A Classical Retirement FundKeith Rankin, 20 June 2001
When we teach economics today, we still contrast the "classical" with the "Keynesian" point of view. The central (though largely forgotten) point of difference relates to the importance or otherwise, to the national economy, of having a high savings rate.
In this classical view economic growth is driven by savings. Firms finance "capital goods" (eg the new buildings, machinery, infrastructure that were thought to have been the sine qua non of economic growth) from prior savings. The habit of thrift is seen as the foundation of capitalist development.
The Keynesian view was diametrically different on this point. Firms would only invest in new buildings and machinery if consumers were spending rather than saving their incomes. Businesses, armed with bank credit, would compete with households for resources. Employment and productivity would increase, leading to more income and eventually more savings. That is, savings would rise as a consequence of (and not as a prerequisite for) the accumulation of capital.
The Keynesians won the argument hands down in the 1930s. And they won it again in the 1990s. In Clinton's America, a low propensity to save created a high level of business confidence which in turn led to investment which, for the first time, made productive use of information technology (IT). At the same time, high-saving Japan went nowhere.
Winston Peters and the Act Party are our most classically-oriented politicians. For them, the future will turn to custard if New Zealand's savings rate does not increase. The retirement income issue is simply an opportunity for them to push for what amounts to a national savings scheme; a scheme which reduces the living standards of all working age people today, no matter how little their disposable incomes might be.
Labour (in both New Zealand and the United Kingdom) has joined the ranks of the classicals, of the economic conservatives. While Michael Cullen is not the savings' zealot that Winston Peters is, he is nevertheless laying his political career on the line for the sake of what amounts to a compulsory savings scheme. Surpluses which could be returned to each of us are being squirreled away on the premise that by having less now we can have more later.
The Green Party, although coy about economic growth, have taken a more Keynesian position. The Greens are doing better than any other political force in pointing the way to economic growth triggered by spending rather than by the absence of spending. Rather than following the intellectual straightjacket that embraces most of our policymakers and public servants, the Greens want us to invest in a sustainable "prosperous" public future - eg to invest in the environment and in our social infrastructure, to employ scientists in public science.
One irony of all this is that real classical economics - the nineteenth century economics of David Ricardo and John Stuart Mill - represents a much richer vein of intellectual capital than what passes for classicism today. What we have lost is the classical emphasis on the distribution of income between the classes of society and the large economic "funds" that together make up the economic cake.
Classical political economy divided the economic cake into three funds (wages, profits and economic rent; the latter representing a free return on nature's gifts). Classical political economy was also a system of sociology. In its simplest form, society consisted of landlords (whose income was that 'free lunch' called rent), labourers (whose families were supported by the collective wage fund) and capitalists (who saved and invested most of their profits and in doing so grew the economy).
One of the agendas of classical political economy was to shift the public sector (formerly the "sovereign") from being a kind of landlord with special powers into being a kind of consuming household (the "state" or the "government") with the special powers of taxation. The public economy was reinvented as the parasite economy. (That's the way Libertarianz and Ayn Rand cult followers continue to see it.) Eventually, this interpretation helped to discredit classical political economy. Unfortunately, in discarding nineteenth century classical economics, we threw out the baby and only a little bit of the bathwater. (We could reinvent the public economy as a class of its own with the help of that classical baby. But that's another story.)
Since the time of Ricardo and Mill, government has been reincarnated from parasite to referee (following the intellectual leadership of Alfred Marshall the father of neoclassical microeconomics around 110 years ago) to corporate business (following Keynes in the 1930s).
Michael Cullen and Winston Peters share a worldview of residual Keynesian corporatism bathed in classical bathwater; an unlovely hybrid that makes early-1980s' Muldoonery appear both visionary and compassionate. Cullen's bankrupt growth strategy is that the government, like a school-masterly squirrel, should save acorns for the winter of 2015-2050.
We can see the problem differently, by dividing society into four new classes, or categories. Each class is sustained by a fund; by a slice of the economic cake, a share of "Gross National Income" (GNI: formerly known as Gross National Product).
My categories are "family", "paid workforce" (or "labour force"), "post- workforce" and "working-age non-workforce". Inasmuch as everybody is to some degree a consumer in the market economy, all four categories are supported by just one group of people, the paid workforce. But then the paid workforce depends on the non-market contributions of the other classes. As always, social classes are interdependent rather than autonomous.
The "family fund" is the income required to support children and their caregivers. The family was traditionally funded by transfers from "breadwinners". It is now funded in large part by the earnings of caregivers and rather mean means-tested public transfers. It serves as a present model for how the post-workforce "retirement fund" will operate in the 21st century if the present social contract breaks down.
The post-workforce retirement fund is the income required to support those persons who, on account of their seniority, are deemed free to retire from the market economy if they please. While there will continue to be no stigma associated with people of retirement age choosing not to seek employment, it will probably not be the norm for people in the future post-workforce to be "retired" in the sense that we still understand retirement today. Hence my preference for the term "post-workforce".
Income from all sources paid to persons over 65 constitutes what I call the "classical retirement fund". A Cullen-Peters fund may or may not make a net contribution to the retirement fund. Ultimately, the size of the future retirement fund depends on how much of the economic cake the future labour force is willing and able to make available to the post-workforce.
The "working-age non-workforce" fund is the slice of national income that supports all persons of "working age" (18-64?) whose primary activity is neither paid employment nor caring for children. (Think community wage beneficiaries, ACC and invalids' beneficiaries, tertiary students and non- employed partners without children.)
A rising post-workforce can in large part be funded by a diminishing working-age non-workforce. Or it can be funded by rising taxes made possible by productivity gains. The ratio of persons of working age to persons of retirement age has been overstated as a matter of concern for future retirement funding.
For now, we need to consider how to achieve sustainable economic growth, and how to maintain a social contract that will ensure the continuance of transfers from the labour force to the other three classes. The present universal "pay-as-you-go" system - or a close variant of it - seems to me to be more supportive of both sustainable growth and the continuance of the social contract than any conceivable form of squirreling, whether compulsory prefunding or the subsidisation of saving. I cannot see the problem that Dr Cullen and Mr Peters have staked their political careers on.
We must invest in the development of our 2015-2050 labour force, not in acorns for our ageing baby-boomers.
The classical baby we left behind at the beginning of last century can provide us with more inspiration than the stagnant bathwater of our exhausted 20th century paradigm. We can better see the virtue of what we already have - a functioning social contract and a society made prosperous by intangible social capital - by removing the mote of tunnel-vision that accompanies this period of diminishing intellectual innovation.