You are currently browsing the tag archive for the ‘pensions’ tag.

My post last week on the case for homeownership as an investment has received some good feedback (the e-word is hereby banished from this blog), a good chunk of which has been constructively critical. While I responded to specifics in comments, I also wanted to supplement the post by fleshing out the remainder of the argument and adding a couple of points.

It has been pointed out to me that there are certain costs – mostly taxes, insurance, and maintenance – that weren’t included in my spreadsheet and only implicitly in my analysis. This is – for the most part – true! I did handwave away depreciation, as much for the sake of simplicity as anything, but I only touched on the other two to the extent that they’re wrapped up into the rent counterfactual. Let’s delve into that some more.

Rent – the price of shelter to non-owners – is in the simplest analysis driven by the same things that drive all markets prices: supply and demand. That means rents aren’t directly responsive to the costs of housing, but those costs do impact the supply curve. If the costs of creating and renting new housing can’t be justified by rents, then supply will not rise even if demand does, driving up prices until they are so justified. Therefore, in general we should expect the costs of renting shelter to be similar (though not equivalent) to those incurred by the owner of the same. In fact, I bet if you play around with The Upshot’s ‘Buy vs. Rent’ calculator, you’ll find that housing and rental costs are very similar.

This brings me to my next point; while people have pointed out what costs I didn’t include, fewer have mentioned the benefit I didn’t include in my analysis, even though that benefit is much vaster. I focused solely on the capital gains returns of buying a house to demonstrate the power of leverage, but the huge share of the returns to a house are the rents you receive as an owner. This is central to any complete case in favor of homeownership. It is further worth noting that these imputed rents are, in fact, an enormous share of our economy.

a vampire weekend song entitled "david ricardo"

Net imputed rents, as I pointed out in my Piketty thinkpiece which seriously you must have read this thing by now also tend to be fairly stable, returning between 4-6% of the house’s price over time.

seek those rents seek them hard 

This chart actually understates the stability of imputed rents (as the former chart makes clear) since most of that volatility is driven by volatility in the denominator. For context, here’s the Case-Shiller index, since basically forever (with bonus real interest rate series):

 oh hai the aughties

While volatility has more recently increased (consider that my application for the Understatement of the Year Award), note that houses, at the very worst, tend to be inflation proof (the Case-Shiller is a real, not nominal, index) – an asset whose nominal price grows alongside inflation while consistently returning 4-6% annual net returns is, hey, not too bad, and if you can use tax-privileged leverage to buy it, not too bad at all. Especially since we’re going to pay a bundle for housing no matter what we do:

 what would a cake chart look like

…using housing as a vehicle for savings makes an additional sense.

That leads me to an additional point on volatility; here’s Shiller’s stock price index, also since basically forever:

 oh hai the 20s oh and the 90s hello

That looks a lot more volatile than house prices, huh? Which brings us to a key point – as asset price volatility increases, so does the importance of investment timing. This, as Neil Irwin recently noted, can make long-term averages of returns misleading.

seriously though fuck umberto nobody likes that guy anyway

While his examples are obviously stylized, they clearly-enough make the point that otherwise-identical savings behavior in a volatile market can achieve vastly different outcomes depending on the timing of returns even holding long-term average returns constant. Therefore, the relative stability of housing returns – prices + rents – helps savers reduce long term risks.

I want to conclude, though, by taking a major step back and examining the whole purpose of this exercise. When we’re talking about savings from a consumer perspective (not from an investment perspective) what we’re talking about is retirement; and when we’re talking about retirement, we’re always talking about the same somewhat-odd phenomenon. When a person retires, they cease all economic production through labor, yet continue to demand a share of the economic output of their society. We tend to view these claims as just and deserved because they are made by the elderly, who we feel have earned it/are unable to work/are generally venerable (as opposed to similar claims from the non-elderly poor, which we treat very differently) but that doesn’t change the underlying structural nature of the phenomenon, in which we are trying to ensure that a substantial portion of the adult population is consuming an broadly-equally-substantial portion of present economic output while providing no inputs.

Debates about savings and retirement, therefore, are all about how to structure this phenomenon – specifically, what network of programs, policies, mechanisms, incentives, and behaviors we want to establish to justify to the working and capitalists that a portion of their labor and capital outputs be directed to the non-working old, which we often do by creating mechanisms that somehow tether those portions of redistributed present income to guarantees of future income. All governments in wealth nations do this, and the ways in which they vary are influenced heavily by politics, ideology, and other socioeconomic factors. In the United States, our prevalent ideology around a certain kind economic freedom means we tend to be less generous in direct public redistribution and instead attempt to subsidize private savings through the tax code and public insurance – ergo, 401(k)s, the home mortgage interest deduction, and the Pension Benefit Guaranty Corporation. Indeed, the increasing prevalence of that ideological strain is driving defined benefit plans into extinctions in favor of defined contribution plans.

good thing we don't have unions anymore

This leads us to many debates about the best savings vehicles for middle class Americans, yet those debates are to a decent extent a red herring – the vast majority of retirees receive the majority of their retirement income from Social Security, and for many, it’s all the income they have – though to be consistent, I’m nearly certain the figures in the chart below don’t include imputed rents, though I could be wrong, and this is important because 80% of seniors are homeowners:

society secured 

This is very good evidence for the proposition that a vastly disproportionate share of the private-savings-for-retirement subsidy network flows to those who need it least. And it suggests that questions like “houses v. stocks” are, for many Americans, mostly a red herring – if we want to put more money in the hands of retirees, we should simply make Social Security more generous – or, in a better world, maintain it at its current level of generosity while implementing a Universal Basic Income.


Inline image 1

Niklas Blanchard responded to my post on education funding with some very interesting thoughts, and since my manfunctioning computer gobbled my attempt to comment on his response (I think) I figured I’d respond here:

Mainly, his ideas are promising, or at least interesting. I think Zingales’ idea to fund education with equity is promising in theory but in practice has bad optics, but apprenticeship-style education support is not only a very good idea but one that is already in practice. I can’t find any link to this but I know through personal experience that the Montgomery County, MD school district subsidizes graduate education in education in exchange for a guarantee of a minimum term of service. I could definitely envision more firms and institution identifying promising future employees and offering them scholarships or fellowships in exchange for some claim on their future labor as opposed to their future income. Note, also, that this is the inverse GI Bill model; there, service precedes education. That model may also be promising but could run into some pension-insolvency-type-problems if the firm promising the funding proved unable (as opposed to merely unwilling) to provide the promised funding due to bankruptcy, which might make the money-first model more popular.

Which reminds me – I have some fellowship applications to complete myself. If only blogging paid the bills!


Just listened to Planet Money discuss subsidies for having babies, and thought, first of all, since I am now engaged to get married and both the fiancee and I are on the same page re: having a couple kids, I hope the United States institues such a policy! Maybe it could united pro-lifers (incentive to carry pregnancy to term) and progressives (it would largely be a very progressive redistribution of wealth)!

But more importantly the economic logic behind it sort-of-tangentially reminded me of a pet concern of mine:

This can be good for a little while. With a young workforce and fewer babies to take care of, a country can show enormous growth.

But then people start to get old, and governments say uh-oh.

"Who’s going to pay the bills? Who’s going to pay for pensions?" says Patricia Boling, a political scientist at Purdue.

In many countries, including the U.S., workers pay for retirees’ pensions. Fewer kids means fewer workers funding those pensions.

"And in countries that have really low fertility rates, that’s a very extreme problem," Boling says. It "makes what we have in the United States … look like peanuts."

All true! And yet one would think that overall economic growth could fund a higher retiree-to-worker ratio, right?

Here’s my vision for the future of the economy:

  • Robots replace humans at doing some job. A few humans are unemployed, but overall there is a consumer surplus.
  • Repeat.

Here is where my simulation diverges. Essentially, replacing a human worker with a robot is substituting capitol (the machine) for labor (the worker). On a small scale this will simply cause sectoral shifts; if it gets cheaper to buy some tchotchke because a robot made it instead of a human, when I buy the tchotchke I save some money which I will then use to buy coffee and when demand for coffee goes up it causes a commesurate rise in employment in the coffee sector. Yay! But on a sufficiently large scale you are faced with what I like to call the reverse-Ford problem:

Mr. Ford announced that he was doubling the pay of thousands of his employees, to at least $5 a day. With his company selling Model T’s as fast as it could make them, his workers deserved to share in the profits, he said. […]

The mythology around this story holds that Mr. Ford wanted to pay his workers enough so they could afford the products they were making.

In fact, that wasn’t his original reasoning. But others made the point, and, in time, it became part of Mr. Ford’s rationale as well. The idea became a linchpin in an industrial philosophy known as Fordism.

More production could lead to better wages, which in turn would lead to more spending by the public, yet more production and eventually even higher wages.

"One’s own employees ought to be one’s own best customers," Mr. Ford said years later. "Paying high wages," he concluded, "is behind the prosperity of this country."

So what happens to Ford Motors if making the same number of cars requires far less labor input, replaced by less-expensive capitol input? Well you get higher and higher wealth and income inequality as those at the top need not share their profits with a large workforce.

So what happens when there exist enough robots to basically obviate human labor from the fundamentals of the economy?

I see three possible futures:

  • Robot dystopia – a few scions of capitol control all the machines, make vast fortunes, and surrender as little as possible, leaving most of the rest of humanity living at subsistence levels.
  • Robot utopia – socialization of wealth through whatever mechanism, meaning the vast surplus is shared relatively equitably, meaning most people have most of their needs met and are free to pursue higher levels on the Maslow heirarchy.
  • Robot apocalypse – the robots rise as one to destroy us all.

I don’t know what to do about option #3, but I am concerned that ruling that out that option #1 is more likely than option #2. And the reason I think that has to do with, well, baby subsidies. To some extent we are facing a similar problem – the economy is producing more but finding that more and more of the humans in the system don’t have a great deal of utility but still require resources. In theory this shouldn’t be hard, but in practice it’s proving difficult. Even in Japan where they had some nasty economic times they have still passed their original peak GDP and are have a very high GDP per capita, though not nearly as high as the United States. Keep in mind also that a lot of Japan’s troubles here are culturally based; a different country facing similar demographics would probably not have such a difficult time. But looking at the United States where GOP scissors are already being aimed at Social Security despite being projected not to run into any trouble for the next 75 years because raising taxes on wealthier individuals is the dread socialism doesn’t necessarily leave me optimistic that we’ll be able to wrest sufficient control of the Great Robot Surplus from the hands of its nominal owners before they are able to consolidate control.

Join 3,848 other followers

Not Even Past


Error: Twitter did not respond. Please wait a few minutes and refresh this page.

RSS Tumblin’

  • An error has occurred; the feed is probably down. Try again later.