Pensions

MFW_ASAP

CLAPTON wrote: »

The first issue is the production of goods and services and what level of 'cake' we will have in the future when the proportion of employed people falls significantly.

The second issue is how the cake will be divided.


If we invest wisely now, to increase the size of the future cake in terms of the ability to produce goods and service then that will increase the size of the cake we can consume in the future.

Most pension funds do not specifically target such provision and most individuals 'investing' in pensions are concerned with monetary growth and security.

I've not heard a pension fund boasting of their contribution to UK productivity or future GDP ; they usually emphasis the fund size.

Investing in a wide variety of bonds gilts shares may or may not boost UK GDP or its productivity although it may be an accidental side effect.


The employed people produce the whole of the economic cake; they have to forgo part of that cake if pensioners are to have a slice.
The amount they forgo determines what the pensioners (and other non workers) get, whether via taxation or from 'savings' or from pensions.

From the employed peoples point of view (what I have called a 'burden') it makes no real difference.

So a 100% funded scheme imposes the exactly the same 'burden' as a 100% tax payer funded schemes if in both cases the pensioners enjoy the same standard of living (i.e. the goods and services) produced by the employed).

Such is the nature of the demographic time bomb.

Ah, I see. That particular 'burden' is only true if the production of goods is only limited to this country. With globalisation, most goods are produced overseas.

The growth in pensions come from investing in industry and having industry grow. With zero growth in industry you get zero growth in a pension fund. Hence the reason shares in a company fall when they release a profit warning and the reason pension funds crash when the economy does the same. There is no disputing this. It is a fact.

Out of interest, what did you think shares are for?

MFW_ASAP

CLAPTON wrote: »

However if everyone has an excellent pension arrangement (whether via funded pension schemes or taxation) then the issue is what slice of the cake do all the pensioners take.

If the cake is relatively small and the pensioners are relatively numerous then this means the actual people working receive relatively little as a reward for their labours.

I think the confusion I have is what you mean by 'the cake'?

Loughton_Monkey

CLAPTON wrote: »

Individual pensions are an excellent idea as they potentially allow the specific individual to have a high standard of living in retirement.

Good.

CLAPTON wrote: »

.....If the cake is relatively small and the pensioners are relatively numerous then this means the actual people working receive relatively little as a reward for their labours.

Such is the effect of a reduction in workforce relative to the population size.
Whether you have forgone consumption during your working years may not be rewarded if all your comtempories did the same and now demand the same high standard of living from a now much smaller work force.

I think you need a baking course to learn a little bit more about cakes.

There is, first of all, a cake of 'production' which is the total wealth created by the UK workforce at any one time. Each member of the workforce is (in theory) adequately recompensed for helping to bake that cake. This cake varies in size every year.

But there's a totally seperate cake, and one you are probably forgetting or confusing with the other. This is the cake 'stolen' by the Exchequer. He nibbles away all day long and steals nibbles out of the other cake, to create a cake roughly half of the one above. It leaves the other cake much smaller.

Now this cake sadly increases in size every year. Always does. Probably always will.

To have any rational discussion, we need to dissemble these highly complex, but different cakes, cooked over a very long period.

Meanwhile, some of us were careful enough to put a few buns away in the oven for our retirement. Nothing wrong with that. As a consequence, I need to eat rather less of Mr Osbornes cake than I would have done.

Changing the subject, I've had enough cake and am going downstiars to enjoy a rather large gin & tonic. With Cheesy Nibbles.

CLAPTON

MFW_ASAP wrote: »

I think the confusion I have is what you mean by 'the cake'?

By the 'cake' I mean the sum of the goods and services produced by the working people (lets call it GDP).

The point I'm trying to make is that e.g. if the share of the GDP that the pensioners and other non workers are given is say 40% then that leaves 60% for the people who do all the work.

Whether than share of 40% is distributed via taxation or through savings or pensions in whatever mix makes no difference to the employed people who actually produce 100%
but only receive 60%.

wotsthat

CLAPTON wrote: »

However if everyone has an excellent pension arrangement (whether via funded pension schemes or taxation) then the issue is what slice of the cake do all the pensioners take.

Whether you have forgone consumption during your working years may not be rewarded if all your comtempories did the same and now demand the same high standard of living from a now much smaller work force.

Fortunately, depending upon how you look at it, not everyone will have excellent pension arrangements. Neither do we have to worry about our fellow workers taking as much interest in their pension arrangements as we do ours. They'll have to pay for today's over consumption tomorrow by working for longer. Yes productivity will drop as people can't afford to retire but it should provide a partial solution to the demographic time bomb.

hugheskevi

In theory, an economy that chooses to fund retirement by savings should have higher capital, which in turn should lead to faster growth and a larger cake. However, empirically such a relationship has never been shown to clearly exist.

Perhaps this is due to the increasing openness of the world economy. If people in one economy don't save much, but folk in another economy do, the savings are going to flow to where they get the greatest return - what won't happen is that an economy is starved of investment funds despite offering excelletn returns whislt another economy is swamped with excessive investment funds they cannot efficiently use (although there have been some possible examples of this over the years - whether or not it happens in the future is another matter).

So the amount of investment is increasingly determined by the prospective return, rather than the amount of saving in the domestic economy. Whilst even as recently as about the 1980s a lot of domestic saving remained in the domestic economy, this has rapidly changed.

One observation about the 'cake' discussion is that it clearly applies at world level, but not necessarily at country level. It is possible Britiain could save huge amount of funds and invest them overseas. As we are a relatively small economy in world terms, this wouldn't mean all future pensioners competed against each other for the same resources. Of coure, if the world as a whole pursued the same strategy this wouldn't be true. But even then, it would only work in relation to imports, as the British pensioners still need to have people build roads, produce food, etc, etc, and so wages would be competed up if there is a relative shortage of workers.

MFW_ASAP

CLAPTON wrote: »

By the 'cake' I mean the sum of the goods and services produced by the working people (lets call it GDP).

The point I'm trying to make is that e.g. if the share of the GDP that the pensioners and other non workers are given is say 40% then that leaves 60% for the people who do all the work.

Whether than share of 40% is distributed via taxation or through savings or pensions in whatever mix makes no difference to the employed people who actually produce 100%
but only receive 60%.

By 'working people' do you mean just UK based workers?

CLAPTON

MFW_ASAP wrote: »

By 'working people' do you mean just UK based workers?

The world is an island so the logic applies globally.

However, if a country had a large sovereign fund or large net investments overseas then that country could, when it is in need, sell those asset (or use the income).

In the case of the UK, I believe we are in about balance with the rest of the world (i.e. they own about the same amount of our assets as we own of theirs).
As we have a chronic trade deficit, the balance is tilting against us.

MFW_ASAP

CLAPTON wrote: »

The world is an island so the logic applies globally.

If we look globally, then workers in the UK and pensioners in the UK are not competing for a slice of the 'cake' (the sum of production and services) because the demographics balance out much better.

CLAPTON

MFW_ASAP wrote: »

If we look globally, then workers in the UK and pensioners in the UK are not competing for a slice of the 'cake' (the sum of production and services) because the demographics balance out much better.

yes globally, the world does not currently have a shortage of working age people.


that of course does leave the Hamish solution (massive immigration) and the investment oversea solution.

So unless we consume a lot less now (or increase GDP in a very significant way) there isn't an realistic prospect of building a high level of net overseas assets.