The “Real” Economy Verses the “Paper” Economy and Our Pensions

Jim Stanford

Jim Stanford

Participants in the International Foundation of Employee Benefit Plans’ 47th Annual Canadian conference had a chance to listen to a keynote address by Jim Stanford, Unifor’s economist. Jim addresses the split between the Real Economy which produces useful goods and services and the Paper Economy which creates, sells and buys financial assets and the impact this has on the viability of our Pensions.

Jim drew attention to the Financialization of the Canadian and World economies. Quoting a definition for Financialization from G. Epstein, “Increasing importance of financial markets, financial institutions and financial elites in the operation of the economy and its governing institutions”, Jim characterized it as the over development and over importance of the financial sector (the “paper economy”) relative to the real economy.

real and paper

In the Paper Economy, the Stock Market sets values separate from need and use, whereas in the Real Economy a brewery produces product which have value and fills a real need.

Jim regretted that our pre-funded Pensions have contributed to the Financialization trend, creating a culture of stock marketing and assessing financial risks. This runs counter to the real economics of pensions. Future pensions will have to be paid out of real future production, not the paper of stocks and bonds.

The Myth of the Apple Tree

apples and paper

Financial apples and apples are not the same thing

Financial accumulation is not about “saving real apples”, Jim continued. In fact the reality is, financial markets hurt real growth. Countries with less Financialization invest and grow faster because money goes to real projects that make things rather than the moribund corporations in Canada which accumulate cash in the form of “dead money”. Money held but not used in the economy. Financialization does nothing to increase future apple production which will be shared between working and retired workers. In fact, financialization probably actually reduces future growth of production.

Looking at the three legs of retirement income in Canada, Jim noted the performance of Old Age Security (OAS), the Canada Pension Plan (CPP) and private and workplace plans and savings. Neither the OAS nor the CPP use financial institutions to manage their funds, both are reliable and give strong performance, unlike our RRSPs, which are controlled by financial institutions and have poor performance and are extremely volatile with wild swings in value.

For the future, Jim recommends concentrating on future growth of the Real Economy which will be shared by retirees and workers. Public plans (OAS and CCP) must be protected and expanded by public pressure. As for the third leg, we must do what we can to focus on efficiency and security. Pension Plans can and will play a role but RRSPs need to be replaced with something more secure and efficient.

The Collective Approach

By pooling risk and using good management, higher returns and lower fees make a substantial difference in the size of pensions paid than when financial institutions are extracting profits from retirement savings. The CPP is the best Defined Benefit program in the country and should be expanded but the financial institutions and business lobby groups would like to see it eliminated. Private sector employers feel no obligation to provide Pensions unless Unions put them forward in bargaining. West Jet has no pension for its employees, even though it earned over $260 million in 2013. This pressures Air Canada who does have Pension to cut or eliminate them just to compete.

Jim is clear that defending and expanding Public Pensions is primary, but we must be looking to expand the Real Economy so there will be increased resources to share in the years to come.

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