What an Excellent Idea!

One of my little pastimes (sad, sad geek that I am) is keeping an eye on the latest ideas of one Richard Murphy. He's a retired accountant who writes all sorts of well meaning pamphlets about tax, investment and how we can all make the world a better place. I have to admit that his latest idea really is something of a corker. He notes this line from the Observer:

Stock-market historian David Schwartz says : 'It is one of the biggest myths that shares offer generous returns provided your time horizon is a long one.If you look at average annual returns from 1900, stocks come in at about 1 per cent; it is only if you re-invest dividend income that the figure rises to 4 or 5 per cent.'

He then goes off and designs a much better system for pension savings. We should have a form of government guaranteed bond to invest in infrastructure projects (schools, hospitals and the like). A hypothecated gilt in effect: the money rather than going into general funds goes to a specific project but we've still got that government guarantee so that it's as safe as the promises of future Chancellors. Here's the plan.

I can see a problem or two with this: the government of course won't want to be paying out more on such bonds than if it does borrow to add to the general funds: making schoolsn'ospitals more expensive than they already are doesn't to my mind add to the wealth of the nation. But more importantly, while that return on stocks has been less than stellar, what about the return on government bonds over the same time period? Well, just because these are the figures I first found, here's the numbers since 1945.

If you had invested £100 in equities and reinvested all the dividends, then by 2006 you would have £4,061. If you'd lent the money to the government (gilts) you would have £ 164: if you'd simply left it in a bank account then you would have £197 (all numbers are post inflation and reinvesting gross income and not accounting for tax).

So, our excellent idea is that, given that shares do not provide a large enough return in aiding people to build their pension funds, we should encourage them to invest in something which provides less than one twentieth of the return! In fact, we should encourage people to invest in something that, compared to leaving the cash in Abbey National, actually loses them money!

No, really, isn't that an excellent idea?

Just for your information, Mr. Murphy writes reports for the TUC. No, the logic isn't much better there either.