Ireland’s Hidden Pension Crisis

While back in Ireland a couple of weeks back, I caught a documentary about Ireland’s hidden pension crisis. The financial crisis affected many people in many ways but pensioners (or indeed anyone working in Ireland who plans to retire some day!) took a bit of a serious hit.

In the middle of the boom, many in Ireland built up large debts, often in the form of mortgages either with the goal of putting a roof over their head or as part of a pension plan that involved bricks and mortar (build or buy a few apartments or office units and rent them out to fund retirement).

However when the crash hit, it meant many found themselves squeezed from multiple directions. The drop in house prices left many in negative equity, while at the same time the financial crisis either left millions out of work, or facing a significant cut in their income (less trade in the doors of shops, etc.) To make matters worse the rental market in Ireland, in particular the business rents have taken a hammering (so anyone relying on tenants to pay the mortgage was soon in trouble).

Furthermore in response to pressure on the government’s finances Ireland, like many countries has raised the retirement age. This created serious problems for anyone forced into early retirement, or whose contract required them to retire at a certain age (meaning their forced to live hand to mouth for the next few years as they aren’t yet elible to draw on the state pension, nor claim jobseekers allowance!).

Meanwhile there’s many others who would like to retire, but simply can’t for financial reasons. They interviewed a 70 year old taxi driver, who is still driving his car, simply because he can’t afford to retire and pay off his mortgage on his megre pension. Or a shop keeper who also can’t retire and is working well past the day when its healthy for him to be lifting heavy crates, as that would mean his business collapsing (largely due to mortgage related debts) and him and the wive likely out on the street.

Of course I for one would argue that this is always the danger with property. It looks like a safe bet, but its ultimately unhedged commodities speculation, which as any market trader will tell you is pretty much the most financially risky thing you can do. However, this was always the problem with the build-up to the financial crisis, politicians, in Ireland as elsewhere failed in their job to listen to the warnings (notably those from Economists Morgan Kelly) and they didn’t take away the punch bowl as the sub-prime party got rowdy. But most ordinary folk, who clearly didn’t understand the risks they were taking, just went along with the band wagon.

And now the country is paying the price and with Ireland, like most countries, facing up to the demographics imposed by the baby boom of the 1940’s and 50’s (which means a huge acceleration in retirements) it can only get worse. Consequently while the Irish economy has recovered a good deal by now, most people will tell you that business is still slow as people are still being very careful with their spending.

Quantitative Easing
Meanwhile, the head of the IMF Christine Lagarde urged the UK and US not to be too hasty in ending quantitative easing and implied that Europe should consider a similar policy. I would note however, that while I supported the idea of QE in the Eurozone at the height of the crisis (more to scare off the spiv’s and speculators circling around Greece or Ireland), bringing it in now would be a case of shutting the stable door after the horse has bolted.

In fact quantitative easing had a nasty effect on the situation for Irish pensioners. Scared by the complete lack of action during the crisis within the Eurozone and the apparent possibility that the Germans might actually let Greece or Ireland leave, many Irish (and people in other Eurozone countries) began moving money abroad, notably to UK bank accounts.

Now if you read the Daily Fail, you’d think the Euro was doing badly v’s sterling or the Dollar. Actually since 2007 (when QE started) the Euro has gained in value relative to the pound by about 25%. Hence if you had moved you’re money from a UK account and even if you’d stuffed it under a rug in Euro’s in Ireland, you’d have gained the equivalent of 5% on its value per year, as good as you’d get from a high interest savings account (and of course putting it in a Euro savings account would have netted you more via interest).

However many Irish savers, including many pensioners did the opposite, move money into the Sterling or dollar areas, which means they automatically lost 25% of their savings value due to the UK policy of QE (a price British with UK savings accounts are paying as well I might add!).

The wrong bailout
Ultimately however we can trace the woes of many Irish pensioners and workers back to a faithful decision at the start of the sub-prime crisis in America, when the US government, under G. W. Bush decided to bailout Fannie Mae and Freedy Mac. Ironically, the reaction of many on the left, notably Naomi Klein, was to oppose this act of overt socialism by G. W. Bush and suggest that Fanny and Freedy (sounds like the lead characters in a horror film!) should be allowed to go to the wall. With instead governments focusing on bailing out deposit holders or mortgage holders rather than the Wall street firms themselves.

Now granted it would have been a ballsy strategy. As the implication would have been that the entire banking system in the Western World could have potentially unravelled. While this happened in Iceland and, contrary to what you’ll read in the Wall Street Journal Iceland, didn’t explode and sink into the Atlantic. But that’s a country of a few hundred thousand people, there’s no guarantee that would have worked for the whole western economy and indeed the collapse of Lehman Brothers suggests it could have made the crisis worse.

However, certainly the only reason for rescuing the banks was to rescue Main Street. This fact seems to have gotten lost, either in the way the likes of Fred Godwin (or as I prefer to call him Scottish Holder of Indebted Titles ;D) held onto his pension and the fact that the bosses at anglo or the others in the rogues gallery of bank bosses are not presently in prison.

But more significantly, the bailout of the banks has not included any provision for them to go easy on ordinary people who got in way over their heads during the boom. Consequently these individuals are struggling, not spending or investing (even those with some cash floating around), economies are stagnating and as none of the serious structural changes that should have been implemented on the banks were performed, they’re likely off again building another bubble (most likely I suspect one founded on Shale Gas fracking). For as the LIBOR scandal shows, they’ve learnt nothing since the crisis, its business as usual for them.

Consequently there is a need for governments to revisit their strategies. Far from selling shares in banks, I’d argue for them to be re-structured (and broken down into smaller firms) and providing relief to ordinary borrowers given priority. I’d also look at bringing in new laws with hefty fines and long prison sentences for financial crimes. The best way of preventing another financial crisis is to ensure that whoever is responsible for the next crisis knows they’ll do more time inside that Myra Hindley. For as things stand, the end result is just going to be economic stagnation until the next crisis hits and then we’ll know what a real depression feels like!

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2 thoughts on “Ireland’s Hidden Pension Crisis

  1. QE only benefits the Banks and the financial markets – we are all poorer now except the very rich who are richer and when the next crisis hits there are even bigger banks now –so too big to fail will be the motto again…. If QE is stopped the US will collapse.

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    • I saw the point of QE as a temporary measure to scare away the spiv’s and buy time to stablise things. But clearly its being used for other purposes. The structural changes that should have been brought in have not been implimented and now, as you point out if QE were removed the panic that results could be worse than the panic it was originally meant to thwart!

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