Pension Fund Myths

In this chapter we take a look at superannuation schemes, why they are useless today and maybe even harmful, and why they were at one time useful in the past.

Up-front, to avoid you going away immediately, I will say superannuation funds are not harmful if governments running the schemes do not use them to create mass unemployment. The trouble is they do! Yet it’s just a policy mistake, so can be corrected. So we will learn why they should not make the policy error in the first place!

The New Zealand Superannuation Story

When Michael Joseph Savage’s Labour government introduced superannuation it made a lot of sense. This was because at the time New Zealand was a small open economy under the umbrella of the Bretton-Woods fixed exchange rate system. Under this system the US dollar (USD) was a global reserve currency. While the USD no longer swapped for gold, other currencies swapped for US dollars, which is fine if the smaller economies never needed USD.

If NZ never needed USD then we would not have to borrow USD, so we would never care about the exchange rate fix. But a lot of goods we import are only for sale in USD, and so we did end up needing to swap NZD for USD. This puts pressure on the exchange rate, which under Bretton-Woods was fixed.

That meant if someone overseas found themselves with a few million NZD, say from selling to us what we imported, they would have a claim on NZD, at the fixed exchange rate, and our reserve bank was obligated to supply the NZD, if claimed. Or the foreigner could buy goods for sale in NZD. Both actions place pressure on our domestic economy to send them millions of NZD worth of our output, which also permits our exporters to raise their prices to get a good return for selling our output.

Either way, our domestic economy loses, either from goods produced that we are not consuming, or through a pass-through effect of the higher prices, since our producers do not care who the sell to, so if the overseas price they can get goes up, odds are the domestic price will too, all other things being equal. That is, unless our government imposes export controls.

Some government will impose a few controls, but a lot do not, and a lot don’t impose controls that are of any benefit (save to the oligarchs).

But in any case, either way, the fixed exchange rate can be a problem for our price stability, and particularly if our reserve bank ends up borrowing USD (or any other foreign currency) because our central bank does not legally create that currency, so we have to end up — in one way or another — artificially suppressing domestic demand for our real output in order to keep the fixed exchange rate fixed, otherwise we would soon get into unpayable debt to the foreign central banks (the bankers for the foreign governments).

That sort of arrangement is all but neocolonial, since foreigners who have lots of guns have no qualms about using the threat of military conflict, or more often these days trade embargoes (and in the extreme case economic hitmen ), to extract their claims.

We could survive fine provided we can produce enough domestically to meet our needs, import what we fall short of, and still have some excess output that we do not need — since in that case we can export our excess and so will not need to borrow USD to keep our exchange rate fixed.

Remember now: it is not the exchange rate that is the problem. The problem is price stability. The cost, under this regime, is incurred when we cannot export enough, and so are forced to suppress domestic demand for goods. This is also known as unemployment. Any artificially suppressed domestic demand for goods results in unemployment, again in one way or another (unemployment defined as people seeking to earn the state currency who cannot get it).

Remember too: the price stability is not really the deep problem, since the NZ government can always use policies to redistribute from rich to the poor (Robin Hood taxes). The problem is they don’t! Because the rich exert a disproportionately powerful influence over governments. Robin Hood taxes are considered politically unworkable. (Unless everyone is poor, so the rich are not powerful, but then there is no one rich to redistribute from.) The deep problem is that the price inflations hurt the poorest the most. That is the problem. It is the only unavoidable problem with the fixed exchange rate and the gold standard. But it is a big f-ing problem! It’s an enormous bloody problem that we have to eliminate if we desire a decent society. And that is the goal of all macroeconomics from a spiritual perspective — a decent society.

The fixed exchange rate problem

This is a very insidious state of affairs, because if you think about it for a second (and I assume you have) what we really need in order to produce the exports to protect the exchange rate is more employment not less. Via using exports as the price we pay to get our desired imports without pass-through price inflation.

But the economics nerds harp on to the politicians that the fix is to generate unemployment! (to suppress domestic demand.) You see the problem! The economists have no moral compass, it makes them into idiots. The labour stick is too short for them, and no matter how much they carve off it, it is still too short.

Now none of this occurs if instead we adopted a floating exchange rate. Because under an exchange rate float the import/export balance will adjust automatically, so without price inflation effects. If our exports drop off (maybe due to shipping bottlenecks, transport costs, a war, or bad weather, or whatever) but foreigners are raising their prices, we just buy less imports. However, we can still run full employment, because in this case our domestic currency is now not being constrained by a fixed exchange rate. We cannot do any better than full employment under any circumstances, so this is the optimum.

Under a fixed exchange rate we have a more severe problem if our exports drop off. These were previously mentioned.

Finally this brings us to superannuation. Superannuation is a reasonable way to suppress domestic demand for goods for sale today in the hope they’ll be cheaper to produce “tomorrow” (where “tomorrow” here means 15 to 30 years or so). Workers get the same wage, no prices go up, but they save some of the wage in the superannuation fund, which they know will be paid back through the pension fund to us upon retirement — since government is fairly trustworthy on this due to strong political pressures.

The government is a fiat currency issuer though, so they never have an operational problem paying the pension cheques. They can always pay, even if the superannuation fund goes into negative savings territory. This is just a fictional quantity after all, points on a scoresheet: a negative on a balance sheet means you owe more than someone has deposited. It is not a problem for a currency issuer. They can always make the payments no matter how negative the number in the fund gets.

The problem is the fixed exchange rate and more acutely the pressure on our real supply of goods that we want available for retirees to consume.

It is not an operational problem for the government (to pay bills), it is a political psychology problem.

Analogy to gold standard

The best way to understand this is to make the analogy to the gold standard. When currency is redeemable for gold, as long as the government has a supply of gold, people will accept the currency. But if the government runs out of gold they are screwed, and are forced to impose draconian crippling taxes to get back the claims on the gold they do not have. Either way they tend to get frequent mass riots, or mass starvation, while the rich hoarders of the gold play on their fiddles sipping wine.

Same with a fixed exchange rate system like Bretton-Woods, here the “gold” is the US dollar (or a “weighted basket” of foreign currencies). We can end up owing other countries their currency, which we cannot type onto our balance sheets with a computer or ink${}^\ast$. So we are back to the forced selling of our goods that we might not be able to afford to sell. If we cannot sell enough, then we get import price hike inflation events.

${}^\ast$ Why we cannot fake a foreign currency is because of the central banking system. All banks, and only banks, run the payments clearing system, and they are all licenced by the state. The central bank holds all the other bank’s reserve accounts. So any anomalies in the accounting clearances at the end of the reserve maintenance periods will be automatically red alerts. The diplomats who are actually economic hitmen will be knocking on our government doors if we created so much as a few hundred of their currency units. US dollars do not get through any payments without the central bank knowing. This is not a matter of imperialism or anything, without the central bank accounting no currency would be trusted, it’d become like bitcoin or worse, completely wild, at least until some warlord seized hold of all the cash registers and normalized things again.

New Zealand is a relatively productive country with surplus output capacity of goods others want, so we never suffered terribly under Bretton-Woods. But the risk was always there. Then absurdly, once we removed the choke of Bretton-Woods, our successive governments invented a risk (called the NAIRU) that never needed to be invented (more on this soon — the neoliberal hysterics era, which tragically continues to this day).

The Superannuation fund thus acts in this case to defer our spending, for a hopefully sunnier time ahead, when our exports are back to strength. Or that’s the idea.

Hopefully you can see the superannuation is not guaranteed to fix the problem. The real problem is adopting a fixed exchange rate. The deferred consumption that the superannuation scheme imposes is good in this case only if in future we can raise our productivity. This is not guaranteed.

When New Zealand adopted a floating exchange rate in 1985 we forevermore got rid of this problem. Which meant we no longer needed a superannuation fund for our retirees. Now the NZ government can pay the pension payments without suffering price inflation events, because our exchange rate is on a float, it adjusts to the export level we are able to sustain at full domestic employment. Everyone wins, or at least everyone absent corruption by our greedy export oligarchs, stand a chance of winning (in economics that means living up to our full means).

The Tragedy in New Zelaand

We did not end up winning from the exchange rate float in 1985. Instead we got cycles of massive unemployment, sometimes up to 10%, but with underemployment more like 20%. Even post-COVID-19 stimulus and rebound we are still at 4% unemployment, and likely 10% under-employment. A massive waste of Kiwi lives. A massive loss of real output. But why?

Why did the NZ government not adopt a full employment policy once we moved to a floating exchange rate?

The tragedy is that they chose not to run full employment because they still thought in terms of fixed exchange rate paradigms. They thought unemployment had to be tolerated to suppress inflation.

This is the myth of the NAIRU.

They were ignorant, and still are to this day, because on a floating exchange rate there is no NAIRU, it is a fictional concept. But those who believe in it run our government, and their belief tells them unemployment is a “necessary” cost we have to pay to keep prices stable. These people are completely${}^\ast$ mad. But they run our government.

${}^\ast$ OK, not completely mad, but on this one issue they are completely insane.

The NAIRU Myth

The NAIRU (Non-Accelerating-Inflation Rate of Unemployment) is a fictional concept that a Kiwi engineer named Bill Phillips is credited with “discovering.” This NAIRU is manifested in what is known as the Phillips Curve.

This is a curve plotting unemployment ($x$ axis) against inflation ($y$ axis). Phillips showed that if import prices are relatively stable, and labour wage bids are effective, then the private sector cannot reach full employment without accelerating inflation (they need to raise prices continually to afford the ever higher wage demands). The workers will demand the wages because the prices rise. There follows a spiral upwards (hypothetically).

The unemployment level that equilibrates this competition between capital and labour is computed numerically to be roughly where a unit increase in wage results in the same percentage unit rise in the price level (i.e., at unit slope, but this is only in a model, in the real world it will depend upon industrial and political and social institutions). That is the NAIRU rate. (The word “rate” here can confuse scientists, it means the percentage change.) If we go below the NAIRU labour wage demands gain more power and we go back up the curve, conversely if the price level goes too high above NAIRU employers gain more power and can bid down the wage demand (or fire workers) and we go back down the curve.

The thinking of the elite snobs is that if labour ever gain too much power they will push the whole economy up the Phillips curve, which we call hyperinflation — which is the big bogeyman for people who like to live off inheritances.

The conservative and neoliberal solution to avoid hyperinflation is to suppress wages, artificially, and so we have had generations suffering labour union crushing and semi-fascistic state police crackdowns on labour strikes and whatnot that in the old days used to be the way workers could get their fair wage bargain.

In modern times the wage bargain is more unfair than it has ever been in probably 100 years, the capitalist bosses won, and organized labour lost. We live in misery in the working class. Or at least relative misery. Life ain’t bad for many in New Zealand because we’ve always profited off our productive land. But life is tougher today than it ever needed to be for Gen-X and Gen-Y, because the Neoliberals (Gen-Boomer) drank the NAIRU koolaid and deliberately used government power (through privatization, deregulation, union-busting, and laissez faire) to crush the working class.

So why was Phillips wrong?

Bill Phillips was not wrong. It was the economists who were wrong in reading Phillips’ papers (remember Phillips was an engineer, not an economist, so he was not allowed to interpret his own work for the elite educated class of academic ivory tower economists). John Maynard Keynes understood though, and never would have subscribed to the NAIRU mythology.

What Keynes knew (and I suspect Phillips too) was that (i) while it was true that the private sector being given enough sales to afford the wage demands of workers who see the rich getting richer off their fat lazy asses, cannot sustain full employment without raising their sales prices, (ii) the government can always hire any unemployed, without putting pressure on their prices! the monopolist is price setter, not price taker, and the government is the currency monopolist.

What Keynes implicitly understood was that governments were currency monopolists, so never can run out of their own money, and can always pay the wages for anyone willing to work. Thus, in a state currency system, there is no NAIRU, it is a total myth, invented by conservatives and neoliberals who hate the idea of “big government” empowering the working class.

Because if government is known to be powerful enough to hand out meaningful jobs to anyone who wants to work, “Where will we bosses of industry find our workers to exploit for our profits?” (say the neoliberals). You can see why if John Maynard Keynes were alive today he would not be branded as a liberal, but as a commie, since he was saying (a) governments are that powerful and (b) they ought to be doing this — running full employment.

It is not up to liberal elites to say what types of jobs should be available — public or private sector, or a mix. It is up to the demos, the people, to decide. That’s the idea of a democracy at least. In most countries communism has no sway because people generally like private industry. Communists will never gain significant power in such a society (like the USA, at present). But what Keynes said was that any country issuing it’s own currency (aka. tax credits) can have as much communism or as little communism as its people desire. The NAIRU is just not a constraint to such governments, if only they knew.

Pension Indexing Issues — Inflationary?

No, the rising old age population meaning more government spending on pensions is not inflationary to first order. Why not? It is because pension payments themselves support the production of the goods pensioners want to consume. The pension payments are not taken out of the rest of the private sector (unless you’ve done so in the past via regressive FICA taxes). The MMT remedy is to not withdraw any currency from circulation for making pension payments. At the zeroeth order this does not add to firm’s financial costs, only there real costs, which are costs to other consumer who also want to buy the firm’s output. To first order the pension payments support private savings desires. Only to third order are pension payments having an inflationary bias — when the firms cannot produce both what both retirees want to consume and the rest of us.

Even then, you’re likely to see price inflation only in commodities the pensioners are buying, so that’s a relative price story, not a general inflation story. Because of the way the CPI is constructed this shows up as “inflation” in the popular press, but that’s false language framing. Hard to fight against of course, such is social psychology. But wherever you find a chance, please make the point! Each one teach one.

The only inflation worth talking about in social media and officialdom is the real wage. But officials like to use the olde time religious scaremongering in class warfare, so use the CPI for their murderous austerity ends. (Either that, or they are just woefully ignorant idiots, tragically for others.)

They really should not even bother computing the CPI. Just publish the real wage statistics, and do so by class and income group. C’mon all you government statistics departments, I know you’re not all neoliberals.

Do relative price upwards adjustments ever pass-through to general prices? Yes, but not often. The energy sector is one where all other prices tend to upwards adjust to the OPEC+ cartel price fixing. But that’s natural, it is still a relative price story, when OPEC+ go upwards, the governments can go upwards with the minimum wage (or hypothetical job guarantee wage floor).

The constraints here (on governments) are entirely political, not financial. Only MMT understands this. Which is precisely why MMT is not “mere accounting” — no, no,no! MMT is the most political branch of heterodox economics possible, because it shows you what the real constraints are, no bullsh*t, not fairy stories about “fiscal discipline, because if the plebs knew they’d be out with pitchforks.” MMT tells us the pitchforks (at least intellectually) are justified, and in a way other heterodox schools of thought (post-Keynesians, Marxists) do not appreciate. the latter think we need to generate “class consciousness” — which I do not disagree with, but it’s never gong to be enough.

If you doubt any of this, just tune into the Internet MMT army. It’s fairly small numbers, but the most sincere little army in terms of knowledge and appropriate outrage, and it is diverse as heck, all sorts are MMT’ers. The only characters I have not yet found among MMT’ers are neoliberals. (Dick Cheney and Don Rumsfeld were right-wingnut MMT’ers and neocons, so borderline fascists, not neoliberals, they were for prosperity for the M.I.C. and austerity only for the working class, so that’s I guess a half-neoliberal.) I know this is not a sexy MMT selling point, but I prefer honesty to misinformation and obfuscation. All sorts are MMT’ers.

Fascists are the worst MMT’ers, and being anti-fascist is something you have to do as well as being an MMT activist.

Aside on Spiritual Economics

I mentioned Dick Cheney and Don Rumsfeld were half-neocon and half-MMT’ers. But the mind rejects the latter! Why is that?

This is only my personal opinion, but I think it is because the birth of MMT out of the post-Keynesian and Institutionalist schools of thought was always predicated upon honesty. Forget about telling comforting lies to assert “fiscal discipline” (which does not work anyway, the discipline ends up being far too severe).

Honesty is a spiritual virtue, not a term of science.

So from inception MMT has been a nascent spiritual economics. This is why the mind rejects Cheney and Rumsfeld. They were MMT’ers without being MMT’ers.

The meaning of that (to use a Mitchellerian phrase I love) is that whether you are left-wing or right-wing, up-wing or down-wing, MMT is based on a spiritual quality: the truth and honesty regardless of consequences. That can be brutal. Maybe even the body rejects it, psycho-somatically?

The MMT Money Story starts with the coercion of imposed legal liabilities (tax liabilities as well as the potential of fees and fines). That’s brutal medicine for any anarchist or libertarian to swallow, and they find their mind rejecting MMT. But they’re rejecting truth.

The fairer types (semi-fair?) like old Bob Murphy , might say, “Well, I accept MMT is correct, I just hate it and don’t want it!”

Gimme back da gold.

Maybe it’s just the character of folks like us, do we like a little touch of intellectual masochism. A bit of intellectual grotgrot? It’s like a Wim Hof cold treatment, bracing, but honest. Yes, we have a coercive system. But what’s the damn purpose of that?

Ask for the purpose, see it’s not being up-held, and then you have seeds for a very decent intellectual revolution that can have impressive knock-on political, realpolitik, consequences. You at the very minimum give the bully oligarchs the mental tools to avoid the pitchforks, if they wish to avoid ’em.

I believe we’ve already seen some of these knock-on effects from spreading knowledge of MMT. No one serious (no one who is not a joke) was worrying in their dreams about where government would “get the money from” for the COVID stimulus.

Wouldn’t it be nice if people just turned a few scant degrees around on their intellectual axis and figured the same about pension payments?

Pure Injections

The FICA tax is a demand drain, it re-gauges your actual wage earning, and that is all. Maybe it reduces a tad what you claim leaving some on the supermarket shelf for the pensioners, but that effect is insignificant to non-existent. If you think correctly that it is a re-gauge and is not funding the government capacity to mark-up pensioner bank accounts each month, then you are better able to realise what the real problem with social security happens to be: it’s supply of the goods retirees desire to consume. The problem is not “how are we going to financially afford it?” It is how are we going to resource it?

((That was straight out of chief neoliberal sockcucker Greenspan's mouth , go figure.))

The pension payments are then pure injection. But wait? Isn’t a pure injection of base money for no supply inflationary? Yes, it is, at least an inflationary bias. But the consumption is also taxed, one way or another (through rents, wage incomes from sales to pensioners, and so on). The pension payments are not a monetary cost of the private firms, they’re income, but they are a real cost: the firms will sell more to the pensioners not their workers. This however supports private firm debt relief and savings desires.

Plus, pensioners are not bidding up prices directly, they’ll pay the rent, utilities and groceries &c., at the going price.

So there is no mechanism whereby decent pension payments can be inflationary. To generate inflation requires some positive feedback. At worst, pension payments maintain a base inflation rate that should be pretty constant until the nation hits real resource limits and full employment. It will not be an accelerating inflation rate in other words. So if it is politically tolerable today, it will be again tomorrow.

We are working under the implicit assumption (now making it explicit) that we as a society do not desire to have the pensioners live like kings and queens. We just want them to have a comfortable retirement, after all, we expect the same when we get old. (It is interesting how fast a greedy self-obsessed yuppie twenty year old can skip straight past that logic.)

At full employment but with a rising old age population-to-worker ratio, then yes, you can get inflation, but then only if technology has not increased the productivity of workers. If not, then the supply/demand dynamic can generate inflation if you are at full employment. And some inflation just below full employment if there is no policy for keeping workers skilled. And the thing is, this is a good healthy source of inflation! Real wage goes up, purchasing power of idle wealth goes down.

Overall then, with a rising dependency ratio and an unskilled wasted workforce, the way pensions should index roughly to CPI can have an inflation risk.

However, there are sensible offsets: targeted taxes to pull workers out of bullsh*t or luxury goods jobs and tax breaks to get workers into more socially useful production. In the worst case, if some moderate inflation is so politically intolerable then rationing could be used, but which is the more politically intolerable? Any other fiscal policies to share the burden of the rising dependency ratio is simply what a decent civilized nation should look to implement.

Is some moderate inflation a good political hassle to bear for caring for your elderly? Only a sociopathic politician would think not.

In any case, there is never hyperinflation from only too much demand. Because households have insatiable savings desires. If luxury goods and house prices go up those households will simply stop buying, they always do. They know the price will come down later, and if not they’re always prepared to forego the luxuries. I’m not in favour of enriching pensioners by squeezing the lower class, it’s a matter of balance, and the upper class can always be induced to take more of the burden if the government wishes it to be so. It does take a steel balls government, so in this case “I’m just sayin’.”

The worst case would be a rising dependency ratio causes about the same rise in prices, if you are at full employment. But the MMT community would point out this is probably fine, you’re at least maximising useful production (if the functional tax is applied to do so — shift workers from unproductive or bullsh*t jobs into useful productive jobs). In which case you are never going to do any better for your retirees.

Most youthful and middle age workers are ten times as productive as needed to support the elderly. So if you are not producing enough for a comfortable retirement for the elderly there is something else terribly wrong, not the payments system. The world has never known a nation with a working age population that could not provide well for the elderly.

We have, under neoliberalism, seen nations where the political class have chosen to use unemployment to “fight inflation” which starves the elderly. Why would they choose such policy though? It can only be they do not understand the monetary system or do not wish to understand, for whatever classist or reactionary reasons. We saw this in Greece: austerity imposed by the EU Troika, which was really economic warfare by Germany and Brussels on Greece. The Greeks raided their pensioners to avoid more Troika penalties. The Germans laughed.

This is not “an MMT problem” — but I should point out the whole thrust of MMT activism is to highlight these problems. MMT’ers are deeply concerned with the political! That’s our whole project.

No other activists understand the truth about the complete barbarism the Greeks endured. They (other activists) point to “neoliberalism” and “the oligarchs” and they are right, but they can’t offer a proper critique when the bastard neoliberals start talking about “huge government debt” and “leaving debt to our grandchildren” and “needing to raise taxes”, and all the rest of the horseshit that otherwise well-meaning liberals with a conscience buy, hook line and sinker.

“Oh dear, I’d better pay more taxes!” No you don’t (Mr Piketty). You need to spend on the poor. Because your government isn’t. Your government likely is over-taxing you.

MMT is the knowledge that tells us when the economic constraints are fake and stupid. Why are Marxists and other socialists not making these points? They have the same social justice goals. It’s because they do not understand the monetary system, so they think within the context of the self-imposed voluntary constraints the elites place on our government. I am sure the socialists do not want to be ignorant, so we have to educate. There’s no other way, because we’re not going to achieve economic justice with a military or guerilla warfare solution. Fascists will for sure win that war. (Or maybe I watch too many movies?)

Caveats

I do not have too many caveats for this chapter. One is that building monetary system models that show the Phillips curve effect (NAIRU) is easy, all you need to do is delete the government sector from your model. Similarly it is easy to show the NAIRU is a myth, simply by putting back in the government sector, and then setting parameters for your model equivalent to full employment.

I am still working on writing the software for such models in a human readable form, so would like to promise the appearance of dashboards for these models soon, but I cannot promise a fixed due date. If you want to see such models, GPL code too, sooner than “vaguely soon” then please consider donating, and drop me a message when you do telling me what you want to see.

To help me complete these chapters and write the software, please donating
via Achronomaster @ Ko-fi.

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