Dead Money

[peterbirks]

And so, Readers Digest UK goes into administration, putting 117 jobs at risk. And why? Because it cannot meet its pension fund obligations.

So, let me get this right. Companies have to meet obligations to already retired employees (promises made in the past). If they can't, then they are insolvent, thus putting existing employees out of work, and the already retired employees get their dosh guaranteed by the government, while the existing employees (effectively put out of work not because their company is unprofitable, but because a past management made unsustainable promises) are just told to "get on their bikes". GDP falls, the proportion of people producing compared to people not producing also falls. Yet one significant minority gets treated far better than anyone else.

Personally, I doubt that this is a sustainable situation. With asbestosis, all of the primarily responsible companies are now out of business, so the claimants go after secondary companies and insurers. With pensions, will we get a situation where a large number of companies go into administration in order to avoid their pension liabilities? Quite possibly. Eventually the government realizes that its system for guaranteeing the pensions of those already retired, although legally binding, is unsustainable. Something will have to give.

Disproportionate allocation of income is not just a matter of million-pound bonuses for bankers. If you have one sector of the economy feeling that GDP is not being allocated proportionately, you have a recipe for trouble.

The front page of this morning's FT covered a report stating that the younger generations face a "wealth deficit". That is something of an understatement. But the speech by David Willetts highlighted the intractability of the situation, because all that he could say was "the challenge for policymakers is to smooth fairness across the generations". Of specific policy recommendations, there were none.

And with good reason, because any policy that would actually work would have the oldies (and I include myself in this category -- I am one of the winners if the current system stays at it is) up in arms spouting all the normal shit of: "I worked thirty years of my life so that I would be guaranteed an inflation-indexed pension of half my salary on retirement at 55! Any attempt to take this away from me is theft!"

Apparently there has been a good deal of research on intergenerational inequality in the US, but the solutions there will be considerably easier than they are here; partly because of societal attitudes, partly because of the structure of the economy (fewer public service guaranteed pensions) and partly because of a smaller proportion of final salary pension schemes.

If the old give "enough" back to the younger generation, a larger economic cataclysm might be avoided. But if they take the stance of "what we have, we hold", then they might soon find that what they have won't amount to very much. As they say, life ain't fair.

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Comments

[ceemage.livejournal.com]

But having your employer go bust is considered an accepted risk in society. Having your pension go tit-over-arse isn't. Of course, you would probably say that this is the public's fault for not having a sufficiently Paxman-like attitude to their government ("Why is this lying bastard lying to me?") But there is another side to this.

It's similar in principle to the argument about the investor deposit protection scheme. If everyone believes that the only safe place to keep your money is in the mattress, then that whole circulation of money thing stops working. Likewise, if enough people believe that cash invested in pensions is wasted, and you might as well live high on the hog and hope you die young, this creates obvious problems. Rather, it's in everyone's interests for the government to keep the societal ponzi scheme that pensions represent going.

[peterbirks.livejournal.com]

Yes, you are right; there is currently an "acceptance" of the "rights of the old" taking precedence over those of the people who are still economically productive. But as the system comes under more and more strain, this acceptance will be stretched. And either the retired give ground, or the whole thing will snap.

I agree that it is in everyone's interests to keep the unsustainable system going. The small problem here is that it is just that -- unsustainable. This is what cannot be said by politicians. They have to pretend that the unsustainable is sustainable, because everyone is happier while the unsustainable scheme continues.

But is this really in everyone's interests? All that it does is stave off the day of reckoning, and it will make that day of reckoning much more painful when it comes. It may make everyone feel better, today. But that's not the same as saying that it is a "good" thing. We are all still increasing the debts on the credit card. One might argue that it is in a whole family's interests to carry on with this system, because to stop doing so will make everyone miserable. But you can't increase creedit card debt levels forever. Eventually the interst payments on that debt are taking up everything that you earn.

That is what is going to happen with pensions. And whether or not it's considered "an accepted risk", people will eventually be forced to see that it's a rather unpleasant reality.

PJ

It can't last

[peterbirks.livejournal.com]

As if by magic, the ONS numbers for January gave something of an indication that you won't be able to take state backing for granted for long, no matter how you get your money. The deficit was £4.34bn for January (i.e., the long-term number for the year is worse, because January is a good month for state earnings). That's about £60 overspent in a month for every man, woman and child, or £120 overspent for every person employed. I was going to put in bold that this is real money, but then I realized that the opposite of this was my point. It isn't real money. It's what the government is promising to pay back at some future unspecified date. And either the value of that money will be devalued (through inflation), or the government will go bust (default on sovereign bonds), or (least likely) it will actually repay the cash, one day, in real terms.

PJ

.

[e584.livejournal.com]

Is this one of those spots where US chapter 11 proves superior - a viable business gets to continue, rather than get sunk by a non-business cost? Or alternatively, will the receivers be able to sell the business as a package to some PE barracudas (assuming that there are any left with any money)?

The aging society/pension timebomb problem is still far from clear in my mind. As the workers:nonworkers ratio falls, the relative value of labour becomes more important and so the idea that the few slave away to pay the pensions of the many seems to me to make little sense. On one level, it looks like it's set up to be really nasty - old people with political weight pitched against young people with economic power. But I imagine that it ends up being defused somehow less spectacularly

As far as I can see, this manifests itself in either high inflation, rendering the real size of nominally-fixed pensions smaller, or perhaps in consistently very low interest rates - low real returns to the pension savings leading to much smaller annuities. These seem to be contradictory, so something must be wrong. Of course, there's also the inflation-linked pension issue, as raised by yourself, but as far as i can see these will simply have to be reneged upon at some point.

Re: .

[peterbirks.livejournal.com]

High inflation and consistently low interest rates are not completely contradictory, because the important point is not how high absolute interest rates are, but how high real interest rates are. You could easily get 9% back in the 1970s, but savers were still being wiped out and the value of nominally high annuities at the start was being reduced by the month.

The British being the British, I agree that the whole caboodle will probably be fudge-solved somehow.

The simplest way to renege on inflation-linked pensions is to redefine inflation in such a way that it bears virtually no relation to the real cost of living. Will the ONS play ball on this? Probably, provided the terminology is sufficiently fudged.

Speaking of which, I see that a JP Morgan was bombed in Greece this week. They have different ways of solving such problems abroad.

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Re: .

[e584.livejournal.com]

Yes, the more I think of it, the more I think it is a red herring (albeit it one that is likely to arise for separate reasons) and that a fall in the real return on capital is the key process.

Incidentally David Willetts made a presentation at the LSE about his recent book on the baby boomer wealth accumulation which might be of interest:
http://www.lse.ac.uk/resources/podcasts/publicLecturesAndEvents.htm

I found it a little underwhelming - it was more of a starting point for analysis than any real insight, I thought. His focus is very much on the accumulation of capital by a bulge generation, whereas I tend to think more about the flip side of the coin - the relative decline in the size of the labour pool.

I guess control of the pool of capital does at least mean that the aged get to determine where those assets get invested - I'd be willing to bet that there is going to be a fairly sustained growth in focus on the 'scandal' of nursing care over the medium term, as the people with the money start to see their future trajectory, for example. Still, I think that there is a tendency to focus only on the the nominal value of accumulated wealth without 'looking through' this to focus on what it can actually buy, given the total level of economic capacity. International effects obvious complicate things also.

Ian

Re: .

[peterbirks.livejournal.com]

You are right about international matters complicating things: This article (taken from a Canadian paper so that we don't get the intrinsic pro-British bias of the UK press on the matter)
http://www.theglobeandmail.com/report-on-business/british-pensions-regulator-seeks-greater-stake-in-nortel-assets/article1475841/

In a way, this reminds me of the UK savers who got burnt by investing in Icelandic bank aacounts. However, as no doubt the "our pensions are sacred" group would argue, there's a bit of a difference between voluntarily putting your money in Shyster and Shysterson (Iceland) so as to gain an extra 1% on your money, and working for a UK subsidiary of a foreign company that goes tits up, leaving behind a huge pension deficit.

And the big problem here is, yes, regulation. As an employee there might be lots of talk about "stakeholder", but the fact is that company A can sell your promise-to-pay (i.e., your pension and the likelihood of you getting it) to foreign company B, thus drastically reducing your chances of winning a court battle on the matter, and there's bugger-all that you, the employee, can do about it.

Part of the problem here is, definitely, that people saw pensions as a certainty, whereas they were never more than a rather shaky IOU. But for once I am rather on the side of the employee. If I choose to work for a British company with a pension because I consider that pension promise to be, in rating agency terms, triple A, then I think that I should have some rights when it comes to a foreign company taking over and, intrinsically, turning that "promise to pay" into single B minus or worse. In essence this amounts to the shareholders ripping off the employees, because obviously a sound debt is worth more than a shaky debt. The difference between the two would be pocketed by the selling shareholders, or, worse, by the buying company. And, legally, there was little that the owner of the IOU could do about it.

PJ