Autumn 2014 Issue of Economic and Social Review

So the most influential foreign economist in Germany is in fact a psychologist!

@Peter

How should we define “economist”?

re: Pension Coverage Report by Sanna Nivakoski above:

That is an excellent and comprehensive report that makes shocking reading for private sector employees who hope to live long enough to retire.

On an overall basis, Table 4 presents a fine summary of Ireland’s retired:
Of the bottom two income quartiles (50% of the retired population), about 87% of their income comes from either State Contributory, Non-Contributory or Social Welfare. In other words half the retired population is living pretty much, if living is the word, on the State pension which has a max of 230.30 per week.

In addition 49% of all male private sector employees, now retired, has no private pension coverage at all. [Table 5]

There is clearly a compelling societal case for a mandatory, employer and employee funded pension scheme for all private sector employees.

The politicians and PS, with their saver-than-houses pension provision, should be thoroughly ashamed to preside over the kind of pension apartheid that the report illustrates.

@docm

Few people will talk against their own book.

Didnt take long for the public sector to be blamed i notice. For …whatever
Its a regrettable tendancy for this blog that absent moderation EVERY thread degenerates.

Joseph
Wasnt there a plan to have mandatory pension coverage.? Is that now dead
And isnt there a state funded old age pension? To say private sector workers have no pension is simply wrong. They have, its the contributory or non contrib OAP. And wasnt the NPRF set up to make the public sector pension a more defined contribution process but was instead burned to save the pensions of those who invested in irish bank bonds? Has there not been a sea change in moving public sector pension coverage towards a more DC approach with a fairer charge on those in and a much changed system for those entering?
Googling “public sector pensions ireland ” i found these two links

http://notesonthefront.typepad.com/politicaleconomy/2013/06/those-darned-public-sector-pensions.html
and

http://www.nerinstitute.net/blog/2014/06/08/some-data-on-public-sector-pensions-in-the-republi/

Feel free to have a gander…

@ Sam Maguire

I should add that the fact that many public servants are in receipt of very poor pensions – the argument invariably advanced by the unions, as in your links – is not the issue. The question is how pensions for ALL workers are funded and calculated. Workers not employed by the state cannot legitimately be expected to fund – through their taxes – without complaint the pensions of those employed by the state on a DB basis (with no sign of change in the offing) while they have either no pension provision themselves or have to fund them on a DC basis.

http://www.irishexaminer.com/business/pension-levy-will-cost-workers-9000-288558.html

@ Sam Maguire

Of course! The defence “we pay taxes too” is also invariably heard. But that, again, is not the central issue. It is the basis on which pensions are calculated and funded across the work force. Not a simple matter but one that has to be addressed if for no other reason than the fact that the unfunded public service pension liabilities of the state are by now enormous.

DOCM

I have 2 links for you

a) the history of the EM and constant revaluations

http://www.kc.frb.org/PUBLICAT/ECONREV/econrevarchive/1993/4q93HIGG.pdf

b) the substantial, permanent shift of majorities in Germany and consequences

http://www.zerohedge.com/news/2014-09-26/sp-warns-germany-anti-euro-political-party-soars-popularity

The standing of the Bundesverfassungsgericht is impeccable, in stark contrast to the criminal behavior of many institutions in other countries.

DOCM,

please expand on your extremely weird claim “judicial restraint does not seem to have much weight in Germany”

@Sam Maguire

It is better to look at the private sector pensions issue from the point of view of what employers are paying or as it turns out mostly not paying in retirement benefits, rather than seeing the issue purely in terms of the disparity in benefits between private and public sector employees.

I would be interested to know for example what ABP Foods (Goodman group) pay in employee pension contributions. The same goes for Denis O’Brien controlled companies and other large private sector employers.

I had a quick look at Ryanair’s accounts, and as far as I can tell (Note 18, Page 189), Ryanair contributed the princely sum of 2.6 million in 2014 to defined contribution pensions of employees. Ryanair’s total wage bill came to 441 million; so about 1/2 % of wage bill goes towards the defined contribution scheme members, the defined benefit scheme having been closed during the year. I may be misinterpreting the note but it would be interesting to know the facts of the situation.

http://corporate.ryanair.com/docs/corp/investor/2014/final_annual_report_2014.pdf

So in effect the State is allowing very profitable companies, with so-called high powered executives, to blow about their success and trouser the profits, while the majority of their employees will have to depend pretty much fully on the State to support them in retirement.

Not a very good deal for the State or the employees involved.

We need the blow-h$oles in such private sector companies to stop blowing and start paying.

@ francis

FYI

From the Encyclopedia Britannica

“Judicial restraint, a procedural or substantive approach to the exercise of judicial review. As a procedural doctrine, the principle of restraint urges judges to refrain from deciding legal issues, and especially constitutional ones, unless the decision is necessary to the resolution of a concrete dispute between adverse parties. As a substantive one, it urges judges considering constitutional questions to grant substantial deference to the views of the elected branches and invalidate their actions only when constitutional limits have clearly been violated.”

I am sure the judges of your constitutional court are a fine body of men and women. However, to say that they do not subscribe much to the above legal doctrine is simply a statement of fact.

@ francis

By all means!

https://www.bundesverfassungsgericht.de/en/press/bvg14-009en.html

Dissenting opinion of Judge Gerhardt in relation to the first – procedural – aspect;

“I hold that the constitutional complaints and the application in the
Organstreit proceedings, in so far as they relate to the OMT Decision,
are inadmissible. The Senate’s decision extends the possibilities of the
individual to initiate via Art. 38 sec. 1 GG – without connection to a
substantive fundamental right – a review of the acts of Union
institutions by the Constitutional Court. By admitting such an ultra
vires review, the door is opened to a general right to have the laws
enforced (allgemeiner Gesetzesvollziehungsanspruch), which the Basic Law
does not contain.”

Dissenting opinion by Judge Lubbe-Wolff on the second – substantive – aspect.

“In an effort to secure the rule of law, a court may happen to exceed
judicial competence. In my view, this has occurred here. The motions
should have been rejected as inadmissible. How Bundestag and Federal
Government are to react to a violation, martial or non-martial, of
German sovereign rights is a question that cannot reasonably be answered
by rules making certain predetermined positive actions mandatory.
Selecting from the variety of possible reactions, which range from
expressions of disapproval to an exit from the Monetary Union, can only
be a matter of political discretion. Accordingly, it comes as no
surprise that no such rules are detectable either in the text of the
Constitution or in the case-law interpreting it.”

In normal circumstances, what a national constitutional court decides is solely of concern to the citizens of the country in question. Not so in this instance!

For bookworms who haven’t yet noticed, and have an interest in banks’ capital adequacy in Europe (see the bit about Santander) here is some topical audiovisual on the relationship between the Squid and its pet Fed:

http://ftalphaville.ft.com/2014/09/26/1984512/46-hours-later/

@ francis

I would like to think that the majority view is always correct. However, in the matter of decisions by final courts of appeal, the record tends to prove the opposite as was the case with an unfortunate majority decision known as the Crotty judgement (1986) in Ireland. This made referendums almost de rigeur on all matters relating to changes in EU treaties. I hope that the constitutional court in Germany does not end up making a similar error. I doubt that it will!

@docm

What do you mean “where is the mystery?” ?

What “mystery”?

You have been hanging around this blog long enough to be able to understand that the presentation in the IT article is misleading. Why bother to spin this – selling these bonds beyond the minimum schedule is something the Irish CB and government did not want to have to do. The article presents it as a beneficial achievement.

Why not just be straight about it and say it is an unavoidable consequence of the return of financial stability?

@ Ufc

My apologies! The question was innocently meant.

My point is that the link made between the two issues by the ECB is fairly evident although, admittedly, the IT article only hints at it. That the sale of the bonds can actually be accelerated given present market conditions is surely good news.

It is not, however, IMHO an unavoidable consequence of the return of financial stability but of the ECB guarding its flanks.

This quote sums up present reality in the EU/EZ.
“The truth is that the attitude of Euro area policymakers, and indeed of many northern Europeans, to periphery countries owes little to common sense, or even good economics, and much to moral and ideological belief in hard money, tight budgets and mercantilism as the path to prosperity. When macroeconomics becomes a morality play, debt is equated with sin, and debtors must atone for their crime with hair shirts and self-flagellation. The Glienicke group’s call for creditors to be held responsible for excessive lending inevitably falls on deaf ears.”

http://www.nakedcapitalism.com/2014/09/frances-coppola-simon-wren-lewis-modest-proposal-vs-austerian-federalists.html

Ireland is compared to Iceland, not favourably.

http://www.nakedcapitalism.com/2014/09/iceland-bankers-convicted-unemployment.html

@DOCM

You are missing something.

The arrangement was circular, but with a defined timetable specifying amounts and date of release of the bonds into the market, at which point the bonds become a true cost to the State.
Any early release pulls forward the point at which the interest cost is no longer circular, but becomes a net cost to the State.

Even if the bonds sell now, the immediate capital gain to be received on the par value, (due to the better interest they pay), will be offset by a higher interest cost that the State will pay on these bonds, versus what the State would currently pay on the ‘open’ market.

It would be another example of taking the gain now, and leaving a higher cost the next generation; pretty typical of Irish policy from the outset (2002) of the crisis.

The Ir Times did itself no credit with the way it reported the proposal.

@DOCM

I would defer to Karl Whelan on this issue, because it seem to me that there several issues that you don’t wish to acknowledge here.

1. Private investors taking on the risk (at a profit to the CB).
But you forget to mention the net cost to the State!

2.”………..agreed with considerable reluctance by governments unwilling to make their own taxpayers pay and with doubts as to its legality against ”
The ECB doesn’t like the deal they dictated, firstly to keep Anglo alive at Irish expense with ELA and then a promissory note payable by the Irish State, and then the conversion of those PNs into an arrangement (presumably nodded through/’noted’) by the ECB, in order to ensure this country’s stability.
Now the ECB, whose initial action dictated the necessity for the deal, (by insisting on keeping dead banks open) wants to welch on that deal, and stick it to this country again!!

The Irish govt should, tomorrow, reissue the bonds based on current market rates, with the same schedule.

No more Mr Roll-Over. The ECB should be told to take a hike.

@ francis

If you wish to quote me, please do so correctly. What I said was “I would like to think that the majority view is always correct” but the record shows that this is often not the case and gave you an example in Ireland’s case with which I am familiar. I happen to agree strongly with the views of the two dissenting German judges and I am willing to wager that the outcome of any subsequent judgement by the constitutional court will be the same as previous judgments i.e. further restrictions on the freedom of action of the German government but no really radical decision such as stating that a breach of the constitution has taken place.

@ JR

I did not mention the cost to the state as I did not see the need to, this being the fundamental background to the entire saga. What is at issue is reducing that cost which I cannot see as anything other than a good news story. Doing the sums is beyond my technical capacity but I am assuming that this is not the case for those taking the decisions and we will (i) come out financially ahead and (ii) fully rejoin the ranks of countries participating normally in the international bond markets.

The Swedes were the leaders in Pension policies at the height of their prosperity in the sixties and seventies. The Swedish consensus at that time was that for a defined benefit pension, retiring at age 65 (max 35 X 2 = 70%) with a cap of 35 years work paying 2% per year service based on the average of the last 5 or 6 years gross pay. Spouses at the time of retirement would be entitled to 50% on the death of the contributor.
Defined benefit deductions required were deemed to be 17% of gross pay with the employer and employee paying 8.5% of gross pay each.

In practice 17% deductions led to surpluses in pension plans which were removed to the benefit of the employer periodically. The reasoning being that surpluses and deficits were the responsibility of the employer, you cannot have a legally binding case to guarantee payout without the balancing
act.

The Swedish model has been widely adopted in the developed countries.

I should add that most developed countries have a mandatory universal Old Age Pension plan that all employees and independent contractors up to a ceiling of about half to 2/3 the average wage in industry contribute to. This typically provides about 25% of work income in retirement (known as the floor). At the moment the big debate is that private sector pensions and individual pension funds are being eaten alive by fees. In a nutshell the management fees are higher than the return on investment.

Needless to say the private and public sector pension plans have to be seen as fair and equitable. If the private sector descends into defined contribution hell while the public enjoys defined benefit heaven it will not be long before everybody is in defined contribution hell. It is for this reason that the debate in pensions now is around reducing management fees and increasing the basic universal government administered (OAP) pension plans from 25% to 50% of work income in retirement.
Like everything in life there is no free ride and there are pension plan deductions from wages. Higher pensions would ride on top of the basic mandatory and universal plan.

Look up Canada Pension Plan and Canada Pension Plan Investment Board. Look at management fees.

@ Mickey Hickey

Things have moved on considerably in Sweden in the matter of pensions.

http://www.government.se/sb/d/15473/a/183496

Not so in the UK!

http://blogs.telegraph.co.uk/finance/jeremywarner/100009757/theres-nothing-unaffordable-about-public-sector-pensions/

But at least the UK economy can carry the cost of public sector pensions if the above commentary is to be believed.

@DOCM
Little has changed, the premium moved up from 17% to 18.5%.
The floor is still in place with an income ceiling. On top of the floor the income based preferred pension is now administered by a gov’t agency since 2010. I am not sure of this but it now appears that the private sector has been shut out of the higher income based plans that existed prior to Jan1 2010.

In Ireland with the economy weakened the gov’t should confine itself to basic OAP of not more than 50%. The private sector can weigh in above 50%. Individuals are free to invest privately and to buy annuities on retirement. Gov’ts have the problem of supporting the poverty stricken 65+ by either making contributions mandatory to cover a pension at the poverty line or handing out a Guaranteed income supplement not supported by contributions (coming out of General Revenue). Defining poverty is tricky but 25% of employment income is considered to be too low and 50% is considered to be high.

The Swedes have had a decade of right of centre government I am surprised that they expanded the state’s role in Pensions. It is quite possible that they saw it as a contribute now because we will be paying later whether you contribute or not.

@francis
I know that Bismarck was without a shadow of doubt the leader in government provided pensions. The reason I picked Sweden was because I was involved in Pension negotiations where we looked at UK, France, Germany and Sweden. My particular interest was having iron clad guarantees that the pensions would be paid. Sweden at that time had very high contribution rates compared to other countries as well as payroll deductions which clearly identified “50% of a contribution to a pension plan by an employee”. How deficits and surpluses in the plan were dealt with was clearly laid out. Sweden had a thriving economy which made the Swedish model an easy sell. Comparatively speaking Sweden has declined in much the same way that the US has declined. It is interesting to see that their Pension Plans have stood the test of time and right wing government.
There were statisticians, mathematicians, Human Resources specialists, Executives and Union Leaders on the committee. Canadians have a talent for reaching decisions that stand up to scrutiny with an emphasis on what is fair, reasonable and affordable by all parties.

I know little about German pensions now but at that time 90% payout looked high while 70% max looked reasonable. The other issue was to have an actual stand alone pension fund with not over reliance on general revenue and political decisions. Having said that, Germans are content with their pension plans as I have not heard any complaints.

@ All

FYI

http://www.irishtimes.com/business/sectors/financial-services/mandatory-system-required-to-deal-with-pensions-time-bomb-1.1946630

http://www.insuranceireland.eu/news-publications-and-events/news-press-release/insurance-ireland-launches-new-report-a-universal-pension-for-ireland-policy-and-implementation-issues-based-on-international-best-practice

(There appears to be no link to the actual report!).

Time-bomb is the word!