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Pension Reform

Smart Taxes has not yet tackled the subject of pension reform –  we got a little distracted by the financial meltdown. We can delay no longer as pension investment is a fundamental component of the fiscal and financial system in the Irish economy. For instance, the national pension reserve fund has been raided to support the Irish banks. Many private pensions funds are also invested in banks and all without exception are invested in increasingly insecure global growth.  Richard Murphy of Tax Research UK has a written a useful primer Time to take pensions seriously, that raises some of the issues and offers some solutions that we hope to develop in the coming months. He points out the riskiness and insubstantial nature of most pension fund investment and how it supports a financial sector elite.  The following is an extract – it is well worth following the link and reading the entire article.

Stock markets: shrinking targets for investment

The total value of equity markets is hard to estimate because of dual listings, as noted above. Irrational moves, as in the last few days, also heighten this problem, but let’s assume a UK value of about £3 trillion, which is a good approximation at present. The new money is tiny in comparison, or so it would seem. But note this: on average the volume of equities in issue in the USA has been falling for some time because of share buy-backs, and before the recent rash of new share issues in the UK to cover losses (which new issues do not of course result in any value added or new investment – they just replace funds irrationally destroyed by exuberant and wholly misguided management) new share issues for the purpose of making investment in new jobs, equipment, research or infrastructure in the UK were almost unknown. In fact as my colleagues and I showed in our 2003 New Economics Foundation report ‘People’s Pensions’, well over 99% of all share transactions in the year prior to its publication were for the purchase of what we called ‘second hand shares’ – that is shares already in issue by companies who received not one cent of the proceeds of the transaction as a result.

As I described it then, and as I’ll continue to describe it now, this amounted to a meaningless trade in what amounted to second hand bits of paper securing very limited rights to a future income stream over which the owner had no control whatsoever, and with regard to which they were entirely at the whim of others, and as a result of which no new investment resulted. This is because the market is, I suggest, deliberately starved of new shares to ensure that the price of existing shares must rise over time as new funds flow into the market – as they do day in day out from pensions and other sources.

Saving is not investment

I make the point very loud and very clear. This may be saving. But please do not for one minute confuse it with investment. It bears no relationship to the latter, at all. There is no (none, nil, zero – say it however you wish, it remains the same) connection between buying shares as a result of paying money into a pension fund and creating new wealth for the future. What that process of buying that share does is two things. First it buys a reducing portion of a finite pot of future wealth – the division of which is now more diluted than it was before, thereby reducing potential future well-being of all participants. Secondly it  buys out those now receiving pensions wishing to cash in their chips – which means that this exercise is remarkably like the unfunded state pension scheme as a consequence, with current pensioners being paid by the contributions of future pensioners who actually have no real claim to future entitlement as a result – a fact that is guaranteed by the new trend towards defined contribution not defined benefit pension schemes.

To put it another way – and to avoid all subtlety about this – the current pension contributions of those employees that are used to buy shares are, for all practical purposes, being flushed away forever because they create no added value, bar allowing current pensions to be paid by creating the necessary current liquidity in the market to let the currently old quit the market for good.

Irrational provision for pensions

So we have a system for the provision of future pensions that is based on irrational behaviour, a failure to create value added, which is more akin to a pay-as-you-go scheme for current pensioners than a savings mechanism for new ones, all of which is hidden by an albeit non-criminal fraudulent process of deception which enriches those in the City at cost to all our futures. Why then is anyone looking forward to retirement (bar those, with the good fortune to be in government backed final salary arrangements – now the target of much abuse from the so called free market press – which wishes, it seems, to join in the general myopia about free market pensions)?

Richard Murphy’s alternative to the current pension investment strategy are two fold

Option 1 – use pension money to pay for public infrastructure

….In 2003 I suggested, along with Colin Hines and Alan Simpson MP, that People’s Pension funds should be created to provide funds to the government, local government, health authorities and other agencies so that long-term infrastructure projects could be provided. People’s Pension funds would be a cheaper alternative than the much hated PFI scheme. And we know that these projects can pay a rate of return: the returns paid on PFI schemes are very high, and much better than anything any pensioner would dream of earning on their fund.

I remain convinced that this proposal is still valid: it provides a secure, government guaranteed rate of return which at the same time ensures that people can invest funds into their local communities and so see a current rate of return as well as a long-term one.

And this type of investment has that long-term essential quality that any pension fund should have. After all, a pension fund is meant to create assets by the effort of one generation that they can sell in their retirement to the next generation in exchange for that next generation providing them with the services that they will be when they are no longer able to work. Quite explicitly building public infrastructure does create assets of worth to the next generation which they will be willing to pay for through their taxation payments.

As such this proposal has three essential qualities: it makes economic sense, it has an implicit guarantee which makes it an incredibly attractive investment and it enhances the current options within the economy by finally laying the PFI scheme to rest, by creating a pool of funds for new public infrastructure investment which is essential at this point of time and by creating current and very obvious economic activity that makes the decision to invest in this way for the long-term acceptable to an electorate demanding current satisfaction.

Option 2 – A pension tax

Another option is a pension tax based on the pioneering work of Rudolf Meidner in the 1950s and 60s in Sweden. This would require that all companies employing more than a small number of staff each year to pay a tax settled in the form of an issue of their shares. The rate would need to be determined, but it would be a significant percentage: BT will be making pension contributions equivalent to 20% of its market capitalisation over the next 4 years. A tax rate of 5% of capital might therefore be required.

The shares in question would be issued to a national pension fund. That fund would have obligation to manage those investments to make a return to pay pensions for all people in the UK, not just the employees of the companies that are taxed.

The benefits of the tax are obvious: it does not reduce the cash capacity of the companies that make it to invest in the future as do current pension contributions; it cuts out the current ‘middle man’ in the form of the City that currently extracts an undue percentage from all pension contributions made, and it is applied across the board….Link to full article

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