Why Branko Milanovic is wrong on wealth under socialism

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One common criticism against Intermon Oxfam wealth measurements is that they are not taking into account the capitalised value of future Social Security payments: the present value of future public pension payments should be included among the assets of any citizen living under a Welfare State, as long as it is tantamount to holding a public bond against the government (tradeable government debt does appear in financial wealth measurements).

However, Branko Milanovic has put forward an interesting argument against this proposal by appealing to socialists countries: if it is correct to capitalise future government transfers, then we should apply this same approach for analysing the wealth of any citizen under a socialist regime. In a socialist country, argues Milanovic, people enjoy guaranteed pensions and guaranteed jobs, so we should capitalise that income (pensions and wages) in order to ascertain how much wealth the average citizen had. According to his estimates, the average yearly post-tax salary in early 80s Yugoslavia was $9,000 (in today’s dollars) and the average yearly pension was $7,200. By capitalising 30 year wages and 20 year pensions at a 2% interest rate, we reach the astonishing figure that the average wealth of the average citizen in a socialist country like Yugoslavia was “almost” $300,000 (more precisely, it would be $266,500, closer to 250,000). Therefore, we face a trade-off: either we admit that the average person in socialist countries was much richer than the average person in capitalist countries or we forget the “trick” of capitalising future Social Security payments in order to ascertain the private wealth of current citizens in capitalist countries.

Milanovic’s reasoning seems compelling, but it is based on an important accounting misunderstanding. Let’s review the definition of “asset” according to IASB/FASB:

An asset is a present economic resource to which an entity has a present right or other privileged access. An asset of an entity has three essential characteristics:

  1. There is an economic resource.
  2. The entity has rights or other privileged access to the economic resource.
  3. The economic resource and the rights or other privileged access both exist at the financial statement date.

Can we state that a 50-years-old Spanish worker who has already accrued a right against the Spanish government to earn a public pension at retirement possess an “asset”? Yes: there is an economic resource (money) over which the worker has a right (lawfully recognised) which is already in existence. Therefore, the accrued right to earn public pensions in the future is an asset. Can we state that a 25-years-old Spanish worker who has not accrued so far any right against the Spanish government to earn a public pension at retirement possess an “asset”? No: because the right over the resource does not exists at this moment. Therefore, the 25-years-old Spanish worker does not possess an asset against the Government.

Note that this is exactly the same procedure that we follow in order to ascertain whether I have an asset against a private pension fund. If I have already made contributions to that private pension fund, I do have an asset; if I have not made any contribution so far, I do not have any asset even if I expect to make some contributions in the future (I will have the asset once I have made the contributions).

Now, can we say that a “guaranteed job” was a private asset in possession of the average socialist worker? Yes, we can certainly say it: it is a right over an economic resource (paid labour) which was in existence for every socialist citizen. However, what we cannot do is to value that asset as the capitalised value of future wages: that asset is not a right to earn future wages in exchange of nothing (it is not a Universal Basic Income), it is a right to have a job for which I will be paid… if and once I have performed my duty as a worker; i.e., it is not an accrued right against future wages, but just a right to work for a wage. We can approach this mistake from two angles:

  • Would you pay $201,000 (present value of a 30 years wages) for a guaranteed job right? Obviously not: I would then pay $201,000 plus around 50,000 hours of my labour to receive a present value income of $201,000.
  • You may distort the meaning of the words to compute the present value of 30 years wages as an asset, but then you will have to compute the present value of 30 years due work as a liability (opportunity cost of working in order to obtain your wages). Your net worth would be just the difference between those two terms.

Then, is a “guaranteed job” right an asset? As I said, it is an asset, but you cannot value it as the present value of future wages. Its value is more closely related to an insurance against involuntary unemployment (although in some senses less valuable, as long as you have to work in order to earn income). We may wonder how much money would be paid by the average US citizen for covering his risk of not enjoying a $9,000 job. I would say that nothing would be paid for that in an affluent society like the US. In much poorer societies (with less available opportunities), the right might be more valuable, but not incredibly more: if the present value of 30 years $9,000 wages is $201,000, how much would I pay for dispelling any uncertainty around my wage?  Even if you were willing to give up 20% of your wages, that right would have a present value of $40,200 (although I fail to think that any Spaniard would be willing to pay in high unemployment Spain an upfront sum of 90,000 euros in order to enjoy a 30 years guaranteed job right of 20,000 euros).

In that case, the average wealth of the average Yugoslavian for having guaranteed jobs and guaranteed pensions would have been around $100,000, not $300,000. And that result would still depend on assuming that Yugoslavians received a $7,200 pension from a non contributory pension scheme. Otherwise, one should only account for accrued pension rights, not for the expectations of those rights.

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8 comments

  1. That’s a very interesting thought. I have a small suggestion to improve it. One way to measure the “value” of a job is to measure the cost of the studies. For instance a bachelor degree:
    A=Average Salary of a person with a bachelor degree.
    B=Average Salary of a person without a bachelor degree.
    C=cost of life * 4 years + University fees.

    Then C is the value of A-B.

    1. well, A and B are not the average salaries, they are the amount of money that they make in 30-40 years. Despite this mistakes I guess the idea is clear.

  2. Se me ocurre un tema tangencial. Imaginemos el siguiente escenario. Luis tiene veinte años, y su padre, Manuel, tiene 67 años. Manuel se va a jubilar cobrando la pensión máxima, pero muere un día después de jubilarse. Luis es heredero único de Manuel. ¿Tiene derecho Luis a reclamar el pago único del devengo de la pensión de su padre?

    ¿Por qué importe: once años, correspondientes a la diferencia entre una esperanza de vida de 78 años y la edad del fallecimiento de Manuel, o solo por el importe de todas las aportaciones de la vida laboral de Manuel?

    Imagino que este extraño e indeseable escenario estará contemplado en la ley y que seguramente la respuesta será “favorable” al Estado, en el sentido de que no tienen que pagar ni un duro, porque, por alguna impenetrable razón legal, la muerte de Manuel “anula” sus derechos adquiridos, o bien no los anula pero no son heredables.

    La pregunta que más me interesa que creo que sí puede responder Rallo es esta: ¿desde el punto de vista contable cómo se justificaría este desajuste? Es una gota de agua en el océano, pero en un efecto acumulado, si mañana pasara a mejor vida el cincuenta por ciento de los pensionistas de España ¿cómo cambiaría la contabilidad del reino, su perspectivas de recaudación y déficit, el PIB y la inflación?

    Bueno, creo que me he pasado preguntando, porque todo esto que pregunto podría servir de punto de partida para una buena tesis doctoral, o más.

    Pero la pregunta básica creo que se puede responder fácilmente: ¿está preparada legalmente la administración pública para “perder” súbitamente la obligación de pago? ¿No sería todo esto equivalente, en cierto sentido, a un impuesto del 100% sobre la herencia?

    Para quitar ideas malsanas a los políticos, convendría que algún economista elaborara un argumento por el cual el genocidio (o clasicidio) de los miembros de las clases pasivas sería malo económicamente.

    Para hilvanar mi pregunta con el tema expuesto en el artículo, Rallo ha defendido bien la crítica a Oxfam del artero rescate de Milanovic, pero ¿sería menos tremendista la contabilidad de Oxfam si se tuviera en cuenta este imponderable de que los Estados occidentales se vieran obligados a pagar íntegramente los devengos de todos los pensionistas a sus herederos, o bien si el Estado obligara a los herederos a pagar de vuelta un exceso de pagos de pensiones en el caso de que el pensionista hubiera cobrado más de lo que aportó al sistema en su vida laboral? En otras palabras, ¿está sobredimensionada la riqueza real actual de los afortunados ciudadanos de los países más ricos por causa de una distorsión contable masiva en el sistema de la seguridad social?

    (Ahora me duele la cabeza; no tendría que haber escrito esto)

    1. Buenos días Colombo,

      Tranquilo que los políticos no tienen pensado matar a los jubiletas, ni a ningún beneficiario de sus pagas ya que son su caladero de votos para mantenerse en la poltrona.

      Respecto a lo de los legítimos herederos no tiene sentido. Actualmente el sistema no consiste en capitalizar tus contribuciones sino de crear una especie de seguro social común. Al hijo le tocará o no una renta por orfandad. Pero por ser huérfano, no por ser hijo de un contribuyente que pagó más de lo que recibió.

      Un saludo.

  3. A guaranteed job is financially equivalent or very similar to an option to a job (in this case, a put option to sell your labor services, but a very badly defined one since there is no job description and only an average salary). Options have cost and value, but it is different from the value of the underlying asset of which they are derivatives. Options can be in the money (worth exercising) or out of the money (not worth exercising).

  4. I think there is a small typo in the last paragraph “would have BEEN around $100,000, not $300,000”