Our present personal debt hell is putting our future at risk
But the Finance Minister does not seem to keen on the idea. People have to be persuaded to save to provide for themselves in the future rather than expecting the State to do it then. An aging population means that the numbers who will be claiming from the State in the future will be enormous; it will be an extraordinary drain on the taxpayers of the future, given that pensions are paid out of a government’s current revenues. No point in adding to that number by allowing people to run their private future pension pots now.
However, the State has done exactly what it will not allow its citizens to do. One of the good things that Charlie McCreevy did in government was to establish the National Pension Reserve Fund, with the idea of creating a pool of money to pay pensions from 2020 onwards when the needs would become much greater than they are presently. Unfortunately, much of that money has been diverted from good investments into the banks and the fund’s value is a fraction now of what it was once. However, it did allow the State do what it felt was required to prop up the banks. Why should people be stopped from propping up their own financial positions with their savings?
The one drawback is that the indebted could find that the one thing they have to look forward to in the future — the prospect of a secure pension — could be taken away from them by banks seeking to recover as much of a borrower’s debts as possible. But many would rather have the opportunity to use whatever resources they can muster to pay off debts too and get banks off their banks. They can start saving for the future again once the strain of dealing with the present is over.
Yet the Government does not seem keen on helping people to help themselves. It is too focused on dealing with its own debt, knowing as the national debt or public debt, and the bank debt, to be overly concerned about the massive debts held by many of the country’s citizens.
Goodbody Stockbroker economist Dermot O’Leary estimated recently that “Irish household debt is about 200% of disposable income and, at that level, it could take between five and seven years to get that back down to “normal’ levels”. He said the International Monetary Fund is appreciative of how this will hamper the economy’s ability to recover but claimed that the other members of our lending trioka, the EU and European Central Bank, seem almost obsessed with public debt.
Yet look at what has happened to our citizens. Latest Central Bank figures estimate that the economic crash wiped more than €230bn off the net worth of Irish households, equivalent to €51,500 for every man, woman and child in the State. This is almost half of the total wealth lost across all sectors of the economy, mainly because property values crashed by more than half. The total net worth of households fell to €413bn by the middle of last year, which works out at about €92,149 for every person. This represents a 36% fall from the peak of €641bn in the heady days of late 2006.
Now you can argue that much of that “wealth” was not real. It was not cash, but the notional and unrealistic values applied to property and other assets. But debts are very real and have to be repaid.
There are also issues as to who suffers to the most, usually those on what are called middle incomes, far from rich but earning above the limits set for the granting of social welfare support. The Central Bank agrees that people on higher incomes lost more because their houses depreciated more but found that lower-income families are more likely to be in arrears with their mortgages or rent because they are likely to have less access to money at times of financial stress. Arrears rates among lower-income groups are running at twice the overall average.
However, I suspect that many middle-income people, and those between the ages of 35 and 55, have run out of savings or the means to pay their debts. This is why access to pension funds to meet such commitments might be worthy, especially as this is the case of person more likely to be hit property taxes and other State imposed levies in the future.
Something has to be done to help those with excessive personal debts yet the political establishment seems set against it.
Late last year O’Leary and UCC economist Don Walshe produced a paper that they present to the Kenmare Economic Forum. In it they warned that the government, the banks and the citizens could not all reduce their borrowings simultaneously without sending the economy into a tail-spin. If everyone emphasised reduced spending and debt repayment there is no way the economy can grow (other than depend on exports). “Ireland wants to reach a destination whereby it will have a smaller private debt level, a smaller banking system and stable public finances,” they claimed. “The current policy course is inconsistent with the achievement of all three goals in a reasonable timeframe and sustainable way.”
Fine Gael TD Peter Matthews believes in debt write-off as the solution, not of the State’s debts (which Taoiseach Enda Kenny keeps emphasising is not being sought) but of those related to the banks that had to be rescued by the State at such massive cost.
Some months ago, Matthews wrote about a meeting of global central bankers that took place in Wyoming in August. They had analysed the impact of the combined debt levels of governments, households and businesses on economic growth across a number of countries. The conclusions were that government debt in excess of 100% of national income, household debt in excess of 85% of national income and business debt in excess of 90% of national income all damage growth. Matthews argued that government debt in Ireland stood at 137% of national income; household debt is 147% of national income and business debt is 210% of national income. He estimated that the combined total for these three debt elements was 494% of national income, or almost twice those of the Greek economy. For every €1bn of debt in the Greek economy, there is €1.8bn in the Irish economy.
Matthews has argued convincingly that the current Irish combined debt levels “will suffocate any chance of a robust economic recovery”. He has pointed out that the Irish banks owe around €150bn to the European Central Bank and the Irish Central Bank that about €75bn of this was lent to the Irish banks by the European Central Bank to enable the banks to repay bondholders in full. This is money that should not be repaid on moral as well as economic grounds.
Matthews though has also argued that such a writedown would be part of the chain, that they would have to passed on to households and businesses as well, to provide a stimulus to the economy. And yet writedowns of this nature would only result in Ireland moving only one place down the international league table of the most highly indebted, putting us just one place below Japan. Such figures provide a compelling argument as to why savings for the future — in the form of pensions — are badly needed by a generation for whom the present is a highly indebted hell.
* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
