Why Branko Milanovic is wrong on wealth under socialism

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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