The notion that one can accumulate past income in a fund that will provide
a pension is, from the standpoint of society as a whole, an illusion.
The income of todays pensioners is created by todays workers. A 70
year old today is not eating tins of corned beef and baked beans that
were bought and set aside in the 1960s. They eat food produced by todays
farmers, warm themselves with today’s electricity, and are treated
when ill by current medical staff.

With state pensions this is relatively clear. A threadbare illusion
attempts to label a portion of income tax as National Insurance, but
few are fooled by that. State pensions are met out of taxes on
current workers.

What is less clear is how private pensions are also met out of tax
revenue. Private insurance companies purchase annuities in the form
of government bonds and then pay pensions from the interest on these
bonds. So the taxpayer pays both private and public pensions.

The difference is that the public pension scheme is vastly more
efficient. Civil servants in the Department for Work and Pensions
are not paid million pound bonuses like fund managers in the City,
nor are there any sellers of state pensions who have to be
rewarded by commissions.

The public pays twice over for private pensions : once as taxpayers
to fund the interest on the national debt that actually pays the
pensions, and a second time in their private insurance premiums.

This notwithstanding the past discussion on so-called “pension fund socialism” that the two of us had.

The more you post this kind of stuff, the more I am indeed inclined to agree with your “nuclear” solution to debt instead of just state debt.

My only objection to including it in a political program is the (perhaps seemingly) one-time nature of this measure. With state debt, you know that when it’s abolished, the state can quickly rake new deficits, start up a new debt balance, and then abolish it.

I have a target set by the site of 600 words, its a blog not an academic paper.

If you want my views on investment and interest rates you will either have to wait for a later post or read the book Classical Econophysics, http://www.routledgeeconomics.com/books/Classical-Econophysics-isbn9780415478489 or some of my technical papers on economics at http://www.dcs.gla.ac.uk/~wpc/reports/index.html#econ

I would not be so disparaging of accounting identities, a large part of the effort of theoretical physics for two centuries has depended on elucidating ‘accounting identities’.

The key point is that the point you have just made was not included in your original analysis, which said nothing about interest rates. And nor is it strong enough to bear the conclusion of your original analysis, which appeared to be a general proposition that cutting G would send the economy into a spiral. Moreover your analysis seemed to say that this flowed simply from the accounting identity.

The only thing I have really been arguing for is that your original model was simplistic and inaccurate and therefore unreliable for the conclusions you drew. A model of accounting identity simply isn’t enough to explain, well, anything. To reiterate the point, your model offers no explanation of interest rates, which you have just implicitly admitted are rather important.