How to fix the pensions
More and more people are complaining about the fact that the public sector are still enjoying generous final-salary pensions while the private sector has mostly moved to much more modest defined-contribution schemes.
The solution recommended by most commentators is to reduce public-sector pensions.
This, however, is not likely to be enough for a comfortable retirement for most people. Pensioners in the UK are already much worse off than those in other developed countries.
The way I see it, defined-contribution schemes (which basically means you give people some money to invest in shares, without any guarantee how the investment will turn out) are far too risky for normal people.
Final-salary pensions, while great for the workers, are far too risky for companies, and they put established companies at a disadvantage compared with newer companies and companies in other countries without similar pension systems.
So a third way is needed. I would suggest something along the following lines:
- Set up some big pension organisations/companies (let’s call them POCs) to take contributions from workers and companies, invest this money and pay out generous pensions to retired workers.
- Make it obligatory for all companies, for self-employed people and the public sector to pay in a specific percentage of salaries to one of the POCs.
- Make sure sure the POCs insure each other and give them some sort of state backing to ensure people can be confident their pension will not suddenly disappear.
In this way, public and private sector workers would have equivalent pensions, and old companies wouldn’t struggle to compete with newer ones.
Also, when people change jobs, their pensions could still remain with the same POC, instead of having small pensions in many different places.
The reason I’m suggesting setting up multiple POCs rather than a single one is to avoid having an organisation that is too big to fail and too big for the state to save.
Can anybody spot any flaws in my suggestion?
Deflation?
Cynicus Economicus has written an important blog posting about inflation, deflation and the Bank of England.
In his own words:
Here is the central problem for the Bank of England. The only way to justify [printing money] is through the fear of deflation, but the only measure that is showing deflation is the RPI. The bank’s remit does not extend to RPI so that it can not use the RPI as an excuse to print money. As such, they subtly conflated the measures, planted the idea of deflation in the mind of the media, and ‘lo and behold’, deflation has appeared.
As readers of this blog will know, I have for some time been a deflation sceptic, so it should be no big surprise I tend to agree with Cynicus.
It is interesting if the Bank of England will manage to create deflation themselves while claiming they’re doing the opposite.
Halfway through?
So much has been written about yesterday’s disastrous budget that I don’t think there’s much point in writing more about it. I just can’t wait for Labour to be thrown out!
All the budget coverage has taken the attention away from some other developments, however.
For instance, Edmund Conway had an interesting blog posting a couple of days ago, about how the IMF has written a report on how the balance sheets of the world’s major banks would look if they were to get back to lending again at more or less the rate they were in the pre-crisis days.
A few quotes:
The simple truth is laid out in page 33 of the Global Financial Stability Report, published today in Washington: “if banks were to bring forward to today loss provisions for the next two years, before expected earnings, US and European banks in aggregate would have tangible equity close to zero.” In other words, the entire global banking system would be bankrupt – kaput – if its institutions immediately wrote off all the toxic assets still sitting in their vaults without any government assistance.[...]
But it underlines one simple but undeniable truth: that this recession is different. It is the consequence not of a simple one-nation housing crash or a consumer slowdown but a catastrophic collapse of the financial system. And with that system still in a wreck normal service will simply not be resumed without more costly bail-outs – or else we must accept the consequence that money will be far more expensive to borrow in the future, and that economic growth will be far less in the future.
To anyone with a keen sense of history this should hardly come as a surprise. The 1930s were marked by periods of optimism before reality set in again. The IMF’s verdict may also take a while to sink in, but here it is, laid out in table 1.4 of the report: we aren’t even halfway through the bank bail-out. Gulp…
More about inflation
Readers of this blog might be aware that I think inflation is about to go up.
It seems I’m not alone any more.
Guido Fawkes today had a shocking posting revealing that the Bank of England’s own pension fund is betting on inflation going up. Please do read this! It also shows they saw the crash coming as early as 2006.
Do also read the article mentioned there by Liam Halligan, suggesting various reasons why many people want us to believe deflation rather than inflation is the problem just now, and more reasons to believe inflation is coming.
RPI inflation about to rise?
I predicted months ago that prices would go up, and Phyllis has now also pointed out that it’s no big surprise prices aren’t falling.
However, economists are still predicting that prices are about to fall.
I don’t understand this. CPI is way above target mainly because import prices are rising because of the fall in the value of the pound.
So far, RPI has been much lower because of lower mortgage payments.
But is this likely to continue? As far as I know, most good tracker rates were removed a year ago, and most new deals are now much worse.
This means that lots of people will be coming off their great deals over the next year.
Let’s take our mortgage as an example: A year and a half ago we got a mortgage tracking the base rate minus 0.2%. This means we’ve been experiencing constantly falling mortgage payments for the past year, thus being part of the downwards movement of the RPI measure.
At the moment, we pay a ridiculously low 0.3% – practically free money.
However, when our two-year deal expires in September, the best we’ll be able to get will probably be 3-4%.
Given that the interest rate can’t go down much further, tracker payments won’t fall any further, and the amount of people coming off good deals will add to the RPI.
So very soon the RPI will rise, and the CPI and core inflation will still be rising because of the low pound.
So why are the economists still worried about deflation?
SU
Nu diskuteres det i Danmark, om man skal begrænse SU’en til de første fire år af studiet, altså reelt til bachelordelen og indføre selvfinanciering (eller lån) på master-delen.
Da Phyllis studerede, fik hun en vis grad af uddannelsesstøtte. Kort efter blev den fjernet, og Labour har siden indført brugerbetaling på de engelske universiteter (£3000 pr. år, men det drøftes ofte at fjerne loftet). De skotske er stadig gratis, men hvem véd, hvor længe det varer?
Jeg vil derfor godt advare om, at det kan være en glidebane, hvis man begynder at reducere SU’en.
Jeg er godt klar over, at Skattekommissionen hævder, at folk med lange videregående uddannelser har så høje livsindtægter, at de vil tjene mere på lavere skatter, end de sætter til på lavere SU.
Det er naturligvis rigtigt for mange, fx jurister, økonomer og cand.polit.er, som sikkert sidder på de fleste pladser i kommissionen. Men det gælder ikke nødvendigvis humanister og teologer, som ofte ikke har specielt høje livsindtægter.
Man kan også nemt komme i den situation, at nyuddannede har så stor gæld, at de bruger første halvdel af deres arbejdsliv på at afbetale gælden, hvilket igen betyder, at de nok forbliver lejere, hvilket kraftigt kan forringe deres økonomiske situation ved slutningen på arbejdslivet.
SU’en er en relativt billig måde at sikre, at mange har en høj uddannelse og ikke starter livet med bundløs gæld, og den er værd at bevare!
House prices will keep falling for another 3½ years
I forgot to blog this at the time, but there was an very interesting article in The Economist a few weeks ago.
It was about a recent statistical study of recessions that had come up with some interesting results.
- House prices tend to fall 36% from their peak, and this fall takes five years. These two figures are fairly uniform.
- Equity prices fall even more, by 56%, but this is faster: Only 3½ years. These figures are also rather uniform.
- Rises in unemployment, on the other hand, varies a lot from one recession to another, but on average it rises by 7% over almost five years.
- And finally, the fall in GDP is typically 9½% over two years, but again with large variations.
In Glasgow, house prices started falling in the autumn of 2007, so prices are likely to keep falling until 2012.
More about the credit crunch
More and more people seem to be coming round to my view that the devaluation of the pound is a bad thing.
For instance, Jeremy Warner has a brilliant article in The Independent today.
He makes an additional point that I had missed: “Sterling’s plunge will undoubtedly have contributed to this absence of credit by accelerating the withdrawal of foreign funds from the UK banking system. Credit in the UK has come to rely heavily in recent years on constant infusions of foreign capital. These have now largely gone.”
Do read the whole thing.
Low interest rates are part of the problem
More and more people seem to be coming round to my view that low interest rates are part of the problem, not part of the solution.
For instance, today this was published in The Times:
Ben Thompson, mortgages director at Legal & General, said that the cut in rates could backfire by denying banks the flow of new deposits needed to fund fresh lending.“What lenders need more than ever are savers’ deposits – and they are not going to get them if they can offer only paltry rates of interest,” he said.
Also, John Redwood (the Tory MP) wrote this two days ago:
[...] the problem is no longer the price of credit the Bank of England is recommending, but the availability of credit. Business groups and others lining up to urge a new cut, should ask themselves is it the base rate that still causes them anguish, or the scarcity of credit, or the failure of the banks to charge them a similar rate to base rate? On reflection many business people might see it is the latter two issues that cause them most current concern.[...]
If the MPC does cut rates more, this does not mean that suddenly all lending rates will fall by the same amount as the MPC cut. It will mean the banks have to create a different structure of lending and deposit rates so they can still do some business and make some money.
Far from establishing the MPC’s wisdom and authority, a further cut would be evidence that it has lost the plot. It would mean a world where base rate was less important than the market rates banks have to set.
I wish the Bank of England hadn’t been so quick to lower the rates – I fear it’ll be much harder to raise them than it was to lower them, even if that’s what the economy needs.
The pound is not welcome
Although all EU members are welcome to adopt the euro, there are some criteria that need to be fulfilled before joining:
- Inflation rate: No more than 1.5 percentage points higher than the three lowest inflation member states of the EU.
- Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year.
- Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.
- Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM-II) for 2 consecutive years and should not have devaluated its currency during the period.
- Long-term interest rates: The nominal long-term interest rate must not be more than two percentage points higher than in the three lowest inflation member states.
The criteria were bent a bit when the euro was created, but recently they have been applied rigorously.
The UK used to meet the criteria, except for the one about the ERM-II.
However, the inflation is far too high, and the deficit is far too big, and soon the debt will exceed the 60% limit, too.
So the result is that the UK cannot join the euro.
Of course things can change, but it’s definitely not going to be an easy goal to achieve.
The government needs to do more to meet the convergence criteria, otherwise they can’t join when they want to.