Friday, January 14, 2011

I Guess You Can Take That Away From Me

-- Posted by Neil H. Buchanan

News reports last week indicated that five countries in Europe have begun to "seize" the assets of citizens' retirement accounts, in an effort to fill state budget gaps. While there is reason to suspect that these reports are misleading or overblown, I will accept arguendo the veracity of the reports. This raises several interesting issues.

Any discussion of pensions anywhere seems automatically to implicate the debate over Social Security in the United States. According to last week's news, two countries saw their governments take over public pension assets that had been designated for individuals, while three others took ownership of the assets of private retirement accounts. That these five are all being taken as essentially equivalent is, however, itself an interesting phenomenon.

Recall that former President Bush, when he proposed a partial privatization of Social Security six years ago, used the rhetoric of ownership to distinguish Social Security entitlements from private accounts. We need private accounts, the former President told us again and again, because only then would people have something that cannot be taken away from them. Social Security was supposedly based on "worthless pieces of paper" in a drawer in a government repository in West Virginia, while money in the bank is a solid asset.

If the reported events in Europe are true, therefore, they are not an argument for privatizing Social Security. They are an argument that people do not really know whether their pensions will be there when they retire, no matter the financial system used to account for those putative assets.

Is there a way to save for the future that is not subject to such seizure at some future point? In a word, no. First, most of what people need in retirement is access to services (medical care, entertainment, travel, and so on) and perishable goods (food, medicines), which means that it is not possible to hoard what one needs to live on during retirement. Second, if one only hoards non-perishable things, in the hope that they can be traded for goods and services in retirement, there is the distinct risk that -- either through policy or pure luck -- the goods that one hoards will lose value. Gold, the favorite "hard" asset of many, is subject to fluctuations in value based on market psychology, policy manipulation, and simple geology. (A big gold discovery, for example, could have a more devastating impact on a person's gold-based pension plan than the Crash of 2008 had on financial assets.) Third, if we are really talking about seizing assets, physical assets can be taken away from people, too. That it is easier to hide physical assets must be traded off against the costs (direct and opportunity) of hiding them, weighed against the risk that an attempted seizure might one day occur.

If the lesson from last week is, "See, government can take things away from you!" then the answer must be, "Yes, and ... ?" It certainly is not obvious why new evidence of that fact would be an argument to change from public to private pensions. And, other than a few apocalyptic types, there is no serious claim that we should return to safety deposit boxes and mattresses as our means of saving for retirement.

More to the point, the intuitive feeling that financial assets are insecure applies to situations where the government does not gain when a person loses her savings. Banks have every incentive to try to seize assets, too. They have taken in the money and credited the accounts with interest or dividends, but they would dearly love to be relieved of the obligation to repay. How to do this? Why not create fees that did not exist before? Why not make them retroactive? Putting one's money into a bank is, after all, a fundamental act of trust. When banks in Iceland froze assets during the recent crisis, British account holders discovered just how ephemeral their money really was. (And not just because it is fiat currency. Safe deposit boxes can be sealed as well.)

Who prevents depositors' trust from being abused? The law. That is, the government. In yet another application of the Murphy/Nagel principle, it is the government that sets up and enforces the rules that make it possible for people to have a financial system that is relatively transparent and that can be relied upon to repay depositors their money. The government can also change those rules or refuse to enforce them, which could allow financial institutions to take some or all of depositors' funds. Whether or not they would bother to justify their actions as, say, "necessitated by market conditions" has no effect on the bottom line, which is that ownership is a legal construct.

Which raises an interesting question of rhetoric. If a bank were to begin claiming ownership of depositors' assets under one or another justification, I would fully expect a public outcry, and denunciations in the press. I strongly doubt, however, that such actions would be called "confiscations" or "seizures" of assets, even though that is precisely what they would be. We might call a new government law that changes how much money citizens must pay to the government a seizure, if we like. It is, however, no more a seizure than is a private seizure of assets. In either case, we must have a functioning government to make sure that any such changes in people's ownership rights are enacted properly.