Seven reasons to hate your parents: Reason #2

The so-called retirement funds, both private and governmental, are allocated toward sovereign bonds

by Eugen von Böhm-Bawerk 

We could write volumes on the western world’s obsession with their beloved welfare systems and volumes have been written. The reader is obviously familiar with most of this history and the glaringly obvious unsustainability of the systems enacted.

We will therefore only make a couple of observations that are novel to the debate. When the systems were introduced in the 1960s it is true that we did get a boost to savings. Payments into the system were made without large payments out of the system. However, contrary to the old system before public pension funds were introduced, saved capital that were supposed to be allocated to productive business loans were now diverted into the government coffers. What used to be cash strapped politicians now suddenly saw a windfall of wealth flowing into their grip, which consequently could be used to buy votes in the next election. Unsurprisingly ambitious projects within the government sphere were undertaken to “invest” the newfound money.

Consider the Swedish experience during the time of plenty. The Swedish politicians “invested” the capital in low cost housing for the poor often in less well-off municipalities. While the intent may have benign and not a wilful act to bribe the electorate to be re-elected it does not change the conclusions that can be drawn from this story. The government allocated scarce capital to highly unproductive usage and gave it to dependents. Participants paying into the system did so under the pretence of saving for old age while they unknowingly consumed valuable capital. As the government coerced them to “save” people were tricked into reducing their own savings confident they were secure from the government program. Instead of securing a decent yield to secure consumption as dependents, they ended up by bailing out the municipalities that obviously could not pay back. First their taxes went into poor investments, and then they had to bail out the inevitable default from current taxes. All was lost. Twice!

In other words, the Swedes reduced savings through the introduction of a system with the intention to make sure everybody saved. Talk about unintended consequences and perverted incentives through government intervention! We are sure the Swedish experience was not unique as similar programs were introduced all over the western world.

More generally we know that a large part of so-called retirement funds, both private and governmental, are allocated toward sovereign bonds. The system is rigged in several dimensions to make sure that happens. But is this not just a more sophisticated version of the Swedish experiment? Think about it; today’s retirement saving goes into destructive debt (see previous blog post), which reduces the productive potential of the economic system! In other words, the assets held by pension funds are an unwilling promise forced upon our generation to pay taxes in the future. Since the system reduces our productivity we have to pay higher and higher taxes just to keep up. From this we can draw the obvious conclusion that a welfare state will per definition create less and less wealth and prosperity, and this vicious circle of lower and lower growth must continue until insolvency strikes and restructuring is forced upon a bewildered population. The generational fight for resources that we face will undoubtedly be ugly, and until the demographics shift to our favour, we will lose.