Housing, Pensions, and Jobs: Win-Win-Win
Providing decent pensions in an ageing society, overcoming the affordability crisis driven by skyrocketing housing costs, and creating better-paid jobs for workers without university degrees are all essential to securing social peace and democracy. A compulsory, state-owned second-tier pension fund required to invest its capital exclusively in social housing can address all three challenges at once. Yet it demands a fundamental shift in mindset.
For years, the financial industry has successfully pushed governments to shift from state-run, pay-as-you-go pension systems to private, capital-funded models, and from defined-benefit to defined-contribution schemes. In defined-contribution systems, all investment risk falls on retirees. Pension funds can promise high returns and venture into ever riskier asset classes – from bonds to stocks and, more recently, private equity – without shouldering losses when markets turn. Retirees may lose their savings, but the funds’ business remains unscathed.
As pension funds accumulate capital, they act as relentless investors, fuelling asset inflation by channelling vast sums into equities, real estate, and other assets. In the process, they often push prices well beyond their fundamental values. By inflating property prices, they make homeownership nearly impossible for many young people and force the poor (and increasingly the middle class) to devote ever-larger shares of their income to rent.
Private Funds vs Public Funds
In the pursuit of high returns, funds have also invested heavily abroad, exporting capital from the societies where pensioners and contributors actually live. Meanwhile, the administrative costs of competing private pension funds far exceed those of efficiently run state funds: private funds need armies of salespeople to attract customers, they skim contributions as profit, and they lack the economies of scale that keep public systems lean.
Rising asset prices disproportionately enrich those who already own stocks and real estate, helping the wealthy grow wealthier. A financial-market-focused pension system effectively provides ‘social assistance’ to the rich. But the dynamic of overvaluation cannot last forever. As funds mature and more payouts must be made, demographic shifts will simultaneously produce fewer contributors. Pension funds, which own between 15% and 25% of the global stock market, will increasingly shift from being net buyers to net sellers of assets, contributing to stagnating or even falling share prices. Private investors can quickly move their money into cash, but large institutional pension funds cannot. Under such conditions, they will likely deliver far lower returns than currently promised.
It would be far safer and more sustainable for pension funds to invest in real assets rather than financial portfolios. There is a massive need for social and affordable housing across most societies, particularly in larger cities, where many people must either spend a huge share of their income on rent, squeeze their families into tiny flats, or move to distant suburbs. Linking a supplementary pension fund to the financing of social housing construction is an obvious solution.
Capital would no longer flow into speculative investments or foreign markets but would instead be channelled into municipal, cooperative, and other non-profit housing associations. These associations could compete for the fund’s investment capital on a transparent basis. A decentralised model guards against the creation of large conglomerates dominating the housing market, opens space for tenant participation and innovative housing initiatives, and avoids the risks associated with institutions that are too big to fail.
In the early years of such a fund, no pension payouts would be required; they only grow gradually as the system matures. During this initial phase, all contributions and returns could be reinvested in building homes. The continuous rental income from the growing housing stock would guarantee stable, low-risk returns of around 3–4%. With a monthly income of $4,000, a 2% contribution should – assuming that nominal wages rise at least with inflation – generate a supplementary pension of roughly $800–$1,000 in real terms after 40 years. At the same time, the pension capital would create affordable housing and help bring down spiralling rents.
Pensions for the Common Good
This approach would particularly benefit younger generations, not only by building a pension for their old age but also by immediately making housing more affordable. By funding decentralised local housing associations, it would also create jobs and opportunities for communities to participate in urban planning and housing policy, strengthening local democracy and rebuilding social cohesion.
Construction is one of the industries least affected by globalisation and can be a powerful engine of job creation. The building trades tend to offer better wages than low-skilled service work, providing workers without university degrees with decent incomes. Stagnating or declining real wages among these workers have been one of the most important factors driving the rise of right-wing populism, particularly among younger men. Creating more construction jobs while building affordable housing would therefore have a dual positive impact, especially for low-income families.
In Germany, for example, at least 100,000 to 150,000 social housing units must be built each year over the coming decades to reverse the trend of rising rents, which are driving many households into poverty. This would require annual investments of around €22 to €33-billion. A compulsory pension fund contribution of 2% from all income earners – including civil servants and the self-employed – could generate revenues of approximately €33-billion per year.
Unlike subsidies for private investment in social housing, where landlords are required to charge low rents for only a limited period, non-profit housing associations create permanently affordable homes. A massive expansion of social housing would be especially significant for younger and less affluent people, who are far more likely to rent than to own. In metropolitan areas, it would allow ordinary people to go on living in their cities rather than being pushed to the margins by gentrification. In the German case, building 150,000 new units per year would have a cumulative effect on rent levels over time – not only creating affordable housing but lowering rents across the board. This effectively raises real wages for tenants and reduces the burden on public budgets for housing subsidies and income support.
Strengthening domestic demand in this way makes the economy more resilient in difficult geopolitical times – to say nothing of the employment effects of an expanding construction sector. The only losers from this combination of better pensions, more housing, and new jobs are the financial sector, property speculators, and rent-seekers. Everyone else wins. •
This article first published on the Global Labour Column website.
