Comment by ThrustVectoring | Hacker News Reader

Comment by ThrustVectoring | Hacker News Reader

ThrustVectoring

The fundamental issue is that saving financial assets today has essentially zero impact on the total consumption of future retirees. Instead, what matters is 1) the amount of real goods and services future workers generate, 2) how much of this production they give up in tax transfers to retirees or sold for financial assets owned by retirees, and 3) how many workers there are per retiree.

As a society, we cannot collectively save our way out of the coming pension crisis. Already economic growth is basically not capital-constrained - if an extra billion dollars starts sloshing around the system, it simply raises the market capitalization of existing bonds, businesses, and real estate by a billion dollars. Public companies, on net, return cash each year to investors. Saving doesn't make future retirees as a class wealthier, it simply rearranges the rank ordering of future retiree wealth while allowing current retirees to spend more via higher asset prices.

So, what can future retirees collectively do? Have more children, allow more immigrant workers, increase future tax transfers, force higher savings rates on future workers (eg, student loan debt, mortgage repayments, land rents), retire later, or accept a lower standard of living. What individual options are there? Basically all you can do is save more and wind up in a more privileged tranche of future retirees, and hope that society winds up rich enough to support your retirement dreams. There's some room for optimizing your investment strategy so that it minimizes costs and risks, via tax-advantaged accounts owning broad-market index funds, but there's only so much juice to squeeze there.

What makes me somewhat mad are the (Western) countries "solving" their public pension problems through immigration. Not only do you then destroy the tax payer base in the country that loses the emigrant, but you're just pushing the problem down the line so that the immigrants that saved you tomorrow, are themselves screwed when/if they ever get to retire.

It's literally a legal Ponzi scheme and in many cases, you are legally obliged to play.

I'm looking at you Canada.

Yeah the new push is to drive our population to 100M in 80 years from about 37M now. It costs $2300/mo in our biggest cities for a single bedroom apartment on average.

A lot of this is the rush of foreign investment and the government you elect caring more about the tax revenue from people who don't even live in your country over the welfare of their own constituents.

Agreed, however it's also a result of overly strict building and zoning codes that don't allow density to increase in exchange for a reasonable price.

The result, however, is tragic. People just live in "illegal" housing situations like stuffing 4 or 5 people into a 1 bedroom or 2 bedroom apartment, where people just create temporary walls to zone off part of the living room or use an extra large closet for extra "bedrooms".

Thus the city loses out on tax revenue AND preventing population increase in certain areas, which is the whole point of these restrictive zoning laws.

You are not the first person I have seen conflate those two things. I assume you’re assuming higher demand and fixed supply leading to rising prices, is that fair? If so, what is your mental model for the how/where/why of house construction?

It's more difficult to build a third floor than a first floor, to build a subway for three instead of a street for one, to install three sewer pipes instead of one, to police three rowdies instead of one. NIMBY laws redistribute those costs to commuter neighborhoods, but the crowding raises prices via simple increasing marginal costs. That's my model (I'm not the OP).

On the other hand, three cities cost three times as much as one city. Or have I missed something?

Yes, because it's not more difficult to build a third city than a first city. It's equally difficult. So there are not diminishing returns like the ones I described in my post. Although it's hard to get over the hump of the first city's network effects and get started.

You need a high birth rate or high immigration rate to grow economies. You are right everybody should be screwed; you need more people.

That is ignoring real gdp growth rate per capita [0].

[0]: https://fred.stlouisfed.org/series/A939RX0Q048SBEA

Canada is known for a large amount of high skill immigration that benefits almost everybody. It’s nice having educated people around and we have access to the best food in the world because everyone brings it with them

I'm not sure about the whole data around it, there will certainly still be positive effects for the countries these people are migrating from. But generally, only accepting high skilled immigrants is very nice for Canada, but leads to pretty serious consequences for the emigration countries (brain drain).

The brain pools are much bigger than you imagine.

This comment nicely explains the concept of the "veil of money": viewing economic activity in terms of real products and services instead of money can clarify what's actually happening in the economy.

but you'd expect that technological advances to prop up the implied drop in worker productivity (which is why there's an implied scarcity of goods and services in the future).

What i know for sure though, is that a large number of future retirees hav not have saved up enough for themselves.

Retirees as a group cannot save their way out of the pension crisis - an extra TV made in 1998 does not materially impact the ability of society to provide health care to a retiree in 2018. You'd have to physically store goods for later consumption for this to work at all. All you get out of extra saving today is higher asset prices, allowing current retirees to consume the extra goods that current workers neglect to consume via saving.

We are also more productive as a society compared to the 50-60 years ago that retirees were born. Theoretically we should be able to make more with less people too.

Productivity gains certainly help, but it's not something that pension plans have any control over. They can only estimate what it's going to be going forward, and try to hedge their defined-benefit terms around it. Defined-contribution plans have a much better time, since they can foist this risk onto future retirees.

There might be others, but I recall 2 styles of pension setup. One we use in Australia is that workers set aside x% of their wages into a fund where they can't access the money until they have retired at >60 years old.

The other is a transfer-payment from current workers to retired workers.

In the second case what you say is true; pension funds would be basically a thin abstraction for what is basically a welfare system. People's benefits are not linked to their productivity and life choices. Pension funds would have no power.

However in the Australian system the funds have enormous power because they sit on a vast pool of capital they have exclusive control over. They have the means and power to start their own business/create demand for new businesses that meet their retirees potential needs. This shows there is no theoretical reason why pension funds can't actively participate in shaping the economy to meet future retirees needs.

But your main point goes to the fact that 'investment' is typically in pieces of paper rather than real things. This is probably a result of government policy favouring people who own financial assets over real assets. Governments have been running a 'war on investment' for many years; look at how well companies like Uber do that take capital and basically burn it. How is a productive company supposed to compete with that sort of business plan? There is far too much credit in the system and that is a direct result of government policies or situations quietly accepted by government policy. All those resources could have gone into things that retirees were going to use.

If a company losing billions can make its owners billions; there is no particular incentive to do the legwork to actually think about the future and come up with a plan that works. We are starting to see the results of that thinking, which is pervasive, in the pension funds.

Addition For Clarity; real investment is supposed to be about making it much cheaper and easier to secure useful resources in the future. If there are broad scale pension crises, which there are, then whatever has been going on isn't real investment. It was a likely outcome of the '08 crisis that real investment would be squelched; because people who were exposed as not stewarding money sensibly were left in charge. I'll bet the Europeans are in a worse spot than the Americans and doing something foolish like following their financial lead but with a more extensive welfare state.

The first style of pension setup is also a thin abstraction over a welfare system. The only difference is that instead of taxation, it uses savings to inflate asset prices to generate additional retiree consumption at the expense of current worker consumption.

>But your main point goes to the fact that 'investment' is typically in pieces of paper rather than real things.

Investment in tangible things also is typically in the form of pieces of paper allocating economic rights. Real estate and corporations are investing in titles and shares, respectively. Extra money doesn't generate any more land or any additional business ideas, it simply bids up the prices of what's out there.

>If a company losing billions can make its owners billions; there is no particular incentive to do the legwork to actually think about the future and come up with a plan that works. We are starting to see the results of that thinking, which is pervasive, in the pension funds.

I'd characterize it more that simply adding more money to the system does not materially increase the pool of useful ideas and innovation out there. I know that I couldn't come up with any better of a business plan if I was handed a hundred million dollars rather than a million, and anyone I hire to do so would just be a zero-sum activity that reallocates who owns their resultant plans.

> Already economic growth is basically not capital-constrained

I really disagree with this. Consider a simple counter-example. Workers in the Bay Area are substantially more productive than the American average.

One simple way to use capital to increase GDP is to build more housing and infrastructure in places like the Bay Area. Even if the population doesn't grow, that housing stock will allow future workers to move from West Virginia to San Francisco.

By shifting future workers from low-productivity job markets to high-productivity job markets, we can substantially increase total economic. Even with the same population and the same technology base. The only constraint is the tight housing supply in places like the Bay Area. But we know how to build more housing, all it takes is a willing political system and capital investment.

The housing supply in the Bay Area is politically constrained, not capital-constrained. It does not matter how much money you have; if you want to build in the Bay Area, you need to convince the local NIMBYs to allow you to do so.

It is geograpically constrainted and cannot build new single detacted. Building up changes the character and no one mentions earth quake issud and the lack of supertall building found commonly elsewhere.

Earthquake safety has only a minor impact on building construction costs. If you put aside land and permit costs, constructing a building in the Bay Area costs about the same as other major metropolitan areas.

" cannot build new single detacted"

so... don't? Plenty of other types of home.

(Nevermind that we're accepting the idea we don't have room at face value)

There's certain economic laws you can't get around even with capital expenditure. Diminishing marginal returns, political and social capital, etc.

In fact, trying to increase capital expenditure to achieve future income gains actually faces an anti-intuitive danger: most capital expenditure creates future depreciation/maintenance/ opportunity costs. So if you mis-allocate big chunks of capital expenditure (and centrally driven political decisions such as this have a high risk of that happening compared to decentralised/incremental/market decisions) your apparent fix can actually make the situation worse, as your big chunks of capital create future maintenance and depreciation and political liabilities which create (political) pressure for further draws on the future tax base.

There's a strong argument that various forms of past infrastructure spending that now require upkeep the local population can't afford (various road infrastructure in local municipalities) and rust belts are literally that.

Also, if the form of capital expenditure focuses on environmental resource consumption or uncosted externalaties, some forms of capital expenditure can be thought of as transferring future consumption into the present.

And then I haven't even touched upon whether the capital expenditure/expansion is funded via debt...

You never hear discussions about maintenance costs of infrastructure. I wonder what the math looks like for a given bridge/road

> 3) how many workers there are per retiree

Rather, total production of workers per retiree. More kids from economically unproductive population segments, and more immigrants to unproductive population segments don't help future retirees.

It seems likely to me that political change is the mostly likely result from a future pension crisis: another government expansion of responsibilities for old age income and health care.

More investment leads to higher asset prices, lower interest rates, business growth and more future production. Investing in capital markets just gets the market to allocate your capital, as opposed to if you built a widget factory yourself instead. The end result is the same (but the market is probably more efficient), more production.

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