Patel Pursues Pensions 2

by Galen Sher

In our first blog post on this issue, Julian provides a great introduction, his view and the full bibliography. I chose to create a second blog post, rather than comment directly, because my response is too long for a comment. I strongly encourage the reader to view this short post and some of its bibliography before reading my instalment.

I am close to pensions and this issue is therefore compelling to me. I hope to provide a middle ground between the various commentators here and an actuarial perspective.

Patel is mooting that 5% of pension funds' assets be invested in government debt, potentially a special kind of 'developmental' government debt, with the intention that this policy would provide government with additional capital to finance public infrastructure.

The Pension Funds Act of 1956 and the FSB's Regulation 28 already encourage retirement savings vehicles to invest in government bonds. Government bonds also provide a good match for level pensions liabilities and provide diversification. For these three reasons, pension funds already invest, sometimes extensively, in government bonds.

If the 5% is viewed as a minimum allocation to government bonds, its impact would be negligible as the vast majority of funds already achieve this. Funds could also use structured products to circumvent this requirement.

If the 5% is viewed as an additional allocation to Dion George's "parallel system of government debt", then this policy could be viewed as Dawie Roodt's "nothing more than an additional tax" strictly when pension funds would otherwise not have invested in such debt. It would amount to an additional tax when markets are performing well, and a subsidy otherwise.

Mike Schussler points out that the real (pun intended) risk is that long-term inflation erodes the fixed returns earned on government bonds. Contrary to Dawie Roodt's skepticism, this problem could be overcome by issuing more inflation-linked government bonds, the demand for which is large in SA.

It is impossible to be decisive on this issue without more information. The proposal is both "workable" (Mike Schussler) and "flaky" (Dion George).

I have purposely ignored the moral issue of whether this level of government intervention is acceptable, or the philosophical-legal issue of whether it infringes on individuals' property rights, but these certainly merit discussion for another blog post.

The management of retirement savings is a sensitive subject because retirement savings constitute a substantial portion of an individual's wealth at retirement.

Patel Pursues Pensions

So the state wants to "encourage" the trustees of private citizen's retirement savings to "invest" in "development projects". So much for private property rights.

Incidentally, this is why I oppose pension funds: they significantly reduce people's power over their (implicit) retirement savings. It's almost a Law of Nature that the less power you have over your money, the less of it you will have in the end.

Here are some relevant links:

Patel to tap pension funds - Times LIVE

Patel eyes pensions trillions for state fund - Free Market Foundation
"The unintended consequences of this action are entirely predictable - individuals will stop investing in retirement vehicles, thereby reducing the level of savings in the economy, resulting in less money for genuine investments that drive economic growth."

Patel's pension plan dangerous - DA - Politicsweb
"Under Apartheid, pension funds were utilised to fund the Apartheid regime through the implementation of prescribed assets."

Uasa opposes Patel's retirement fund plan - Times LIVE
"If the state were a business, we at Uasa certainly would not have invested our hard-earned retirement savings with them."

NUMSA backs Patel's pension funds proposals - Politicsweb

Patel's pension plan 'workable' - Fin24.com
Economist Dawie Roodt: "Politicians are not good at identifying winners and here we have the idea that pension funds be forced to invest 5% of their savings into a politically determined project."


Well, at least we're not Argentina:

Argentina Makes Grab for Pensions Amid Crisis - WSJ

Just a jump to the left (again)

Yesterday's feature article at Politicsweb by Dr Pierre Rabie (DA MP) provides an excellent response to Minister of Economic Development Ebrahim Patel's anticipated policies of import tariffs and company bail-outs (albeit with strict conditions).

Central to the argument is that:

• Protectionism (like company bail-outs and import tariffs) protect jobs for certain interest groups only
• But they force South African consumers to pay higher prices for the goods so produced.

This represents a direct wealth transfer from South African consumers to the workers who would otherwise lose their jobs. It's all well and good to say we should protect workers from losing their jobs, but at what cost? Should all South Africans have to pay higher prices because organised lobbying interest groups like Cosatu demand import tariffs?

In the South African context of extreme poverty, my opinion is no. Workers, however vulnerable, are nevertheless less vulnerable than the unemployed and poorest South Africans. Such workers should not be entitled to protect their interests at the expense of the poor and unemployed.

I thought this piece of the article was balanced:

"...the broader costs to society far outweigh the short term sliver of benefits to a narrow interest group. The ANC government needs to accept that the figureheads of its so-called developmental state, the parastatals, requires urgent attention by way of privatisation, and that labour market rigidities needs to be solved in order to make it easier to employ job-seekers. Until this is done, efforts to step up protectionism are at best attempts at distraction, and at worst interventions that would achieve the direct opposite of the sustainable, job-creating economic growth we need."