Bitcoin as PAYGO Pension Plan. And Land.

Suppose the government starts a Pay As You GO (unfunded) pension plan. What the young pay into the plan today is what the old take out today. The first generation gets lucky; they get a pension paid out, but never put anything in.  And if the plan ever gets wound up, the last generation of old get unlucky; they paid in, but never get anything out.

Bitcoin is the same. What the young pay in to buy Bitcoin today is what the old take out when they sell Bitcoin today. The first generation gets lucky; they sell out at a high price, but bought in at a low price when it was just starting up.  And if the young ever stop buying Bitcoin, so the price collapses to zero, the last generation get unlucky; they paid to buy into Bitcoin, but never get anything out.

The big difference is that Bitcoin is a strictly voluntary PAYGO plan. You don't have to participate in the plan, and if you do choose to participate you can contribute however much you want, and you can pull your money out any time you like.

Now suppose the government starts a fully funded pension plan, that invests in land. If land is the only asset in the economy, and has a perfectly inelastic supply, it's not very different from a PAYGO plan. Or Bitcoin. It doesn't create any new assets for the economy as a whole; it just makes the existing land more valuable. What the young pay into the plan to buy land is what the old take out by selling land. The first generation of landowners gets lucky, because they bought land at a low price and sell it at a high price. And if the plan ever gets wound up, the last generation gets unlucky; they bought land at a high price and sell it at a low price.

At the macroeconomic level, the only difference between funded and unfunded (PAYGO) pension plans is due to the price elasticity of the supply of new assets ("investment"). If it's perfectly elastic, the total physical quantity of assets rises proportionately with a fully funded pension plan. If it's perfectly inelastic, the physical quantity of assets stays the same, but the price of assets rises proportionately with a fully funded pension plan. And you can think of PAYGO pension plans, and Bitcoin, as creating valuable assets ex nihilo, that satisfy the desire to save a stock of assets you can sell later, like a temporary abode of purchasing power.

[Maybe see my old post on the "Junker Fallacy", which isn't a fallacy in an OverLapping Generations model.]

Comments

[louis]

I'm going to try to look at this 'in relief' as it were:
In absence of pensions, young people defer consumption so they can build assets and consume in old age. They dont just plan to starve late in life.
Create a funded pension, and you collectivize that activity - young people defer consumption, pay into the plan, plan builds assets, and lets those contributors draw out when they get old. No macro change (unless the funding is mandatory and above the levels at least some young agents would wish to save at).
Create a PAYGO system, and the existing young defer same amount of consumption as under a funded system. Difference is that the lucky old get a windfall on top of the assets they accumulated when they were young. Presuming they want to die w/ zero balances, they increase consumption. But their extra consumption means fewer resources are available for investment all else equal. Depending on elasticities, investment in the economy as a whole drops when you introduce PAYGO to some extent, and prices of assets fall to the point that the young supplement their pensions w/ additional private saving. When they get old, they sell the assets to the new young, etc.
Structurally, with introduction PAYGO, the old consume more in every future generation and consumption by the young/investment are reduced.... or am I missing something?

[Nick Rowe]

louis: that sounds right to me. I don't think you're missing anything.

[Phillip Huggan]

During the 60's and 70's, career ladders at a firm became displaced by computers. Multiple attempts at achieving upper-middle class services became necessary. Doing a few rote physical motions, good for 1.5 yrs, was never good for a decade or more since J.Cartier presented an option. Now, the money would be better spent to get small business grants or some courses cheap enough to attempt the multiple educations and biz's necessary. For land, I assume carbon allotropes will advance cheap and secure box-car style housing. There are new pest stickers, air quality sensors, mushroom basements with reliable backup power...The learning seems to be ensure services are there for multiple tries at the middle class away from where immigrants are flooding housing (thus you don't buy where your first job is anymore). I would think India demonstrates the need for birth control or underground/offshore housing technology; land there is fixed at its present tech level and you get the equivalent of having more 1st children by having fewer people.
Bitcoin is often about corruption. I can make a furry paw move realistically (it almost shakes like a hesitating animal) if I hold down on the mouse and scale it on one or two axises. But the only UI logged as script is when I let go of the mouse, it records a line of code. I could also use moving one scale axis and one translation axis at the same time; this is unlikely to be in public software yet. When someone from IT invests in bitcoin, they are assuming Microsoft or whoever, will benefit and eventually offer better software or hardware. With pensions, you are hoping for disease cures along the way. Maybe Bitcoin is a better way to achieve this. The land has an optimal carrying capacity. Pensions can always be overfunded. Bitcoin seems to be about creating tangential assets; I hope it models iron molecule residency time in a few organs.

[Frances Woolley]

Yes! This is exactly right! And so clearly put!

[Dee]

What is easier Parallel or Series? For whom?

Dee