Property-owning democracy and collective pensions
In Section 6 of this recently published piece called ‘How to Guard against the Risk of Living Too Long: The Case for Collective Pensions’, I argue that funded collective occupational pensions serve to realise the ideal of a property-owning democracy. I wish I had had the chance, before writing this section, to read Martin O’Neill’s informative, synthetic, and thought-provoking survey article on ‘Philosophy and Public Policy after Piketty’. Here I offer some further observations — in the light of the italicised quotations from O’Neill’s article below — on the ways in which collective funded pensions realise this ideal.
Meade’s property-owning democracy involves, in effect, changing the nature of property rights such that wealth would be much less easily transferable across generations, subjecting it to high rates of taxation with regard to both inheritance and gifts inter vivos. Wealth would be dispersed across the population, with individual capital holdings for all viewed as an entitlement of citizenship, and the use of a myriad of mechanisms that would spread the returns to capital as broadly as possible. Such mechanisms could take a large number of different forms, including “the encouragement of financial intermediaries in which small savings can be pooled for investment in high-earning risk bearing securities; measures to promote employee share schemes whereby workers can gain a property interest in business firms; and measures whereby municipally built houses can be bought on the installment principle by their occupants.” The goal would be both to spread capital returns widely across society, and to overcome the forces for divergence between larger and smaller investors. (p. 363)
Many of the above objectives are accomplished by traditional defined benefit (DB) funded collective occupational pension schemes. Such schemes provide annuities which are a massive conversion of corporate wealth — the equities held in the scheme’s fund — into income streams. Individual defined contribution (IDC) pension pots, by contrast, involve the atomistic privatisation of corporate wealth, by providing people with lump sums of capital at retirement. By providing annuities rather than lump sums, traditional pensions reduce the scope for intergenerational transfers.
In a blog post entitled ‘Planning for a noble and quick death?’, Henry Tapper observes that people are now opting out of DB pensions in order to convert them into IDC pension pots to bequeath to their children. But, given the real chance that they will have to draw their pot down to nothing while still alive and rely on the resources of their children before they die, he also notes that this is counterproductive, even as a means of enriching their children.
As Piketty puts it, “there is the fact that a very large portfolio can manage to get a 7 or 8 per cent return, whereas people with £100,000 can hardly get the inflation rate.” (p. 353)
Piketty shows that, whereas the world’s richest universities, Harvard, Yale, and Princeton, have averaged a capital return (after management fees and inflation) of 10.2% per annum during the period 1980–2010, and the sixty U.S. universities with endowments over $1 billion have averaged a return of 8.8%, those five hundred institutions with endowments of less than $100 million have averaged a return of only 6.2%, much closer to the rates that mere retail investors could have commanded over the same period.
The … “superinvestors” … operate in particular at the top end of the distributions of income and wealth, attenuating the distribution of … investment income so as to benefit the richest and most successful, advantaging the top 1% of recent notoriety and, in particular, the top 0.1%. (p. 354)
…mechanisms for facilitating individual capital investments (together with mechanisms for democratizing the benefits available currently only to “superinvestors” through state-regulated vehicles to manage aggregations of individual investments) (p. 369)
Large occupational pension funds dwarf even the endowments of Harvard, Yale, and Princeton. They allow workers of more modest means than the typical Ivy League graduate to reap the benefits, in retirement, of economies of scale and superinvestors.
Reducing r? Approaches to Reducing the Rate of Return to Capital
It may sound perverse to look to reduce the profitability of business enterprises, but that sense of perversity soon evaporates when one considers the equilibrium effects of some policy measures to do so. In Piketty’s treatment of “Rhenish capitalism” and the German social model, he discusses the way in which German forms of corporate governance — with workers on corporate boards and the “codetermination” of industrial policy (“Mitbestimmung”) — allows more of the value of firms to be captured by stakeholders other than shareholders, as interestingly demonstrated by the differences between the stock market value and “book value” of German firms. In such a model of capitalism, a lower market valuation for corporate assets is not associated with “a lower social valuation”; in fact, quite the opposite (C, pp. 145–6).
In addition to German corporatist models of economic management involving codetermination, O’Neill also considers trade unions and greater taxation of corporate profits as means to “allow more of the value of firms to be captured by stakeholders other than shareholders”.
We should add the following, further means, which involves, not the decrease in what goes to shareholders, but the inclusion of more ordinary workers as among the beneficiaries of shares. This is achieved by the collective investment of occupational pension funds in shareholder equity.
In 1930, John Maynard Keynes imagined the “Economic Possibilities for our Grandchildren,” conceiving of a society in the early twenty-first century in which the social benefits of increased capital intensive growth were widely dispersed, creating the possibility for a life of leisure and refinement for all. (p. 370)
The wide dispersal, via collective occupational DB pensions, has made leisure possible in retirement. With the move to IDC, the period of retirement is being shortened, since workers can’t afford to retire until later given the risks and inefficiencies of such pension pots, and their income in retirement is lower.