If the most famous thesis of [Thomas] Piketty is true and the rate of return on capital is higher than the growth rate of the economy (r > g), it follows that we should have a capitalized social security system . I.e., with the current system of PAYGO in which young workers pay taxes on their wages to supply the pensions of retirees, the rate of return they get is the growth rate of wages, ie, ‘g’. If, on the contrary, we take the money wages of those younger workers and we invested it in capital would get a return ‘r’.
If, as Piketty says, “r > g “, retirees could enjoy a much higher pension if the pension system was fully funded! Which is what I argued to the union leader and former leader of ICV, Joan Coscubiela in a debate on the future of work, we did on TV3 [in Spain] . He said the return on capital was much higher than the growth rate of wages and that meant that capital “ate” an increasing share of GDP. I warned him to be careful of that argument because the immediate implication was that the model of a fully funded pension is superior to PAYGO. I got the impression that Coscubiela did not understand the contradiction of his own argument, but Thomas Piketty does understand that .
He devotes an entire section of his book to discussing pensions. Recognizing the validity of the argument, Piketty explains that now it is too late to change the system because at the time of the transition we would have a generation that has to pay twice [My note; that's not a valid argument, as Milton Friedman has demonstrated]. But that argument is not valid for emerging countries that do not yet have a pension system. I wonder if Piketty (and Coscubiela) advocate the introduction of a capitalized private pension scheme for poor countries that do not have social security.
In fact, the argument is not valid for the rich countries: if truly the return of capital is so superior to wage growth, you could take some of the excess return, save it and grow it until you have enough money to make the transition . Why not defend that, Piketty!
Then there is a second reason for not wanting a funded [capitalized] system: the return on capital is higher, true, but it is also vastly more volatile and uncertain! That is, after writing an entire book on the great bargain it represents for the rich to have capital, at the end of the book he confesses that some of the higher return is compensation for taking higher risk. A risk that Piketty does not want workers to take. Curiously, Piketty does not analyze the risk assumed by capitalists throughout the book. Piketty speaks of the rate of return of capital as an overpayment to a class of citizens who do little more than suck the blood of the workers. At the moment of truth, however, Piketty confesses that, at least in part, that “r” rewards risk taking by those who invest. It’s one thing simply to get a return for exploiting your fellow citizens, and quite another to reap a reward for taking a risk that the rest of society (and Piketty most of all!) is not willing to take.
This lack of rigor in analyzing the relationship between return and risk of capital is one of the major shortcomings of the book.Not that that exhausted the possibilities for mirth in Capital in the Twenty-First Century. As we hope to demonstrate in the not so distant future.