This came from an email from The Economist yesterday:
Today Gita Gopinath, a former chief economist of the IMF, sounds a warning. In a guest essay for The Economist she argues that America's bull market in stocks may not last. A crash could do a lot more damage than the bursting of the dotcom bubble did, destroying $35trn of wealth globally.
In the essay, she said:
At the heart of this concern is the sheer scale of exposure, both domestic and international, to American equities. Over the past decade and a half, American households have significantly increased their holdings in the stockmarket, encouraged by strong returns and the dominance of American tech firms.
Foreign investors, particularly from Europe, have for the same reasons poured capital into American stocks, while simultaneously benefiting from the dollar's strength. This growing interconnectedness means that any sharp downturn in American markets will reverberate around the world.
Despite all this evidence, what we keep hearing is that Rachel Reeves still wants more and more people, and their pension funds, to save by buying shares, which actions rarely adds anything to the net sum of human activity, because the vast majority of shares purchased by what might be described as 'ordinary people' and their pension funds are second-hand, meaning that they are already in issue. All that the purchase of such shares does, in that case, is push up their price, creating the whole consequence that, somewhat belatedly, the IMF and its former staff have noticed that such action always has of creating financial bubbles, when I have been talking about how to address this issue for a long time.
As I note in the Taxing Wealth Report (and did so previously elsewhere in my work), the UK economy is not short of money or savings. What we are short of is investment opportunities, and shares do not represent that. An investment opportunity is the creation of real new economic activity that delivers value for society. In contrast, savings just inflate financial wealth. The two are almost unrelated, and as a result, we have at least £3 trillion locked away in pension funds and over £700 billion in ISAs, and yet we have crumbling infrastructure, an underfunded green transition, and far too few decent homes. Something, clearly, has gone wrong.
The reality is that we have built a system where savings tax reliefs intended to encourage investment have become subsidies for wealth accumulation. The vast majority of these reliefs go to those already well off. In effect, we have used public money to inflate private portfolios, which are now in peril of seeing their value collapse, imposing a second cost as we have to bail out those who have lost what they already accumulated through the use of subsidies from public funds. That is not an investment strategy for a fair or sustainable economy.
That is why, in the Taxing Wealth Report, I argued for pension reform, not to abolish incentives necessarily, but to realign them with the public interest. I wanted to make savings work for society again.
The proposal I have made for 15 or so years now is simple. I have suggested that around a quarter of all new pension contributions and all new ISA savings should be invested in public-purpose funds to form the capital that might be used for investment in new infrastructure, green energy generation, social housing, local authority renewal, flood defences, climate adaptation and for other social purposes. That could be done through a National Investment Bank or similar institution, accountable to Parliament but managed on professional lines. The government could issue new classes of long-term, low-risk bonds designed for this purpose, giving savers both a fair return and the satisfaction of knowing that their money is doing something useful.
This would not mean nationalising pensions. It would not mean taking away anyone's savings. It would simply mean that the tax reliefs which the state provides, and which are, in reality, public subsidies, should earn a public return. If society grants you a tax break for saving, then some of those savings should, in turn, serve the society that granted the relief.
The logic for this reform goes deeper than money. In particular, whilst from a modern monetary theory perspective, the government does not need pension savings to fund its spending because it can always create the pounds required, it does need to ensure that real resources, whether they be labour, skills, or materials, are directed towards socially valuable uses. Redirecting part of the flow of pension and ISA savings to form capital for investment helps achieve that. It channels the energy of private wealth creation into the process of social renewal.
This approach would, I believe, have wide benefits. It would provide a steady stream of funding for national infrastructure. It would reduce dependence on short-term or speculative finance. It would give savers a safer, socially useful outlet for their funds. And it would begin to rebuild public confidence that the financial system serves a collective purpose rather than a private one.
It would also make pension tax relief legitimate again. Right now, it is very hard to justify a system that hands billions in tax subsidies to those who already have the most while doing nothing for those who can barely afford to save at all. But if those reliefs came with a visible social dividend in the form of better homes, renewable energy, and a more stable economy, then they might once again command public support.
I am not suggesting that this change alone could, by itself, transform the economy. But it could mark a turning point. We have spent forty years pretending that private saving and any form of investment are related when, under our current institutional savings systems, they are not. They are, at present, entirely unrelated. We have a private financial bubble creating mechanisms and an almost total lack of real investment to make life better. That is how disconnected they are. And the result is the bubble that the IMF and so many others now worry about, but about the creation of which they have nothing to say because they will not address the systemic failures in our savings and investment systems, as I have done.
Our economic future depends on recognising that the money we set aside for tomorrow should also help build the world we want to live in today. It is that simple. And what we are doing with savings now does not achieve that goal. Instead, it is helping destroy the real economy on which we depend, acting as if it were a cancer within it, as we will describe in the quantum economics series now in progress.
When I suggested pension reform in The Taxing Wealth Report, I aimed to restore the purpose of pensions whilst reconnecting private security with the public good. If only others had shared that objective, we would not be facing a global financial crash now.
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At the expense of banging on about it why isnt there some sort of ‘defined benefit extra state pension’ that people can pay into this would soak up a lot of the money currently going into the stock market and provide a secure return for low and average income earners
That is a variation on what I am suggesting
Isn’t this kind of what the now abolished SERPS was? We definitely need more defined benefit schemes. So called defined contribution schemes are a lottery and only really benefit those who can afford to save a lot.
But we could do better than that – which is wht my suggestion is
Can you give an example of Reeves saying she wants us to save by buying shares.
I ask because I would like to use it in a disagreement I am having with a few neoliberals on another forum
She says she wants to require pension funds to do so.
She is considering cutting cash ISAs to force this to happen.
Of course, many thanks. I was a bit slow connecting the dots there.
There was an article about Reeves and cash ISAs in the FT yesterday, if that’s any help, Keith.
https://www.ft.com/content/93879eba-d742-4d45-ab72-6cedf4e273b9
“The government could issue new classes of long-term, low-risk bonds designed for this purpose, giving savers both a fair return and the satisfaction of knowing that their money is doing something useful.”
What is the difference between this statement and investors choosing to buy a new Gilt issue?
These would be dedicated investment funding.
If investment into stock markets is just inflating the value of financial assets rather than creating new economic activity (and thus the allocation of resources), how can diversion of this investment into a social investment mechanism ‘reallocate’ labour, skills and materials into socially useful activity?
Because the government could buy the services of those currently underemployed by the private sector and put them to good use using the capital saved with it.
They just buy the underused resources. That’s it.
I think that we already have a facility that could be geared up for the pension market, Richard – National Savings & Investments (NS&I). Through a SIPP, you can purchase NS&I Income Bonds and there is no reason why the government couldn’t launch NS&I products specifically for the pension market. Would be very popular as, of course, the government can’t go bust and “Index-Linked Certificates” could be reintroduced just for pensions.
This is very cheap borrowing for the state and offers security and value to consumers.
Agreed.
But on this one I like hypothecation as well, so regional funds, NHS funds and so on.
It would onpy be marketing, but so what?
This is a very good idea. People need a home for their savings which can draw funds away from the housing market and be put to good use. The National Savings Green bonds were a good idea, but issued at too low a rate of interest. I cannot understand why they were not made index linked in order to replace the excellent product National Savings used to have- index linked savings certificates- but which have been discontinued. Actually I think I do know why. Index linked bonds were popular and drew in a lot of money. National Savings are not allowed to ” compete unfairly” in the savings market so are limited in the amount of money they can take in each year. Raising the limits on the funds National Savings can take in would be a start towards shifting pension savings into a more socially useful direction.
We need to end this absurd argument that the state cannot compete. Why not?
“The government could issue new classes of long-term, low-risk bonds designed for this purpose, giving savers both a fair return and the satisfaction of knowing that their money is doing something useful.”
National Savings & Investments issues a Green Savings Bond. It’s a three-year fixed term savings vehicle with a taxable interest rate of a low 2.95%. It is not competitive and seems to me to exploit people who want to do good with their savings.
It’s a poor example of what could be an excellent idea.
Agreed
I bought some but why was I punished for doing so? It made no sense.
While I got your basic argument about pensions, I found some of the detail in the argument tough. The angle you take in this article is one I can talk to people about, or use in a letter. You explain what it would look like in practice. I struggled to get my noddle round the ‘older generation must create assets the next generation want to buy from them’ – I guess the pension companies are dealing in the assets, but as you point out, many are secondhand, so they are not investing in the future.
Thanks for engaging with what is, I know, a difficult argument.
The key point is that pensions only have value if the next generation wants to buy the assets the current generation holds. That’s how the promise to turn pension savings into future income is actually fulfilled.
The problem is that most pension funds aren’t investing in new, productive assets that might underpin a sustainable future; things like green infrastructure, care services, housing, or renewable energy. They’re mostly buying and selling existing shares and bonds: secondhand financial claims on past activity. That may deliver paper profits for now, but it doesn’t create the real goods and services either future retirees or the next generation will need, wo there is no basis for an agreement between them, and so the fundamental pension contract fails.
In that case the argument is that we must build systems that direct pension savings into creating the assets and capabilities the next generation will actually want and need because without that, those savings are, in real terms, promises we can’t keep.
Is that any clearer?
yes, and, of course, the next generation need to be in a position to buy those assets. At the moment too many of them cannot afford to save anything as they are burdened with high rents, student loans , high energy bills and low wages, Tony Blair once talked of a “stakeholder” society. Well we have ended up with a huge number of people, predominantly young, who have no stake at all in society and it is dangerous. People with nothing to lose are much more prone to turn to extreme solutions. Creating assets which the young could buy into financially and emotionally would be in everybody’s interest.
Much to agree with
We are fortunate enough to have a decent amount of savings so it would be great if they were used for the purposes you described. It seems a no-brainer to me.
I’m guessing that financial institutions would make little if anything (or can make more on other products) on this hence why it’s not considered by the govt. Or am I being too cynical?
Craig
You are bveing appropriately cyncial.
Why should they make money from this?
I suspect their response would be ‘because we should, we are the great and the good and deserve to be duly rewarded as such’ or some other nonsense and BS 🙂
Maybe they should just jog on.
Craig
The Green Party Manifesto 2024 adopted four of the Taxing Wealth Report’s proposals, including the proposals to limit tax relief on pension contributions to the basic rate of income tax at 20 percent, with an estimated saving of £14.5 billion a year.
Since then, the Green Party’s Finance and Economy Policy Working Group – of which I am a member – has proposed in paragraph EC642 of its Voting Paper that…
“There will no longer be any tax relief for contributions to additional pension schemes, whether privately or publicly administered.”
The Voting Paper was “referred back” at the party’s conference and this is not party policy.
The rationale of this proposal is that pension fund investments predominantly go to purchasing existing shares and property, inflating their prices but without increasing the productive capacity of the economy.
That proposal would save an estimated £65 billion a year. But the net saving would only be £50 billion a year, because of the £14.5 billion a year already accounted for in the existing GP commitment to limit tax relief on pension contributions to the basic rate of income tax.
The proposal for complete abolition of tax relief on pension contributions is likely to be rather contentious, not least because of defined pension contribution schemes, whose viability would be adversely affected. Even reducing the maximum allowable sum available for tax relief would be problematic.
I suggest that the EC642 policy be amended to a policy of limiting the maximum annual allowance available for tax relief at the basic rate of income tax to £1,000 – the typical pension contribution of non-rich citizens. (The initial £1,000 could be index linked to the rate of inflation.) That would reduce the estimated tax savings from £50 billion a year to £25 billion.
In my view, it is worth forgoing the extra £25 billion a year for three reasons. First, it is not worth risking the ire of ordinary citizens. Second, the loss of £25 billion a year is tolerable in light of the considerable resources made available by other progressive changes that remain, which could include adopting the remainder of the TWR proposals. And third, the fact that a reduced private pension subsidy remained would give the government authority to insist on a significant proportion of pension fund investments being channelled into productive areas, as envisaged by the TWR and reiterated it today’s article.
Contentious.
Keep us posted.
Hi Ian, an interesting proposal. I am GPEW member and RM subscriber. I have recently put myself forward for membership of the Finance and Economy Policy Working Group, however now I see that one of us here is already there!
Any proposal of this kind needs to be rooted in a rational, sustainable policy for later-age, post-employment (‘retirement’) income. I’ve not been a GPEW member for long enough to know that much about many of its policy positions. Are you able to elucidate concerning this aspect, please?
Thanks Ian
Hang about has there been a crash? The only crash in recent years has been long dated gilts which have crashed 50-70%. Is this what you are referring to?
It is going to happen.