Against Pensioner bonds

Which interest rate would you rather borrow at - 4% or 0.6%? It sounds like a moronic question. Not if you're the Chancellor, it's not. In launching pensioner bonds yesterday which pay 4% pa over three years, he is choosing to borrow at a much higher rate than the 0.6% charged by the gilt market.

This is costing the tax-payer money. If, as is likely, all of the £10bn bonds on offer are bought, the government will be paying almost £300m a year more in interest than it would if it borrowed in the gilt market*.  

To put this in context, it is three times as much as the government is saving from the cap on benefits. And it is almost as much as it is saving from the bedroom tax.

In this sense, Osborne is redistrbuting wealth from the poor to the rich. According to the ONS (pdf), the typical household has only around £12,000 of financial assets. Only a wealthy minority, therefore, can afford to take full advantage of the £20,000 pensioner bond offer.

Pensioner bonds, though, aren't just regressive. They are anti-conservative, in three ways.

First, in paying more interest than necessary, Osborne is wasting the tax-payers' money.

Secondly, he is undermining monetary policy. He claims to be a "monetary activist". But one channel through which monetary policy works is that low interest rates are intended to force investors to buy riskier assets such as corporate bonds and equities, which reduces the cost of borrowing and hence raises capital spending. Osborne is (albeit partially) blocking this channel; paying high rates on government borrowing is a form of crowding out - about which Conservatives have long complained.

Thirdly, he is rejecting the concept of individual responsibility. Most older, wealthier pensioners voted for austerity. And a vote for austerity is a vote for low interest rates. In giving pensioners a higher rate, Osborne is protecting them from the consequences of their own actions.

What's going on here is simple. Osborne is channelling tax-payers' money to a favoured client group. There's a word for this - corruption. This is the sort of thing we expect in Uzbekistan or Nigeria, not a western democracy.

In saying this, I don't deny that pensioners are discomforted by low savings rates. But there's a simple solution to this that would benefit almost everyone - a looser fiscal policy.

* Assuming £5bn of the three year bonds are sold with an interest rate of 4% rather than the 0.6% gilt yield, the annual cost would be £170. And £5bn borrowed for one year at 2.8% rather than the 0.33% changed by the gilt market would cost another £123m.

Comments

[Ben]

This is the perfect example of modern Britain. Most older voters voted for austerity with the proviso that it doesn't effect the NHS. In other words everything that doesn't effect them.

We are now one step closer to the truth of modern Britain: the young are enslaved by the UK establishment with the full acceptance of the boomers+ so long as they get a cut.

That sir is modern Britain.

[Dave Timoney]

@Ben, that's "most older voters" with up to £20k spare cash. An important qualification. Not every boomer ended up with a gold-plated pension let alone a mansion.

[Dinero]

I does however have the advantage of broadening the market of creditors.

[Ben]

Elbow - not all got this no. Those that don't have 20K voted for the NHS and to bury the young alive in debt. Both parties are simply pandering to this age range.

It's pretty disgusting.

[Dinero]

These pensioners are not lightly to be distracted away from "corporate bonds and equities", more likely to be term deposits. If that wasn't the case then there would not be "discomfort from low savings rates" in the first place. Unlike profesional investors and Gilt holders the Pensioners will be spending the interest payments in the economy.

[ian]

Is there not the dimension (possibily fictitious?) that this may reduce later reliance on state provision? If the 20kers had bought that second hand BMW, instead of the bond, would they be more likely to need more state support in 15 or 25 years?

[aslangeo]

I feel that poorer older voters are more likely to vote for the NHS, social care etc . Richer old people can afford to pay for these services but are less willing to do so. As stated in the ONS statistics wealthy pensioners, with over 100K in financial assets are very much a minority

[Blissex]

«I don't deny that pensioners are discomforted by low savings rates.»

Only some pensioners, those who went long liquidity and short volatility, dislike low savings rates. Many pensioners who went short liquidity and long volatility, have benefited immensely.

Also both categories have benefited from low interest rates as rates are low in (significant) part because median wages have been falling fast, and pensioners are overall short labour, as lower wages don't mean lower incomes to them, but mean lower costs to hire helpers.

«But there's a simple solution to this»

Give them the Right-To-Buy at 70% discount of state owned property with 100% mortgages even if they don't live in it? So they can buy up property and enjoy massive tax-free capital gains and they will vote too for permanent recession to keep wages and interest rates falling and delivering immense capital gains to the rich long property in the South East?

«that would benefit almost everyone - a looser fiscal policy»

First, not sure that a looser fiscal policy would benefit affluent swing voters in South East seats (at the expense of poorer voters in the North), which is all that matters in UK politics.

Then to some extent low interest rates *are* fiscal policy, because they are in effect a spending cut. The benefit of low interest rates on the government budget is pretty large (IIRC it is four times as large as much diminished Scottish oil royalties), and means smaller spending cuts than otherwise.

Whether they are of net value however it is somewhat doubtful. But it is pretty obvious that continuing wage compression to keep interest rates low is a core strategy of the government, as that transfers the cost of the balance sheet crisis from "highly productive" property (real or financial) owners to "lazy exploitative" labour suppliers.

[Blissex]

«Osborne is redistrbuting wealth from the poor to the rich. [ ... ] Osborne is channelling tax-payers' money to a favoured client group. There's a word for this - corruption.»

By the same logic Right-To-Buy with 70% discounts on state property prices and 100% mortgages with the declared intent to turn South East working class voters into Tories (at the ultimate expense of Northern Labour ones) was and is corruption too.

But in British politics if that kind of stuff is done by a local council it is misuse of public funds and Mrs. Porter got "taxed" for it:

http://en.wikipedia.org/wiki/Homes_for_votes_scandal
"a political scandal in the United Kingdom which involved the selling off of council housing to potential Conservative voters"

But if it is done by sovereign Parliament it is just politics, as Parliament can dispose of public (or private...) property as it, or South East swing voters in practice, see fit.

In UK national politics "Blow you, I am allright Jack" is a political strategy, not a crime.

[Blissex]

«the Pensioners will be spending the interest payments in the economy»

This is the perfect illustration of the benefits of "trickle-down" policy: raise VAT and cut benefits to squeeze the luxury-loving poor until the pips squeak, to transfer income upwards to the struggling moderately wealthy and some of that may even "trickle-down" back to the poor. :-)

[Blissex]

«Parliament can dispose of public (or private...) property as it, or South East swing voters in practice, see fit.»

That "South East swing voters in practice" hints at a much wider idea that I have been thinking about for a while. Punch line at the end...

Huge asset bubbles have happened not just in the UK but worldwide, all fueled by government sponsored credit bubbles (and immigration booms).

This is in part due to "core" country exceptionally expansive credit (and monetary, but less so) policy, as leverage ratios and collateral rules were changed in law or fact to bubble up credit, and as Michael Pettis says "wall of money" credit bubbles in core countries tend to reverberate worldwide.

But what is striking to me is that the hugest credit bubbles and asset prices bubbles redistributing income and wealth from workers to rentiers have happened most clearly in anglo-american culture countries.

I suspect that in part this is because their right-wing political strategists all share ideas, and purchasing conservative voters with redistributive property bubbles is the most important of those ideas.

But the other aspect of anglo-american culture is first-past-the-post voting within geographically defined voting areas, and in recent decades those anglo-american culture countries have seen the geographical sorting of income and functional classes ("spontaneous" gerrymandering), both sometimes on a regional scale (as entire regions have been pauperized to destroy unions) and on a finer scale (as within regions more affluent voters have chosen to live only among each other in suburbs).

This means that in those countries many if not most seats are "safe", and the fewer marginal seats and the swing voters within them effectively rule the country.

Well summarized here:

http://en.wikipedia.org/wiki/Homes_for_votes_scandal
«The Conservatives were narrowly re-elected to Westminster City Council in the 1986 local council elections, with their majority reduced from 26 to just a majority of 4.»
«the eight wards chosen had been the most marginal in the City Council elections of 1986. Three — Bayswater, Maida Vale and Millbank — had been narrowly won by Labour. A further three, St. James's, Victoria and Cavendish had been narrowly won by the Conservatives, in West End ward an Independent had split the two seats with the Conservatives while in Hamilton Terrace the Conservatives were threatened by the SDP.»
«An important part of this policy was the designation of much of Westminster's council housing for commercial sale, rather than re-letting when the properties became vacant. The designated housing was concentrated in those wards most likely to change hands to Labour in the elections. Much of this designated housing lay vacant for months or even years before it could be sold.»
«Other council services were subverted to ensure the re-election of the majority party in the 1990 elections. In services as disparate as street cleaning, pavement repair and environmental improvements, marginal wards were given priority while safely Labour and safely Conservative parts of the city were neglected.»
«In 1990, the Conservatives were re-elected by a landslide victory in Westminster, increasing their majority from 4 to 38. They won all but one of the wards targeted by Building Stable Communities policy. Porter stood down as Leader of the Council in 1991, and served as Lord Mayor of Westminster in 1991-2.»

This as national policy is entirely legitimate, and mandated by swing voters long property (and votes) and short liquidity (and labour) in South East marginal seats.

The UK (and some other countries) is ruled by the interests of middle aged or older middle class property owning South East (mostly women) swing voters in first-past-the-post marginal seats.

I think that it would be interesting for political scientists to investigate the correlation between first-past-the-post, explicit gerrymandering, or "spontaneous" gerrymandering at regional or local level, and credit and asset bubbles and other policies directed at buying swing voters in the few marginal seats that matter.

[Luis Enrique]

I don't pay enough attention to know, but I hope to god labour are taking the points in your first three paragraphs and beating the conservatives with them. If they are not, they deserve to lose.

[Keith]

As has been pointed out corruption started with right to buy. The real cause of housing shortages stems from the selling off of state assets below real value and the refusal to replace them. Plus the related policy restricting supply of land to raise asset prices of privately owned houses.

The only quibble I have with your argument is that the bedroon tax and benefit cap do not save any money net, that is a fiction. They force people to go into the private rented sector and families with children have to be supported so this policy increases public spending. Again it is the wealthy in the form of landlords who gain paid for by the rest of society. In the same way housing benefit claimants on low pay are increasing in number so employers who pay a inadequate wage are subsidised by the general tax payer. Profits and capital gains are increased rather than production being based on need.

[Blissex]

«the young are enslaved by the UK establishment with the full acceptance of the boomers+ so long as they get a cut»

That's a bit crude, it needs some additional qualifications.

It is more that those short assets and long labour are being redistributed income and wealth from those long property and short labour; and those long liquidity and short labour in between.

To some significant extent those short assets and long labour are young, and those long property or liquidity and short labour are older, but the qualifications are:

* Those who are long property in the North are not getting much if any redistribution, and many of those who are short property in the South East stand to inherit a lot of property later in their life and know it.

* Those who are long property and short labour in the South East tend to be because of age and inheritance and divorce middle aged and older middle class and wealthier women, the famous "poor ladies living alone in mansions" and many more, which also tend to be much bigger consumers of NHS services and much smaller contributors to NI and taxes.

So I think that there the North/South East aspect is perhaps as important as the young/old one, and the male/female one too matters (but perhaps not as much as North/South East one).

[Blissex]

«those short assets and long labour are being redistributed income and wealth from those long property and short labour;»

That was "*to* those long property and short labour".

[Blissex]

«The real cause of housing shortages stems from the selling off of state assets below real value»

That was the starting point, but the current real cause is that any government that built houses and brought house prices or rents down would be fired by property speculating middle aged and older voters in the South East.

«and the refusal to replace them.»

A little known detail is that the original Right-To-Law law explicitly forbid local councils to use the proceeds from sales of council houses to build new council houses.

Also note for fairness that the other scandal is that a lot of council houses were *rented* at below market rates, and to some extent the discount on the sale price merely capitalized that rent discount. Many of those council houses with much discounted rents had been built by Conservative (and also Labour of course) councils that wanted to buy voters with cheap rents. They later found that tax-free instant capital gains worked a lot better.

[Blissex]

«labour are taking the points in your first three paragraphs and beating the conservatives with them»

In UK politics those points are swing vote winners for the Tories. Osborne is not redistributing to cash-rich South East pensioners from the Northern poor secretly; the Conservatives are boasting loudly about both sides of that policy because they think with cause that both sides win them votes where it matters.

[gastro george]

"... labour are taking the points in your first three paragraphs and beating the conservatives with them."

@Luis Too right. If they frame it correctly, this is a "value for money" and "sound management of the economy" issue.

[Blissex]

«a "value for money" and "sound management of the economy"»

Cutting £53/week benefits to "Northern scroungers" is very popular in the South East, it is seen as "value for money" and "sound management of the economy" as much as giving hundreds of billions of subsidies to the City and subsidising property sellers by giving subsidies to property buyers with "Help To Buy".

As to giving a handout, a "leg up", to Tory pensioners (mostly in the South East: how many Northern pensioners have £10,000-£20,000 in cash in the bank?) with subsidized interest rates, I doubt anybody will resent the good fortune bestowed upon nice old ladies with a chunk of spare cash.

Voters hate handouts very selectively, usually depending on whether who gets them is "respectable" like themselves and whether they are direct cash handouts. In this case the Tory pensioner ladies, they are not the poor ones who cannot buy bonds, but the relatively rich respectable ones who will "invest" their savings. Who can be against a "leg up" for rich savers? :-)

As to lack of resentment about some handouts, Thatcher was worried about it for Right-To-Buy:

http://www.conservativehome.com/thetorydiary/2014/03/how-thatcher-sold-council-houses-and-created-a-new-generation-of-property-owners.html
«Thatcher was worried that Conservative voters who had paid in full for their houses would be annoyed if council tenants were able to buy at a discount: “What will they say on my Wates estates?” she asked. But she was prevailed upon to swallow this objection.»
«"The tenants will have the right to purchase their homes at a price one third below market value. [ ... ] a duty on every council to sell homes on these terms – giving their tenants what amounts to a 100 per cent mortgage with no deposit.”»

Actually almost nobody objected to this massive handout.

I suspect that most voters have considerable cognitive biases as to what they consider redistribution at their personal expense and what they don't realize is the same thing just thinly disguised.

[Paul Garrard]

It is a bribe. Nothing more, nothing less

[Blissex]

«It is a bribe. Nothing more, nothing less»

Ah no, it is something more than a bribe, because as a bribe it has been carefully limited: the maximum per-pensioner handout is 3.4% of £10,000 per year plus 2.2% per £10,000 per year or around £560 per year, so hardly huge; even if it means that it is an extra £560 on top of the £120 returned by ordinary gilts, or nearly six times the return.

But even such a token absolute sum gives Tory pensioner long cash instead of long property the signal that the government is a bit on their side too: sure pensioners long property get 160% per year profits, but at least the Conservatives are more than sextupling the interest rate returns of those long cash.

It is a tribal signal that the governments wants to take care of all affluent "deserving oldies" (mostly in the South East), just it boasts that it wants to punish all those cash and job and property poor "lazy scroungers" (mostly in the North).

[Catch Boy]

"A little known detail is that the original Right-To-Law law explicitly forbid local councils to use the proceeds from sales of council houses to build new council houses."

I worked for a council housing department for a while a number of years ago. IIRC the councils didn't even get to *keep* the proceeds from Right to Buy sales, far less spend them on new stock. The money went to central government, who redistributed it to cash-strapped housing departments (mostly in London). In other words, not only are poor Northerners subsidising wealthy old people in the south, we're even subsidising the scummy flats their carers and domestics live in.