, and strict planning restrictions; and infrastructure projects like Crossrail. This degree of long-term management only works contingently (and land is one of the few areas that lend itself to this kind of long-term national level management), but the State is the only ‘player’ that can manage the investment environment to this degree, even in land; and even that is contingent on unforeseen or unforeseeable future events in the world.
I am touched by the optimism shown by the statement in quotation marks above, but have some difficulty identifying or calibrating the supporting evidence for the level of foresight claimed (beyond the bland, apparent assumption that the future will be much like the past).
Well said John
Peter says:
“You seem to think savings should be directed towards state sponsored activity for the public good? ”
Obviously a totally silly idea that government should do ANYthing for the public good …….
Right wing extremist?? Because I advocate owning equities for a SIPP..and suggesting those who have a SIPP and have enough to live on probably won’t get much of a state pension so there is more to fund those that need..
You call that right wing extremism??
Yes Peter
And I also now realise you are using maybe your sixth identity in recent days
So a right wing extremist troll
peter says:
“Investors can progressively go up the risk /reward curve as they see fit….”
And what proportion of the population (even of those who can afford to play this game ) actually have the expertise to benefit from this gambling game ? We’ve already turned the domestic utilities market into a an informal futures market to the detriment of the mass of customers.
Peter also says:
“…..defined benefit & personal pensions (sipps) where the onus is on the individual to save from an early age when earning power is good…”
Really. You think the upcoming generation of young workers trying to get onto the housing ladder while crippled with student debt are going to be in good position to save. And the ones who aren’t saddled with student debts and aren’t in well paid jobs (which I suggest is probably the majority) don’t have any thing to save either.
I think you are extrapolating from the model of how the financial industry works. It’s not typical.
It is also naive dogma
Where have we come across that before?
A really good question!
If rentierism means benefitting significantly from unearned income – income that does not depend on a contribution to the production of goods and services – whether directly through work or indirectly through real, productive investment (as opposed to means of wealth extraction such as capital gains) – then yes private pensions are mainly based on rentierism (4 below).
There are three ways we can provide pensions:
1. inter-generational democratically-approved transfers from those in employment to those who are retired
2. simple savings out of salaries, not invested
3. savings out of salaries invested productively
4. savings out of salaries invested extractively – i.e. providing free lunches at the expense of others without the need for their approval, unlike 1.
The last of these is not only parasitic but highly regressive because many cannot afford private pensions through not having been able to secure the right kinds of employment. And as Pilgrim Slight Return says, it allows the financial sector to use private pension holders as a human shield in the defence of its continued rentierism.
Regards
Andrew
Modest fees for fund management appear to have disappeared around the same time as the Mutual Funds…..
The Dutch have avoided this problem: rates of return are much higher as a result
Richard, keep going in this direction, at the end of this road waits a full liveable basic income.
I hope so
But you’re going to have to tackle education and critical thinking first. Going by some of the comments you get here we are either massively failing to teach reading with comprehension or you’re plagued by dishonest numpties that always try to spin and twist.
On the odd occasion I think some of your clarifying replies below articles are needed. Most of the time I really struggle to see how anyone could have read your article in the way the commenter has.
So do I!
I agree with your comments about the stock market. The problem, as I see it, is that most shares in most companies are held by institutional investors rather than private individuals. As a result, individual investors have very little say in the running of companies. Institutional investors have different priorities and these do not necessarily align with the interests of their investors / fund-holders. A huge amount of power over companies is thus exercised by a tiny number of people and it seems to me that they are only accountable to each other. I doubt whether this situation can be resolved without legislation or a wholesale reform of the investments sector.
Many people distrust the stock market, bonds and funds and have, instead, put their savings into buy-to-let properties. The resulting property price inflation means that someone now needs to earn around twice average earnings to be able to afford an average house in many parts of the UK. Property is thus completely unaffordable for far too many. This is an absurd situation and is the root cause of low living standards, high benefits costs, poverty and a sense of hopelessness for far too many people. Decent, affordable housing should be a human right in any fair and reasonable society, not an asset to be milked for profit by buy-to-let landlords.
The property price bubble needs to be burst. Average property prices and rents need to be re-aligned to average earnings. Since the price of a new property is overwhelmingly the land it sits on, rather than the costs of bricks and mortar, fixtures and fittings, the obvious solution is to regulate the price of land for new builds such that someone on average earnings can comfortably afford to buy or rent an average house.
The buy-to-let sector should be outlawed. Only not-for-profit, properly regulated housing associations and Councils should be allowed to rent out houses. Existing buy-to-let landlords should be given a reasonable time period, say five years, to offload their portfolios.
The lower price of new builds will increase demand for them and that demand will need to be met by the prompt allocation of sufficient land. Compulsary purchase orders will likely be needed, along with amended legislation to prevent delays to the process.
The resulting building boom will greatly increase the number of well paid, skilled jobs. The lower prices of new builds will act as a benchmark which will progressively moderate the prices and rents for existing properties. The supply of these cheaper new builds will take time to increase and thus the deflation of the property price bubble will be moderated rather than sudden.
Unrestrained capitalism is failing the overwhelming majority of people in the UK but we have a political duopoly and a first past the post electoral system that virtually guarantees its continuation for the foreseeable future. Regulating the price and availability of land is not something that either half of the UK’s political duopoly is advocating. They are ignoring the elephant in the room.
Well Peter has certainly been outed, and what I particularly noted was his typical Daily Mail comment about final salary pensions being a fantastic gravy train.
As a public servant I can look forward to one of these “gold-plated” final salary scheme pensions. But there is of course no fund into which my employer and I “contribute” my pension “contributions.” In that respect the Civil Service Pension Scheme is no different from the National Insurance Retirement Pension Fund – it is all funded out of current government incomings. The additional “contributions” which the Cameron government (following on from the lead taken by its Blair/Brown predecessor) have made me and my fellow civil servants make are in reality quite simply a pay cut. And these “gold-plated” pension arrangements have been used as an excuse for decades now to suppress public sector pay.
My point is this – if there is no fund into which these “contributions” are paid, on what basis do Peter and his neolib chums think public sector pensions should be promised, if not final salary (or career average, as we now have/are moving towards)? Am I missing something?
Colin Dawson says:
“Existing buy-to-let landlords should be given a reasonable time period, say five years, to offload their portfolios.”
I think that perhaps a little draconian, and I’m sure there are private landlords who provide good service. It’s another area of regulation which is no longer properly funded through local government. The ‘market knows best’ free-for-all rears it’s ugly head in so many ways.
In a mixed economy there should be space for private letting. If the prohibition of BTL is broad brush and clumsy, as we have learned to expect from Westminster, it may do more harm than good. It will surely create unintended consequences.
Wise words Andy
It is balance that is required
It has only been a side show in the pensions issue, but buy-to-let has been a desperate attempt by individuals to establish their own personal, rentier-based pension schemes.
Ironic that it was George Osborne as chancellor who introduced the tax changes to the playing field which have largely killed-off this avenue of personal wealth building. The very idea that we could all benefit from buying second houses to produce a rental income is clearly a logical nonsense so it was always going to be advantageous to only a minority with spare cash or surplus income. Sound Tory policy you might think….but the catch which Osborne spotted, (perhaps) is that home owners are the traditional bedrock of Tory electoral support and BTL excludes a new generation from becoming homeowners.
It will be interesting, as an observer, though fraught for some of the participants, to see how this plays out over the next few years.
I am beginning to think it an issue I need to address
I think your four points contain a logical error of arguing that something cannot be because it should not be.
1. Pensions shouldn’t be based on shares. Agreed but they clearly are.
2. Rentierism pre-dated widespread shares. Sure, but that’s not an argument against our situation having evolved into one where pensions require rentierism.
3. Modeling the economy for the few beneficiaries of widespread pensions makes no sense. Sense should but almost never does determine policy. Look at Brexit or the Triple Lock.
4. Companies aren’t run for shareholders in the way this implies. I think you’re suggesting that companies aren’t always run so as to maximise Return on Investment. You wrote about this a few years ago http://www.taxresearch.org.uk/Blog/2013/01/07/companies-do-not-have-a-legal-duty-to-maximise-profit-or-to-avoid-tax/
I think though that often companies are run to maximise shareholders’ return and the widespread myth that they have a legal duty to do so affects the way companies are run. Shareholders’ returns is a phrase almost synonymous with pensioners’ rents. So it may be largely true in practice even though it shouldn’t be.
There is little evidence companies are run to maximise returns – unless it is for the directors
Simon says:
“I think though that often companies are run to maximise shareholders’ return ….”
I’m not convinced. Of course some companies are run on this basis and on sound longterm policies, but …there’s a New Testament biblical expression about hirelings looking after sheep….. too many boards of directors are rogue hireling shepherds, they maybe share the income from the fleece, but they are meanwhile eating the flock.
That is certainly how it seems. Where bonuses are determined by share price they are the principle beneficiaries and motivated to make short term policy decisions. When the company goes tits-up they have their spoils already banked and can walk away leaving shareholders and staff (and frequently pensioners) shafted.
We have seen this happen far too often.