The main ingredient of any safe pension system is a healthy and sturdy economy.

Sir, I refer to Martin Wolf’s “It is folly to make pensions safe by making them unaffordable” FT, June 28.

Wolf writes: “We also need true risk-sharing within and across generations, which is absent from today’s defined-contribution schemes”

But current risk weighted bank capital requirements, with lower risk weights for financing the “safer” present, e.g., loans to governments and residential mortgages, than when financing the riskier future, e.g., small businesses and entrepreneurs, is a clear example of how that intergenerational holy bond Edmund Burke wrote about has been violated.

John Kay and Mervyn King.“Radical uncertainty”? Please, give us a more stupid "radical certainty", than credit risk weighted bank capital requirements.

And way back, when observing how many Social Security System Reforms were based on the underlying assumption that they will be growing 5 to 7 percent in real terms, I also warned, time and time again, that it was not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. In this respect the 'chickens are only coming home to roost'.

PS. Historically, through all economic cycles, there is nothing that has proven so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that, in real terms, you can't beat with any social security reform.

A letter to Martin Wolf in 2015. An essential component of an Edmund Burke intergenerational holy bond, must be the willingness to take risks.

Another letter on this subject sent to Martin Wolf in in 2017

And another letter on the Covid response intergenerational conflict of monstrous proportions, also published by the Washington Post in 2020

How much lower fertility, less children, is caused by “habitual well-being”?

@PerKurowski

All awful on the pension front

Sir, John Authers responsibly puts his finger where it hurts, the issue of whether there will be sufficient resources to provide those pensions that so many take for granted will be there, “Hunt for the middle ground to avert pension poverty” July 9.

And doing so Authers discusses the implications of defined benefit and defined contribution plans, especially in times of extraordinary low interests. His suggestion to find an in-between plan that takes a little from both, sounds very logical, though of course, unfortunately, that cannot guarantee either there will be enough to meet the needs and much less the aspirations.

But the state of the economy at the time of any drawdown of a pension also matters tremendously and, if bank regulators are allowed to continue distorting the allocation of bank credit, that state of the economy will be very bad.

The risk weighted capital requirements for banks are causing a dangerous overcrowding of the safe havens, like public debt to which a risk-weight of zero percent was decreed; and for the economy an equally dangerous lack of exploration of the risky bays, SMEs and entrepreneurs, and which got hit with a risk weight of 100%.

As a consequence banks are now mostly refinancing our safer past and not financing sufficiently our riskier future. And that bodes very badly for the future pensioners, and very badly for the future prospects of the pensioners’ last reserve and hope, their children.

PS. 2006 “My insecurities about the social security debate” 

@PerKurowski ©

The best pension security you can get is to have grandchildren who love you and who work in a not too bad economy.

Sir, John Plender valiantly discusses one of the most difficult and delicate current problems, namely if tomorrows pensioners will even come close to collect on their expectations, “Uncertainty clouds the outlook for pension funds” May 16.

And looking at the problem solely from the perspective of the current manipulated low rates he already concludes: “What we can safely posit is that an exit from the low or negative rates that cause the blight, however desirable for the pensions system, is unlikely to be a smooth and painless affair”

Add to that longer life expectancies, more robots - less job opportunities, already extremely high indebtedness, climate change, demographic changes, existing inequality and quite possibly much weaker economies… and we start getting the feeling that the only variables capable of balancing the disastrous pension outlooks… are those variables we do not even want to think of… down the line of epidemics and wars.

But how could it not be?

Never ever before has a generation consumed as much of any existing borrowing capacity to sustain its own consumption… so of course little is left for retirement.

And to top it up, we have had to suffer the risk aversion of manipulating regulators who do not want our banks to take the risks that building a healthy future economy needs.

When in the past I often protested the implicit promises of sustainable high rates of return of pension fund plans, I remember always ending up with that the best pension plan was to have children that loved you and who worked in an economy that was not too bad. And I have found no reason to change that opinion… much the contrary… although I now include loving grandchildren too J

PS. By coincidence I posted this opinion on pension funds and social security exactly 10 years ago (on my 56th birthday)

Negative interests make you need deflation to balance your social security plans.

Sir, you mention that “José Viñals, a senior IMF official, has warned that negative rates could become more damaging for society the longer they persist, undermining the viability of life insurers, pensions and savings vehicles.” “Negative rates may be nearing a political limit” April 11.

Of course it does that. More than a decade ago, as an Executive Director of the World Bank I frequently objected to all those documents on Social Security System Reforms that assumed pension funds to obtain real rates of return I felt were unrealistically high for the long term. And to achieve those returns in an environment of negative interests, how much deflation might you need? Clearly, negative interests do not lead to something good.

You write: “Opponents of negative rates need to spell out the alternatives”. But Sir, that is precisely what I have done, in those hundreds of letters that you for whatever internal reasons decided to silence.

And so here it comes again. You mention that negative interests are — “intended to encourage… banks to lend more to the real economy”. But it is not only a question of more lending but also of correct lending. And the risk weighted capital requirements for banks impede these to allocate credit efficiently to the real economy.

How? Again: by allowing banks to leverage more on “safe” assets than on “risky”, the expected risk adjusted returns for safe assets will be higher than those of risky assets, and so banks will lend too much to “the safe” and too little to “the risky”.

And so in order for negative interests, QEs or any other monetary concoction to work, that regulatory distortion needs to be eliminated. Capisci?

@PerKurowski ©

The by far best “collect as you go” pension plan, is built around loving kids and a healthy economy.

Sir, I refer to Michael Skapinker’s “Five possible scenarios for a ‘work till you drop’ world” March 10.

In my book “Voice and Noise” of 2006, on the issue of “Social Security in Real Terms” I wrote:

“In order for your savings and social security investments to be worth something when you need them, the real economy must be in a reasonable condition at the time of your selling your investments. When I hear the many discussions about the financial preparation needed to accommodate for the upcoming demographic changes, I find it truly amazing how little is being said about the economy in real terms.

Considering that there will be many fewer young ones to drive people around and shovel snow, much of today’s beautiful real estate might drop in value when the elderly start selling their houses to live close to a metro, hospital, and more reasonable weather conditions. So, before putting the money away in a private accumulation trust I think we need to rethink the whole retirement strategy.

Also we should never forget that historically, through all economic cycles, there is nothing so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that you can’t, in real terms, beat that with any social security reform.”

I have the very loving very great kids, but I am still very concerned. Regulators concocted credit-risk weighted capital requirements for banks, and that is seriously distorting the allocation of credit to the real economy. If that mistake is not soon corrected, our economies are doomed to stall and fall.

How many kids of working age are not already living in the basements of their ‘work till you drop’ parents?

Sir, as I see it, we have no choice but to fire, immediately, the current bunch of dumb bank regulators.

@PerKurowski ©

Because of way too optimistic expected returns, pension funds will not be able to deliver.

Sir, Martin Wolf writes “Pension reform makes sense up to a point” March 11 and I hope he takes the opportunity to also look in at the rates of return of pension funds used in actuarial valuations.

As an Executive Director of the World Bank (2002-2004) I continuously held that “It really is not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. Therefore when we observe how many Social Security System Reforms are based on the underlying assumption that the average pension fund will obtain returns of 5 to 7 percent, in real terms, forever, I have to wonder when we are going to use our knowledge, and inform the world that this is just plain crazy.”

And even after the crisis, the world mostly uses those overly optimistic expected rates of returns in… what cheats they are!

PS. The extract is from my book Voice and Noise of 2006, one of which I also then gave Martin Wolf. Unfortunately Mr. Wolf must not have read it otherwise he would not have perhaps wasted so much valuable opinion space on his macroeconomic-imbalances explanations for this crisis, and would have understood better and earlier the monstrous regulatory imbalances.

PS. Strangely it seems this article by Martin Wolf has disappeared from the web.