Sunday, January 12, 2020

The easiest retirement system - Retiree Tokens

People are often confused about retirement income systems. Understandably so. Most economists, and organisations such as the IMF, OECD, national treasuries, and think-tanks, have promoted a view that countries that rely more heavily on taxation and transfers to facilitate retirement incomes (pay-as-you-go systems) are at an economic disadvantage compared to countries with “pre-funded” systems. The aggregate value of assets held in pension funds is believed to measure a country’s capacity to support a retirement income system. More funds, more capacity.

But this is wrong, and it is easy to demonstrate why.

All retirement income systems merely allocate goods and services to the retired at the time they are needed. They only differ in terms of the accounting system used to implement them. Some use public finance and cash transfers, while others, such as superannuation, require compulsory asset transfers.

But the problem of allocating goods and services to the retired does not necessarily need any accounting system at all. Just make a law that requires all retailers to supply their products to people over retirement age for free. Voilà. Retiree incomes, in terms of the goods and services they consume, are automatically and immediately guaranteed.

When a retiree fills up their car with fuel, there is no charge. When they go to the supermarket, again, there is no charge. When a customer reachers their magical retirement age birthday, their electricity and gas bills go to zero. New clothes? Free for the elderly.

This system redirects real resources to the retired. The cost is borne by the non-retired in the form of higher prices and hence lower real incomes. All retirement income systems do this — the non-retired have less ability to consume goods and services, the retired have more.

But, this "no accounting" retirement could be easily gamed. Retirees could begin to sell their free goods in secondary markets, on-selling to non-retirees to profit for themselves.

To fix this problem you could introduce a Retiree Token system. Each retired person gets a limited number of Retiree Tokens that they use at retailers to exchange for the free goods they are entitled to. This Retiree Token system would limit the ability for retirees to on-sell in secondary markets the goods and services provided to them for free. Hypothetically, you could provide each retiree with, say, 24,000 Retiree Tokens each year that they can swap at a 1:1 exchange rate to the dollar for the free goods and services that businesses are legally obliged to provide.

As you can see, a retirement income system can be achieved without any accounting system. It might be operationally problematic, and could be improved by using Retiree Tokens to limit the free goods and services that the retired are entitled to.

So if retirement income systems do not need money at all, where does that leave the idea of “pre-funding” a system? After all, there is no way to use financial markets to create more Retiree Tokens, just as there is no way for airlines to uses financial markets to “pre-fund” their frequent flyer token system.

The answer is simply that it is not possible to “pre-fund” a retirement income system. In terms of goods and services consumed by the retired, all systems possible systems are pay-as-you-go. There should be no confusion about this.

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