Accumulated capital massively exceeds gross domestic product

The introduction of the own-fund system caused massive capital accumulation. Ideally, this capital should be reinvested in the real economy. But such an enormous mass of capital cannot be absorbed by the real economy. In Switzerland alone, savings from the second pillar amount to more than 700 billion francs. By comparison, Switzerland’s gross domestic product in 2011 was 590 billion francs.

High probability of bubble formation

The economy needs credit for new investment, which it repays out of new activity, new value formation. If saved capital is not lent back into the real economy, but used to finance real assets and financial products of all kinds, processes are set in train that inevitably lead to today’s well-known financial bubbles.

While loans to industry for rationalization and productivity gains lead to lower production costs, consumer credit (borrowing to buy) and investment in merely financial products tends to result in price increases. Too much capital creates a huge demand for real assets, such as real estate (land). This is easily observed: return-seeking capital leads to high land prices and land speculation, leading in turn to rent increases.

In contrast to the own-fund system, Pay-As-You-Go contributions are used immediately again by pensioners to fund consumption.

Pay-As-You-Go funded by consumption (expenditure), not by wages (income)

Of course, Pay-As-You-Go has its drawbacks. Repeatedly put forward as the pretext against the Pay-As-You-Go system is the argument that it presupposes a demographic trend in which pensions are predominantly funded by the working population. But if Pay-As-You-Go is seen analogously to the taxes levied on domestic sales (VAT), then it would benefit from any efficiency gains in the economy generally and be fairly independent of demographic development. This financing method would also render the export sector more competitive, as social security contributions would no longer form part of labour costs, and thus not be included in the costs of goods.

Encourage circulation instead of hoarding

In itself, the 3-pillar concept is not at fault. But the ratios between the pillars need to be better adjusted. Especially by effecting balance between the first and second pillars – the amounts of capital and thus the amounts of credit which the real economy needs but can also absord – we have a tool for managing and adapting to the particular circumstances obtaining today.

The increasing frequency of today’s financial crises is caused by too large masses of capital. Again and again, they endanger economic life. Therefore, we should strengthen and expand the first pillar, while drastically reducing the second.

Daniel Maeder 

Now organised as a pension fund, the CoOpera Group comprises CoOpera Sammelstiftung PUK, CoOpera Investment Ltd, CoOpera Immobilien Ltd, CoOpera Leasing Ltd. As envisaged by the founders, pension funds should not be subject to the lack of transparency and unpredictability typical of the capital markets, but should flow directly into the financing of concrete, sustainable economic and cultural projects, thereby enabling such projects not only to have idealistic goals, but also to be commercially successful. It is because it has worked in this way for over 25 years that CoOpera’s pension funds have never been put into question in times of financial crisis.

www.coopera.ch