Spending Variance Tightening.

Discussion in 'Economics' started by morganist, Aug 25, 2020.

  1. morganist

    morganist Guest

    The article below is originally from Morganist Economics and is copyright (C) 2020 Peter James Rhys Morgan.

    The link to the original article post is below.

    http://morganisteconomics.blogspot.com/2020/08/spending-variance-tightening-reducing.html

    Spending Variance Tightening - Reducing Fluctuations in Income through Reforming Pension Policy.


    By Peter Morgan.

    20:38 24/08/20.

    Fluctuations in saving or income can cause movements in the rate of consumer consumption that leads to changes in aggregate prices and the overall economic growth rate. Closing down the ability to generate high variances in pension saving and annuity payments will reduce the fluctuations in income that can impact rates of consumer consumption. By reducing the ability to make extreme changes to pension saving rates or by securing fixed annuity income returns aggregate prices and economic growth rates can become more consistent and stable.

    Pensioners who receive an annuity income will either receive a variable income or a fixed income payment. By increasing the availability of fixed income return investment products the income pensioners receive in their annuity payments can be made a constant figure. If the pensioner receives an income of £1,500 a month that is fixed instead of an income of between £1,000 to £2,000 a month which is variable their ability to consume is kept constant at £1,500 per month, preventing fluctuations in spending habits which in turn produces price stability.

    A similar technique can be used to stabilise the rate of pension saving by reducing the amount pension savers can contribute into a pension. There are currently two types of pension saving allowance, the annual pension saving allowance and the lifetime pension saving allowance. Both have been altered significantly over the last decade to help to manage the volume of pension saving. The annual pension saving allowance was reduced from £255,000 to £40,000 cutting the potential variance in spending rates to a sixth, this has stabilised aggregate prices.

    Inflation has been seen as something that is managed monthly through using an external mechanism, usually the interest rate mechanism. This is when interest rates change to impact spending and saving patterns to control excessive demand. However this methodology has neglected the other saving and income mechanism, which is the pension saving and annuity receipt mechanism. Pension saving rates and annuity income streams have a similar impact on the economy an interest rate alteration causes and both can lead to or reduce inflation.

    Over the last decade the reforms in the pension saving allowances have closed down the high potential of variance for pension saving. Although it can be valuable to increase the pension saving allowance if high inflation is anticipated, which has been proven to be an effective economic control tool, it is important to limit the potential to change pension saving habits to stabilise spending rates. Pension contributions should be kept low allowing the lifetime pension saving allowance to be reached over a long period of time to even out price changes.

    There is a similar technique to keep pension annuity income stable through the increase in the availability of secured fixed return corporate bonds. Just a movement into more fixed income return annuities or a higher percentage of fixed income return products in an annuity fund can stabilise spending rates that can help to limit inflation or deflation. Variable income annuities can cause aggregate price fluctuations which can destabilise the overall economy and impact economic growth rate targets, the last decade has seen a big rise in corporate bond issuances.

    I am not sure how much of a problem not managing the variance in pension saving rates and pension annuity income was before the pension reforms were implemented, but the economic targets have been adhered to since they were made until the Coronavirus lockdown happened. Limiting the extreme changes in saving and income streams that can alter consumer spending rates which impact aggregate prices and economic growth may be a better way to manage the economy. Control the factors that lead to inflation instead of treating it after it has occurred.

    Optimisation of the pension saving process to provide more efficient and effective pension contribution rates has been in practise. The ignored aspect of pension policy was the impact the variance in pension saving had on inflation or deflation before the reforms were applied. Now that the extreme variances in pension saving and annuity income have been dampened the alterations in the pension saving allowance should not need to be as intense, unless there is a large supply shock which has unfortunately occurred with the Coronavirus lockdown.

    The missed aspect of economic control, that pension saving, pension investment and annuity income needs to be managed, may provide a way out of the economic crisis the Coronavirus has put upon the world. New economic stimulation techniques using pension saving changes can be used to boost economic growth. Pension Pumping, which is a short term reduction in the pension contribution allowance pumps money into an economy increasing spending rates. Pension Fund Easing increases the velocity of transactions through directing fund investment.

    Both of these new pension economic growth techniques can be taken much further, especially with the introduction of new pension products and pension schemes. I am not sure, yet again, how much of a problem not managing the placement of pension fund investments has been in the past. Central banks use a process called Qualitative Easing that changes the composition of the assets held on their balance sheets to alter the velocity of transactions, it is proven to be effective. Pension fund investments are much greater in volume but not managed in this way.

    This in itself might be causing a further variance in spending habits that could be a central factor leading to aggregate price volatility or inflation and deflation. This past neglect could provide a way out of the current slump in economic growth. If pension saving investments are placed in the correct products it could become an effective economic growth stimulation technique. Just appreciating the need to direct investments into certain products to impact the rate of demand in an economy is a move forward, it now has to be managed to enable growth.