Thursday, June 21, 2012

Irish Inequality: Lavish public staff pensions and decimated private ones

Ireland is among countries where private sector workers face huge falls in pensions income. In the period 2001-10 in the 34 mainly OECD developed countries, real (inflation adjusted) pension fund performance was a paltry 0.1% yearly on average. Where public pensions are relatively low and private pensions voluntary, such as Germany, Ireland, Korea, Japan and the United States, large segments of the population can expect major falls in income upon retirement.

Meanwhile, Irish politicians who have one of the world's best pension schemes, linked to earnings, are presiding over the accelerated death of defined benefit (where there is a guaranteed payout related to earnings) schemes for the minority of private sector workers who have an occupational pension.

The Irish Pensions Board says that 80% of Irish defined benefit schemes are in deficit and it has set new minimum funding standard (MFS) rules which require pension schemes to have enough assets in place to secure pensioner liabilities and other accrued benefits if the scheme were to be wound up.

In 2010, Irish pension funds still held average equity allocations of 50% compared with Netherlands pension funds, which held an average equity allocation of 26% and in Switzerland 30%.

In the UK, average allocations to domestic and non domestic equities fell by 4% (from 47% to 43%) in 2011. In Ireland the current average allocation to equities is 44%, down 6% from last year and down over 20% since 2008 (Finfacts Premium).

Irish pension fund returns May 2012

Meanwhile, the Irish Government has a 40-year plan to reform public pensions that are unfunded but the annual cash cost is heading for  €3bn. Read more here.

This week, John McManus, business editor of The Irish Times wrote on plans to hoover up private pension funds that will increase the risks for funds that will struggle to produce returns in teh coming decade.

The following was my comment:

Ireland is among countries where private sector workers face huge falls in pensions income. In the period 2001-10 in the 34 mainly OECD developed countries, real (inflation adjusted) pension fund performance was a paltry 0.1% yearly. Meanwhile, Irish politicians who have one of the world's best pension schemes, linked to earnings, are presiding over the accelerated death of defined benefit (where there is a guaranteed payout related to earnings) schemes for the minority of private sector workers who have an occupational pension.

It has been official policy to keep employer social security low but the politicians have feathered their own pensions nest well and those of public sector staff.

In 2010, Irish pension funds still held average equity allocations of 50% compared with Netherlands pension funds, which held an average equity allocation of 26% and in Switzerland 30%.

Almost 2 weeks after HSBC Bank revealed huge losses on subprime mortgages in the US, Irish bank shares hit an all-time record on Feb 21, 2007. How many well-paid fund managers bet with others savings that the

The Irish free lunch fairytale was going to continue?

Responsibility for semi-State and university pensions was assumed directly under the Financial Measures (Misc. Provisions) Bill which was rushed through the Dáil in just three days in 2009. The National Pensions Reserve Fund is now responsible for these funds and the deficit in the funds exceeded €1bn according to a 2010 response to a  Dáil question by the then Minister for Finance, Brian Lenihan.

The university deficits amounted to about €630m led by Trinity College at €315m.

While the majority of Irish private sector workers have no occupational pensions and those who do face the prospect of meagre payouts, it has been an exception in universities for both academic and non-academic staff  to retire without additional pensions years allocated.

This is an expensive perk and of course coming from the public treasury, there wasn't much to worry about.

In  a report, the Comptroller & Auditor General said additional years had become a feature of pension awards in universities. By way of example, in UCD 78% of staff retiring between October 2007 and September 2008 had years added to their service for pension purposes.

Similar provisions apply in other universities - - Trinity College stated that since 1972, on the basis of custom and practice the award of added years has become a legitimate de facto entitlement under its Master Pension Scheme and that Scheme members were advised that they had been granted added years.

How can a civil servant in a bankrupt state retire at the age of 57 with a lump sum payment of €428,011, a special top-up of €142,670 (for senior civil servants who retire early) and an annual pension of €142,670?

Brian Cowen, former taoiseach, retired at 51 and his ministerial and TD's pensions gives him about €150,000 per year. Cowen also received a tax-free pension lump sum of around €150,000 (three times the value of his TD's pension) and a termination lump sum of around €16,000.

The net cash cost of public pensions (after an employee's normal deductions) was €876m in 2001; €1.4bn in 2006; €2.0bn in 2009 and €2.3bn in 2011 and will rise to €2.7bn in 2015.

I was recently informed that the Irish unit of Atlas Copco, a Swedish multinational, was winding up its existing pension scheme and cutting benefits. I worked in AC for 12 years. The group is in fine shape but it suits under Irish law to claim poverty and screw potential pensioners like me.

So private sector workers who are lucky to have pensions, take a hit while the shortfall in university pensions is borne by the taxpayer and of course that has coincided with academics calling for the burning of bondholders and maybe consequently also some private sector pensions.

Monday, June 04, 2012

Germany cannot alone bring a return to economic growth in struggling European economies

An article by Derek Scally, German correspondent of The Irish Times, on Chancellor Merkel, was published on June 02, 2012.

This was my comment:

It's ironic that it was France that pushed Germany to support the creation of the euro as a quid pro quo for support for German unification but despite the euro in existence since 1999, it has not balanced its budget in any year since 1974 and its national debt to GDP (gross domestic product) ratio rose from 22% in 1975 to 90% in 2010. In addition, it has had a trade deficit in every year of the last decade.

France in 2011 had a deficit of €70bn compared with Germany's surplus of €158bn - - only 12% of the latter related to the Eurozone and two-thirds was ex-EU27. In effect, Europe would have been poorer without the global success of Germany's world class companies.

"Did I mention that -- after unification -- the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results? That wasn't long ago," Tyler Cowen, a US economist, commented in 2010. "And yet somehow it is a mystery, or a strange annal in some long book of Dogmengeschichte, that the Germans are not more interested in Keynesian economics."

Despite massive public spending since 1991, GDP per capita in the former East Germany is about 70% of the level in the former Federal Republic. Convergence within Germany or in the Eurozone, is a very long process.

Even if the weakest German regions were to grow a steady 4 percentage points faster than the strongest regions, it would them take more than 45 years to catch up.

In Europe, without checking the facts, commentators and economists can wrongly assume that the Germans are Europe's biggest savers and have no memory of the fact that as recently as 2003, Prof. Hans-Werner Sinn of the Ifo institute, had a book published: 'Ist Deutschland noch zu retten?' (Can Germany Be Saved?) - - Its blurb read:

“Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. It’s growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe. “

The sick man of Europe!

The benefits of reforms with flexible wage agreements were seen during the recession and up to 1.5m people were kept at work with the help of public subsidies. It's not all roses and in the services sector, there are too many on low pay dependent on public top-ups.

In France, President Chirac ventured into the minefield of reform in 1995 but he soon threw in the towel.

The UK's gross debt/GDP ratio is expected to be 88% this year compared with 145% in 1956.

Sir Samuel Brittan, veteran economics columnist of The Financial Times has commented: "The second world war was financed in the UK with a 0.5% bank rate. Why should it be more alarming for governments to get into debt to put people into useful work satisfying human needs than to borrow for guns and tanks whose only aim is to kill other human beings?"

Governments tend to do a lot more these days and a French male typically retires at 59 - say entering the workforce at 24 and living until 80 - - - 45 years of dependency. The French have a social security tax on wages of an average 40% (30% paid by the employer) and no country can now afford cradle to grave 'socialism' - - and in China, unlike France, most people have to purchase health services.

In countries such as France, Spain and Ireland, some groups have disproportionate benefits while young workers maybe lucky to get temporary work. In Ireland, the majority of private sector workers have no occupational pension while public sector workers have pay premia; guaranteed employment and a pensions scheme linked with earnings.

It all adds up and in 2011, the public pay and pensions bill (ex-local authorities) was over €17bn -- compared with €16bn in 2006 -- the peak year of the boom - - and €10bn in 2001. The social protection budget was €8bn in 2001 and €21bn in 2011.

There is need for reform because the global market is no longer Western Europe, US, Canada and Japan.

What is often ignored in Europe is that the growth crisis is not new and pre-dates the euro. Until the bitter truth is faced, the remedies will not match the challenge.

Eurozone countries like Italy, Spain and Greece have had trade deficits with Germany since at least 1980 -- 20 years before the euro launch. The International Monetary Fund (IMF) says the euro is a continuation rather than a structural break and the Fund's statistics show that since 1999, Germany's trade surplus with the rest of the world has grown faster than its surplus with the other Eurozone countries -- and faster still with European nations that have not adopted the euro.

Marco Annunziata, an Italian economist, says that implausible as it sounds, Italian voters have put up with an average youth unemployment rate of 30% for the last 40 years; Spanish voters with a rate of 32%. Italy experienced “strong” economic growth during 1994-2000, with GDP rising at an annual average of 2%. During this boom period, the youth unemployment rate still averaged 33%. In other words, one young person in three was unemployed when the economy was at its strongest. The rate never dropped below 20%.

Spain’s economy grew at an average of 3.6% between 1995 and 2007. During this impressive run, the youth unemployment rate averaged 28%; it was below 20% for just three years, with a “best performance” of 18% in 2006.

In 1994, Spain's total jobless rate was over 24% in 1994, 21% in 1997 and 8% in 2007 and back to 24% in 2012. Italy's jobless rate was higher in 1996 than it is now.

Italy's economy grew at an annual rate of 0.3% in the last decade. Ex-property booms in Spain and Ireland and a credit boom in Greece, there would have been no growth.

Much of UK growth was an illusion powered by public spending and the financial services boom.

Ireland's jobs in the internationally traded goods and services are below the 1999 level. In the period 2000-2007 -- the bubble years -- no jobs were added as employment grew in other sectors by 430,000.

Indigenous trading firms typically export about 35% of output and the sector added 10,000 jobs but the FDI sector lost 10,000 net jobs.

More on the Irish jobless exports surge here:

Reform is a dirty word in many countries in Europe because vested interests rightly fear change.

The World Bank's 'Doing Business 2012' rankings of the ease of doing business in 183 countries puts Greece at 100, behind Yemen and Vietnam and just ahead of Papua New Guinea. This compares with Italy at 87, just behind the former communist ruled Mongolia; Spain is at 44; Portugal at 30 and Ireland at 10.

There can be a case for long-term investment in current times. However, EU funds have supported significant improvements already in Greece, Ireland, Spain and Portugal.

Despite superior infrastructure, inward FDI as a percentage of Greece’s GDP averaged only about 1% from 2004 through 2010, compared with an average of 8.1% in Bulgaria, Turkey and Romania.

A solution will have to be a two-way street.