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I don't think fundamentally that the problem here is derivatives. I think fundamentally that it is pensions themselves. Think about what a pension is. A pensio

I don't think fundamentally that the problem here is derivatives. I think fundamentally that it is pensions themselves. Think about what a pension is. A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working, and in some cases even, children of people who once long ago worked. It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. The commitment taken on by a pension fund is an increasingly impossible one to uphold as time goes on and markets get more efficient. They have a bag of capital they have to make grow to continue to honor an open ended commitment, so they have to continue to find interesting and clever (and risky) ways to do that. Compounding on this, they're big bags of capital, so they will invariably become load bearing pieces of a nation's financial portfolio. Of course they're going to wind up intimately tied to the overall financial health of a nation. "We take some chunk of money we would otherwise just pay you, promise to invest it wisely to indefinitely pay you later for not working, and in return we get a chunk of capital to play with and a sink to help stabilize the financial system." That's the proposition of a pension, right? You might be tempted to say "pensions are just a part of agreed to compensation, a contractual obligation and nothing more. There's nothing special about a pension that gives it these negative properties your ascribe to it" and to that I'd ask, then why don't people just take the capital through their working years as monetary compensation? Surely they could hand that to a money manager and achieve the same result as a pension achieves? The answer is because people wouldn't be able to expect what they get out of a pension, they go with a pension because they think they're getting something more out of it, and that excess is the ultimately impossible commitment I am referring to.

JonChesterfield 4y ago
The premise that a pension should beat the market without taking on risk does seem suspect. Other traders have the same idea with higher risk tolerance. Maybe gambling over multiple decades is a significant advantage but that's also difficult to see.
v-erne 4y ago
>> A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working... That's and extreme simplification of pension and probably the worst definition You can think of. I guess if You were a marxist as opposed to some form of capitalist/liberal I would expect that You would base Your definition on class struggle. I much more prefer to think about pension as a form of insurance against the risk of getting old. And as such the free market "implementation" is only one of possibilities (for ex. here in Poland we have state pension with a bit of free markets sprinkled on top). I personally believe that "old age insurance" is one of flag inventions of our times and do not think that there is a place for free for all solutions in civilized society (we are in this together and should work out a way to protect the weakest). >> It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. That's an implementation detail in my view - if You look at it from insurance perspective, You just need to search for a way to redistribute effects of current work between workers and retires. And using financial products (stocks and derivatives) may just be a wrong tool for the job.

JonChesterfield 4y ago

The premise that a pension should beat the market without taking on risk does seem suspect. Other traders have the same idea with higher risk tolerance. Maybe gambling over multiple decades is a significant advantage but that's also difficult to see.

v-erne 4y ago

>> A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working... That's and extreme simplification of pension and probably the worst definition You can think of. I guess if You were a marxist as opposed to some form of capitalist/liberal I would expect that You would base Your definition on class struggle. I much more prefer to think about pension as a form of insurance against the risk of getting old. And as such the free market "implementation" is only one of possibilities (for ex. here in Poland we have state pension with a bit of free markets sprinkled on top). I personally believe that "old age insurance" is one of flag inventions of our times and do not think that there is a place for free for all solutions in civilized society (we are in this together and should work out a way to protect the weakest). >> It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. That's an implementation detail in my view - if You look at it from insurance perspective, You just need to search for a way to redistribute effects of current work between workers and retires. And using financial products (stocks and derivatives) may just be a wrong tool for the job.