Pension funds inherently depend on increases in production. Population growth is one factor, but technological development can also increase production.
> The other near-ponzi scheme is the real estate market. In my city of Toronto, average real estate prices have gone from 2x average income in 1972 to 16x average income today.
Hello from a Vancouverite! I broadly agree with this point, and I'm not sure how to work our way out of a housing bubble beyond popping it and dealing with the aftermath. Too many people are invested in the status quo, so any politician who tries to pop it will be crucified for destroying the savings of a large portion of the population.
Reducing the value of property to the structures on them by having heavy taxation rates on unimproved land is fairer than the current system and makes access to property far easier. It reduces speculation in real estate which also improves access.
I also agree with the Georgist moral perspective that we have equal entitlements to all land and natural resources. From there, distributing land that is undertaxed seems to give certain individuals and companies unfair advantages. An added benefit is that income taxes and capital gains taxes have always from my perspective been on morally shaky ground as I struggle to find a good moral perspective that justifies them compared to other forms of taxation that seem morally just.
Doing a transition like that will be just as difficult as popping a housing bubble (if not more so) but I think it will be of great benefit to society.
Interestingly, capital returns and population growth are (unquestionably?) on exponential curves. So, are production factors too slow to evolve along with the exponentials? Maybe they are, because of waste, lack of recycling, raw resources decline and environmental damage.
>> The other near-ponzi scheme is the real estate market. In my city of Toronto, average real estate prices have gone from 2x average income in 1972 to 16x average income today. > >Hello from a Vancouverite! I broadly agree with this point, and I'm not sure how to work our way out of a housing bubble beyond popping it and dealing with the aftermath. Too many people are invested in the status quo, so any politician who tries to pop it will be crucified for destroying the savings of a large portion of the population.
You could argue that in the same time frame, world population has more than doubled, and because the cost of capital is a lot cheaper elsewhere than in Canada, pressure on attractive living space in peaceful and stable countries has increased exponentially. At this point, the "liberal" view on capital flows and capital control, the fuel of foreign direct investments of Western countries into overseas properties since WWII, came back to bite the originators of the idea in the ass.
This is largely how dense cities like Tokyo manage to keep housing affordable [1]. When population increases you keep housing affordable by building more houses per unit of area.
Roads are also an issue as it is seldom viable to build more of them and there is limited ability to widen the ones we do have. The net result is a substantial worsening of transit infrastructure to levels far worse than ever intended for those neighbourhoods.
Higher density makes mass transit systems like subways more viable, opening up alternatives to automobiles. Furthermore, greater density means more revenue to spend on infrastructure projects.
When a metro area experiences growth, higher density is inevitable. It's more a question of how that density will be accommodated. Construct no housing and it will take the form of ever-increasing home costs, and higher rents for increasingly subdivided apartments. Construct denser housing and people will be able to live comfortable and affordably.
Meanwhile the SP500 have all gotten religion about innovation as a driver for productivity increases.
(Not arguing just asking)
Maybe it's just correlation and not causation. I'll post again if i can find the more direct paper on the anticorrelation between very large corporations and productivity.
https://www.brookings.edu/research/declining-business-dynami...
https://qz.com/633080/the-rise-and-fall-of-american-producti...
Optimizing the economy for the retirements funds (creating favorable conditions for existing big companies) has eliminated the paths to prosperity for the new generations (you cannot run your own shop to outcompete Loblaws or Walmart, and a cashier job there will never afford you anything more than bare survival). This is discouraging people from starting families and having kids, so the government began outsourcing population growth by importing people from other cultures with lower standard of living. This ignites political division in the society where the far left sees anything beside a shared room a privilege and the far right wants to deport anyone who isn't a 3rd-generation local.
Keeping the real estate bubble from popping has served somewhat well the real estate investors, but made property ownership impossible for many people. The political response is unsurprising: many question the whole concept of owning real estate, it's becoming increasingly hard to evict a bad faith tenant, and aggressive homeless people actively disrupting the life of nearby real estate owners are seen as victims and not malefactors.
The corporate media is doing their best to steer the discussion away and people are buying it. "Fair" isn't somehow when the median salary can reasonably afford a single-income household comfortable to raise 2+ children. It's now about how your fellow minimum-wagers should use the pronouns and how promotions from toilet scrubber to shelf stocker should be granted based on the skin color and historical oppression points, while the actual oppression of the former middle class by the corporations is happening right now.
Technology, efficiencies of scaling, and automation make it difficult for less efficient businesses to compete. Retirement funds have nothing to do with it.
Well, yeah, since all major media companies and social networks are owned by the entities directly benefiting from the "economic challenges" of the former middle class.
It absolutely does not. Investors in a Ponzi scheme do not have the information needed to allow them to be aware of the fraud involved. In contrast, at any given point in time you can extrapolate when the Social Security system (for example - the same principle applies to any pension that isn't literally cooking the books) will need to start drawing on the general fund, or fail, if it continues operating as it is operating today.
It is a bad mistake to just characterize every non-sustainable investment scheme as a Ponzi scheme. For starters, you'd be awfully confused about what is legal and what is illegal...
> when you have zero ability to act
You have hit another item (do I have the option to opt in?) on the “differences between social security and ponzi schemes” bullet list, but you are pretty aggressively missing the point, I think.
What we’re going to see is either govts incentivize people move back to these places. Or more housing in desirable locations. I think the former will happen more than the later.
My wife and I saving to house shop soonish, but one of the primary requirements of our residency will be transit access. We don't like driving, don't like having to own a car, and definitely do not want to have to drive up and down the east coast to visit friends and family. Amtrak access is thus basically required, and anywhere we can avoid buying a car to live is valued dramatically higher than alternatives.
Its a growing sentiment the younger you get, where the veneer of the 50s American dream is more and more eroded and we are realizing humans in the 21st century should be living denser, with public transit, and walkable access to day to day needs, than to live in gated communities without a sidewalk or any human contact.
And 99.9% of US real estate is built up totally in antithesis of this, largely on racist fundamentals dating to the early 20th century.
Like we legit were looking at areas and when talking about just over the DC border into MD the conversation always immediately goes to "yes the properties are a third cheaper, but theres no metro access" and its just off the radar. Pittsburgh is our joke city since it has no usable Amtrak routes out of it (and yes, I know its urban core is nice, but its also tiny and unable to grow).
None of these decaying places can afford the capital investment to redevelop to be walkable and sustainably dense. They already are burdened to maintain a million acres of suburbia that is all tax negative. And nobody wants a "top down" solution that involves displacing millions to redevelop cities so the demographic trends going forward want to live there.
For anyone looking, Philly is actually pretty affordable. Its combined income tax is 6% in the state, the sales tax isn't outrageous, and property costs are a fraction of NYC or DC. Its definitely near the top of our list considering how unaffordable the parts of Portland, Seattle, and Baltimore with transit are.
I'm in NYC now, but keep circling back to Philly. We're renting for ~3200 now a one bedroom 650sqft in NYC, both work from home. To get the ideal separation we want, not have our joint offices in the living room, we would need to go to between $5,500 and $6,500. While in Philly we could get a trinity, small town house three floors plus basement, about 900sqft, in downtown for ~2200.
I wouldn't buy in Philly, I just don't trust the city planning at this point. They're trying, but it's an uphill battle. The tax situation as a self-employed was much more complex in Philly. Safety is not something to just shy away. I lived in Old City, two years back, and there were still shootings near my apartment. It's a problem in a lot of cities as we gut social spending and relief programs. Philly did open a safe injection site, and is making head way.
I really like Philly, close to NYC Megabus was 15$ a seat, and about 3 hours. Amtrak is even quicker. Great music and food scene, Reading is great for food / produce.
The biggest issue I've found is the job market. Locally, a lot shifted out to office parks, requiring regional rail, and walking along multi-lane roads. If you're working remote, I got cost of living adjusted like crazy. The quotes I got were 80% pay cut over my NYC rate. While local jobs, were only a 10% cut. The local tech scene is a bit behind, more legacy.
Comcast has a great VC program as well for startups. The city also has tax programs to help get startups in the area.
Where in NYC are you and how does it compare to downtown philly? $3500 NYC rent means you're living in a hip/gentrified neighborhood. You can certainly find cheaper apartments if you are willing to go deeper into Queens. Whole houses? They exist but are in the 4-6k range as well ( friends aunt rents a home in belle harbor for something like 4-5k/month). By me (ozone park) the rent is not that high (~1600+)and we have plenty of busses and the A train. Further north is woodhaven with busses and J&Z train. You can go further east but you are now past most subways.
This is fundamentally a demographic problem, rather than a problem with the pensions system.
If pension funds worked by people saving their own money for themselves, it wouldn't actually be all that different. At any point in time, there's the productive part of the population, and the unproductive. If the productive part is too small to support the unproductive, there is going to be a worsening of the situation, probably especially so for the unproductive.
This doesn't need to be a ponzi scheme though. Even if population size is stable, if people on average work longer than they are retired, they have to pay less than they receive, all things equal. A problem here has been that people get increasingly older, so they spend a larger percentage of their life being retired, making the ratio of payers vs. receivers worse. The most obvious solution to this is raising the age of retirement, but that's always politically difficult and somehow seen as cruel.
Completely untenable when the generation retiring has also taken the lions share of property wealth, imposed student debt upon and consistently voted against the interests of the generation paying for their retirement.
There is another problem: many people go into decline as they get older. My company retires some people at 40 with a full pension because most people physically cannot do the job anymore (I'm not sure if they are able to do much else after that). Airpline pilots are required to retire at 60 (I don't remember the exact age) because we are sure none are very far into mental decline even though a few could work for 30 more years.
However, the current system is quite far from that. The money you pay in goes nearly immediately to existing retirees with a moderate reserve of capital that is slowly decreasing as more money exits the system than enters it. This system cannot pay current retirees without the investment from new users, and that's what makes it a ponzi.
Until we invent self-replicating physical capital (i.e. a Santa Claus machine that can make other Santa Claus machines), this will always be true.
No, they are not. “A ponzi” is a fraud. Some of the schemes you mention are not sustainable under certain hypotheses, but none of them have the deceptive and fraudulent aspects of Ponzi schemes, which is important. These are strategies, that might work out or that might not, but in any case they are not tools for personal enrichment through deception.
So what?
As an italian, I don't get that.
I bought a 240k euros home for 25k in advance and 550 €s month of mortgage for the next 30 years. And in 30 years I will pay nothing, neither rent nor mortgage. That's why I did that.
Real estate growth wasn't even in the back of my mind. I bought a home to have MY place, and to stop paying 750€ plus rent to some landlord. Rent will also go up with inflation, mortgage payment will get smaller and smaller meanwhile thanks to inflation.
I just don't understand the whole estate growth thing at all.
The motivation for homes to be investments is that we are taking out the largest loan we will ever have and allocating more than 100% of everything we own into an asset. Having done so it's natural to want that asset to generate returns.
One should buy a house because one wants to save money, compared to renting, and have its own place, if you are buying for a price increase it's called speculation. If it is speculation, then you should not depend on it for your future and should put little money into it not decades of mortgage.
This is so linear to me. The idea that things keeps getting value forever is flawed and a house is too important and expensive for this kind of speculation.
Places like Toronto are generally an outlier. Part of it is due to high skilled worker immigration (to read it differently: more well off people emigrating to Canada) and high concentration of jobs in cities like Toronto.
I agree with your thesis although I think it has more to do with CAD losing its value compared to hard assets and a consequence of a decade with bad monetary policy.
You've outlined very clearly one of those errors - housing. We know that housing values can not both be an investment and affordable long-term - those things are inherently at opposition. Therefore the best price for land is zero. The way to do that is to increase the tax on the market value of a house until the market value of the house is equal to the cost of the parts and labor needed to build that house. When you do this, you have what we call a 100% land value tax. It fixes all sorts of incentives, turns NIMBY's into YIMBY's, incentivizes the best use for the land. A land value tax is not just increasing the equivalent of PI from 3.14 to 3.14159, it's setting the correct value for land exactly equal to PI.
One of the amazing side effects of the land value tax is that now that you don't need a continually increasing housing values, the amount of debt in the world is going to start growing less quickly, as a large percentage of debt comes from mortgages. When you zoom in on how that works, and why it works, what you find out is that you want debt to only increase when real productivity increases. The flipside of that is also true - you want the currency to increase equal to productivity, this is why Bitcoin is fundamentally unstable long-term and why the gold standard collapsed. The reason the land debt is bad is because land is zero-sum. It can not be created or destroyed. Any debt that is created to buy a zero-sum good will eventually turn the economy into a Ponzi scheme. So while a LVT will fix a large portion of the problem, eventually some other zero-sum asset will arrive, and that too will need to be fixed. When all zero-sum debt no longer increases the money supply, the problems that you outline will be resolved.
Once you have a money supply that increases equal to productivity, suddenly retirees will be able to save their money and retire on it without threat of inflation. We used to have this in the middle ages, but that's only because we had a flat population with no productivity increases, so a stable currency was sufficient.
If we were to do an instant change, the best way to do that is to give everyone a tax credit equal to the value of their existing land, with retirees and others who need public support having a few more options to convert those tax credits to cash.
The basic issue is the current US property market is estimated at $33.6 trillion. If you assume 80% of that is land value you end up needing to compensate 26.88 trillion. On the other side of the market you have mortgages you put under water that people will walk away from. The mortgage market in the US is $17.6 trillion. If you assume 80% of mortgages are walked away from and the mortgages end up 70% underwater you end up having to compensate $9.856 trillion dollars. So solving the residential portion of compensation potentially costs $36.736 trillion dollars. If you have compensation in the commercial and industrial land markets as well that makes things even more expensive.
A tax credit that gets subtracted when the homeowner defaults equal to the value of the default would resolve the walk-away problem.
I agree you can modify how the tax credits work to potentially transfer the mortgage loss credits from the homeowner to the mortgage holder when the homeowner walks away. If you do this effectively you can reduce the cost by nearly $10 trillion but still have around $25 trillion in residential costs.
Remember, the "stocks" here, are all fiction. production at time t pays for retiree consumption at time t. Likewise housing prices are a waste of time when we should all rent, and there should be a land view tax (rent-turtles all the way down).
"Pay as you go" pensions scheme is good for the same reasons as LVT is good.
I believe society could function with a shorter work-week so I sure as hell am not worried about needing to raise the retirement age cause people are living longer.
If we need more productivity, abolish suburbia.
The other near-ponzi scheme is the real estate market. In my city of Toronto, average real estate prices have gone from 2x average income in 1972 to 16x average income today. To continue growing at this pace they'd have to reach 128x average income by 2072. Those prices are absurd enough that it's clear there will be a slowdown in real estate prices before then. But much of our society is built on real estate growth and we aggressively encourage people to own real estate assets worth more than the entirety of their net worth. When these assets stop going up, or even worse start going down there will be major complications for society. I'm not talking about the adverse effects of a temporary market correction, I'm talking about a new normal in which real estate is flat or downward trending. When real estate is no longer an incredible investment opportunity it will have significant adverse effects on society. For instance, homes are currently a large part of people's retirement plans and selling a home is often used to pay for an extended stay in a nursing home (which is quite expensive). For many people the home represents over 60% of a retirement plan. In my parents lifetime, their home value increased to roughly 10x what it was worth. If my home increases 4x instead this is a substantial adverse impact. If my child's home increases 0x this is disastrous.
The things we fundamentally depend on to provide things as important in society as retirement are breaking badly. Meanwhile we're so obsessed with political differences that we barely talk about or work towards solving the slow economic crisis we are facing.