Can money TIME TRAVEL to pay for our retirement? Pension bonds reveal the trick that makes many economists believe so
This financial instrument show there is no flux-capacitor, only economic trickery, at the heart of pre-funded retirement systems
The logic of pre-saving for our collective retirement—whether with superannuation, 401K accounts, or social insurance funds—is that we are transporting money from the present into the future.
But money can’t time travel.
All money can do is be swapped for other things today (or not).
This is extremely important for understanding the potential social value of various national approaches to retirement funding, which unfortunately most economists and major economic institutions get wrong.1
I want to demonstrate how these mandatory saving funds make it look like money is time travelling, when in reality they are shuffling the financial deck of cards without adding to our ability to pay for collective future retirements.
The way to make this clear is with an idea I have mentioned a couple of times before (here and here): Pension Bonds.
I don’t think I have fully and deeply explained how this idea shows that pre-funded accounts have nothing special in them that helps pay for future retirements.
All that is in these funds are claims over future income that we mark up at a price based on the last trade of similar claims. But an age pension is also a claim over future income that could have a price today if it was traded.
Let’s see how that works.
What is an asset?
Anything that creates a legal claim on future economic value is an asset. Collectibles can be assets. Treasury bonds, which are the debts issued by state and federal governments, are assets to their owner. Company shares (stocks) and bonds are assets as they represent a legal claim to the residual incomes of the company.
These assets are all tradeable.
Sometimes assets are not. Your own business might be very difficult to trade, even though your ownership of it represents a claim on the future income of the business. Incorporating a company can help to create a legal entity where part or full ownership of your business can be more easily traded. When it is traded, the value of that legal claim to owning the business will be priced by that trade.
However, some legal claims on future economic value are not tradeable.
My children were born with a legal claim on the future value of a free school education in Australia. We sometimes call legal claims of this type a right.
But rights can also be priced if we change the institutional setup to allow them to be traded.
The conversation about school vouchers shows there is a way to do this. By changing the institutional setup of the right to public school to be one of a right to funding for a school, vouchers create the opportunity to trade (choose to allocate) that right to different schools within the jurisdiction.
It is not much of a leap to imagine that it would also be possible to allow school vouchers to be traded between people—one parent might want to sell their child’s school voucher that year to another parent because they want cash instead, and the buying parent is choosing a school that costs much more than their single voucher provides and is now using two vouchers to pay for that school.
Let’s say that a school voucher provides $10,000 per year to the school the child attends. In this example of the trade to another parent of a single year’s voucher, that would likely happen at a price a touch below $10,000.
You can see how modifying the institutional setup to allow more trades—both choosing which school to spend the voucher on, and which parent owns a voucher—starts to allow more pricing opportunities of what was initially just an abstract right.
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