The kindest way of outlining Professor Richard J Murphy’s misunderstandings about pensions is that he’s simply never heard the analogy of the pig through the python.
Sure, pythons eat pigs. They swallow them whole. And it’s possible to observe the movement of the pig through the python too, the lump getting progressively smaller over time as it moves down the gut. All of the pig does get crapped out the other end too, even if in dribs and drabs (there being no anal snake hair to produce clarts). OK, we can get more complex and talk about energy being extracted etc, but that vision of the pig moving through the python is the thing to keep in mind - analogies are, after all, only analogies, not proofs.
As I say, it appears that Professor Richard J Murphy just doesn’t get this.
I have never given this theme up. We live in a country where there is reported to be £8,100 billion of financial wealth and a simultaneous desperate shortage of investment. That is because almost none of that financial wealth represents sums actually available for constructive use within the economy. It is instead either money sitting out of circulation in bank accounts or sums saved for speculative purposes, much of it represented by the ownership of shares in quoted companies or the ownership of second-hand buildings.
The old economic idea that saving had anything to do with investment, which claim provides the logic for the UK government still giving £70 billion of tax relief to those saving money into economically dormant or socially useless ISA or pension accounts, has been shattered in a wholly financialised economy where doing something as unseemly as actually using saved funds to provide capital for real economic activity never appears to occur to anyone in so-called financial markets.
The £8.1 trillion is both household ownership of stocks and bonds plus the pensions funds that are actually funded. So his wife’s doctor’s pension, which is unfunded, is not included. But those defined benefit pensions, anything you’ve got in a pension, they are.
The background insistence here is that Professor Richard J Murphy desires that all of those be invested - perhaps “invested” is better - in the sorts of things that Professor Richard J Murphy thinks they should be invested in. Climate plans, more education, childcare, the real and important things that make our society better. Further, the investing (sorry, “investing”) should be done in bonds, through government. A couple of years back those were going to be nice Green Bonds paying a high interest rate of 1%. Err, yes, that is one percent and described as high. Lovely, lovely, decades long, long term bonds at 1%. Which, by now, would have lost you 30 to 40% of your capital sum and wouldn’t we all have been the lucky ones.
But, to be fair about it, some authoritarian insisting that he knows how to spend, or invest, your money better than you do is hardly an unusual occurrence. We’d not have politics if it were.
Where this tips over into ignorance - gross, howling, ignorance - is the failure to understand how capital and pensions work.
It’s in that complaint about the ownership of second hand pieces of paper - buying bonds and shares off other people. The financial markets are just the shuffling of those rather than money coming in to invest in new things. That’s why his insistence becomes that pensions should only be invested in new assets, not in the purchase of old ones.
Which is the pig in the python problem.
Now try just thinking through how a pension works. We save during our lifetime in order to fund our retirements. OK, we’re all agreed on that so far then. We could use our savings to build new assets which the next generation then buy off us in our Golden Years - the insistence that Professor Richard J Murphy is making. Or, even, they could just rent them off us, not even buy them!
But that’s when we hit the pig problem. For we do not, in our retirement, merely live off the income from our capital. We eat the capital too.
Now these numbers are stylised and we can play with them if we wish. But they do still illustrate the basic logical problem. So, we desire an income, in retirement, of two thirds of our working income. Say. The average Brit earns £30,000 a year, we need a £20,000 a year pension. OK - stylised but still. So if our money is in 1% Green Bonds and we live off the income from our pensions savings then we need a £2 million pensions pot (an advantage with stylised numbers is that they can be fixed to make the maths easier).
Umm, right, so someone on £30k a year is going to have to save 166% of their entire working income over their 40 year working life in order to gain a reasonable pension. Because you’ll need a £2 million pot to produce £20k at 1% interest. That’s, umm, not gonna work.
OK, so let’s say 5% bonds then. You need a £400k pot. So now you’ve got to save 14 years of income out of that 40 year working life. Umm, 35% a year of total annual income in pensions savings? Rilly?
Yes, agreed, we’re not including whatever capital gains there may be in the savings (nor inflation) but then if we’re in bonds there are no capital gains. Further, Professor Richard J Murphy keeps insisting that as the stock market doesn’t rise in valuation over time then nor are there capital gains in shares. Nor are we including earnings (interest or dividends) reinvested which will change the picture as well. But then nor do Professor Richard J Murphy’s calcs do that. Quite famously in his first publication on this subject, he and Colin Hines compared the stock market performance without dividend reinvestment to bond performance with interest reinvestment. No, really.
The way this circle is squared is that we do not, in our dotage, live off the income from our lifetime savings. We consume the capital in our savings as well. Sometimes this is explicit, as when purchasing an annuity - the annuity company says we’ll have all your capital, right now, ta! In return we’ll provide you with an income. Sometimes it’s not explicit but the same thing is happening. Capital is run down to produce that income being lived off.
Our pensioners are not dying with a £2 million pension pot (or a £400k one) having lived off £20 k a year. They’ve been selling down their capital at some rate and consuming £30k, £40k a year.
But note what this means - they have to be able to sell their capital. Even if, in generation one, everyone put all of their pensions savings into creating new assets that benefit society, by the time generation one are consuming their pensions we need a system of selling old assets. The only people we can sell them to are, of course, the net savers in society. This should not be a difficult concept. If some people are dissaving - consuming their pension assets - then other people must be net saving. Buying those old pensions assets.
A more personal and direct example. Back when Grandpops had a mate with a bright idea. This struck the circle of friends (largely blokes who’d made good in a lifetime of military and civil engineering) as a damn good idea so there was a whipround to raise the capital for the new company. Grandpops subscribed for £250 of shares in the new Vibroplant. That company’s still around and those shares are still in Mum’s portfolio. They might need to be sold to pay for her care - just one of those things and what the savings are there for in the first place. Well, OK. At some point that investment in new assets, a new company, will have to be liquidated.
Who too?
Well, they’ll be second hand pieces of paper, so therefore, by Murphnomics, something that doesn’t contribute to society. But if they’re not to be sold to the major source of saving in the British economy, people building their pensions savings, who the fuck are they going to get sold to? How does Mum consume, now she needs to, the results of that investment made 60 years back?
The pig must move through the python.
We can put it in slightly more formal terms. Pensions savings (other forms too) are a stock. Sure, there are additions to the stock in that flow of new pensions saving each year by the current generation. But there are also substractions from that stock as retirees eat their capital.
The python not only eats pigs, it shits pigs too.
The moment that we acknowledge this all the complaints about trading in second hand paper simply vanish. For that’s how those who have saved get to fund their requirements - selling the pieces of paper that are the investments they made. As we are not generation zero - no, despite what the young look like these days, we’re not - then the amount available for investment in new things is not the stock of savings at all. It’s - at very best - the nett addition to savings, the difference between old folk consuming their capital and young folk saving it.
And, obviously, this entirely kills the entire Professor J Murphy whine. Simply because he’s just flat out ignorant about the world. But then, well, you know, this is just such a surprise, right?
If all new pensions saving must be in new assets then who the fuck does Mum sell the Vibroplant shares to? If you can’t solve that then you’ve not a pension plan.
Has Murphy considered that nobody in their right mind would ever invest in the new assets he insists upon if that decision was to be a lifetime commitment incapable of being unwound. All forms of saving are deferred expenditure whether that deferral is managed by means of bank deposits or ordinary shares. One has to be able to turn the saving back into spendable cash; if one can’t one is forced to retain these investments forever and then be decried for holding old and unproductive pieces of paper. You can’t win.
One can only make sense of this on the assumption that Murphy is essentially a communist. He doesn’t think any of us should have any savings. All our operating surpluses should be transferred to the government to spend (not invest) on all the things of which he approves, which would include doling us out our approved ration in retirement. Nominally we would receive a government bond in exchange for our transferred money, with a notional tiny rate of interest paid for us to spend, but that would die with us and be cancelled on death.