The following comments from Con Keating endorse the argument of Ashok Gupta that Britain needs primary investment and not the replacement of existing capital by secondary investment. I am pleased to quote Con again, his work on New Towns is quoted by him here. You can read more on this blog from this link Con
Con argues that financing new towns through investment and not Government borrowing
Investment and Growth – Con Keating
Con Keating
We have heard much about investment and growth in recent days. This has tended to focus on the high levels of overseas investment of pension funds, an apparent absence of a ‘home bias’. In the private DB sector, this is a mischaracterisation: the problem there is excessive investment in gilts and other fixed income, to the exclusion of equity.
The first and most important point is that it is new investment which drives growth. This investment can primarily come from companies reinvesting their retained profits or from the flows of new savings institutions. It is also possible to fund new investment from the proceeds of existing investment sales.
Much emphasis has been placed on investment in the equity of UK companies, but much new corporate investment is financed with debt. Indeed, the proposal for New Town Development Agencies to issue bonds would be a classic example of growth inducing infrastructure investment.
Many believe that investment in existing UK listed equity would result in growth, but the purchase of equity in these markets as secondary transactions does not deliver any new funds to the corporate issuer. It is only primary offerings which achieve that, and even there, there is often a high degree of existing investors ‘cashing out’.
This lack of new investment extends to private investments, when purchased in secondary transactions; the purchase of a major stake in Thames Water by USS from Macquarie did not result in any new funds for Thames to deploy.
If there is to be any new investment in UK plc as a result of secondary market activity, it comes from the actions of the seller, and they have many possible competing uses for those funds, from consumption to overseas investment.
It is of course possible that secondary market purchases of listed equity have indirect effects on growth, through wealth and income effects; but these are significantly lower than direct investment effects.
Given competing demands for investment funds from public and private sector actors, a system of evaluating the implicit growth prospects of any particular investment is needed, and for that I would advocate the use of the fiscal multiplier.
If you aren’t aware of the “fiscal multiplier” this article may help.
Borrowing to consume does not end well maybe we should plan to replace unfunded promises with a fully funded solution with a bias towards the lowest quartile other countries have developed alternatives.
Virtually all advanced economies with an average income higher than the UK maintain some statutory framework for retirement. However, several top-tier global economies do not have a traditional state pension system (defined-benefit, state-funded, or pay-as-you-go). Instead, they rely on mandatory individual savings accounts or restrict pension rights entirely by nationality.
Three primary jurisdictions have higher average incomes than the UK but lack a standard state-funded pension system.
Singapore
Singapore’s average income (GNI per capita) is significantly higher than the UK’s, yet it has no taxpayer-funded state pension.
How the population provides for retirement: Singapore operates the Central Provident Fund (CPF). This is a mandatory, multi-purpose social security savings scheme funded jointly by employees (up to 20% of salary) and employers (up to 17%).
Mechanics of income: These contributions are split into accounts for housing, healthcare, and retirement. At age 55, savings from the Ordinary and Special accounts are merged into a Retirement Account to fund CPF LIFE, which provides a monthly payout starting at age 65 based entirely on the individual’s accumulated cash balance.
Do they stop working? Most do, but because payouts are directly tied to lifetime contributions, lower-income workers or those with shorter careers often transition to part-time or lighter employment well into their 60s and 70s
2.Hong Kong and 3. UAU could offer alternatives. We should also consider taking in other welfare areas such as NHS, Care and Child upbringing instead of abandoning the vulnerable.
Thanks John- good points. I think most people in the UK benefit from a balance between funded and unfunded retirement income but a substantial minority of us have unfunded and no funded pension income. CDC will do something to rebalance things for them. You can of course opt-out of private pensions before you get paid them, you can’t opt out of the state pension!
Low-Income Anomalies: Exceeding 100%
It is worth noting that certain jurisdictions structure their state safety nets so that low-income workers (those earning 50% or less of the national average wage) actually receive a state pension that exceeds their working wage:
Denmark: While an average earner receives a net replacement rate of roughly 77%, a low-income worker can reach a gross replacement rate of 115% to 122% due to heavily targeted universal state supplements and housing benefits.
Iceland: Offers a base replacement rate for average earners of roughly 53%, but implements a heavily indexed social safety net that can elevate a lower-income worker’s net retirement income up to 145% of their pre-retirement earnings.