The stock market has hit record highs and public pension funds are reporting record levels of capital, yet public pension costs keep growing, leaving some observers puzzled. A new book by French economist Thomas Piketty helps clear up the confusion.
In his book, Capital in the 21st Century, Piketty explains that capital is wealth derived from past activities (e.g., your savings represent wealth you accumulated over the past) that combines with labor to produce, and split the benefits from, economic growth. Everything works fine so long as returns promised to capital are lower than economic growth rates. But when returns promised to capital are higher than economic growth rates, Piketty says the past “devours the future.”