Economics 11/03/2010: Replying to Prof Krugman

Updated: 14/03/2010

I have a choice today - to either deal with the notoriously influential article by Paul Krugman, or respond to a large number of responses to my commentary on the Letter of 28.

I will do both in proportional terms, relative to their substantive weight.

On L28 debate:

I received a number of supportive comments, including from the people who are self-identifying with the Left in their traditional views. Many thanks to all who commented. Please, continue to read the blog and comment on its posts.

I received a number of negative comments:

• A large number of simple 'I do not agree...' ones. Thank you for you comments. Hope you continue reading this blog and commenting on other posts in better force;
• A very small number (3) public comments in other venues that were constructive, engaging, one even funny (Mrs G posted one on her Facebook). I linked one of them (the best one, to my judgment) on the original post. Thank you for these. I strongly disagree with their main points, but I am sure we will continue debating these and I am looking forward to this;
• a large number of anonymous, outright rude and bizarre comments.
  

Now to Professor Krugman.

You are all familiar with his article in New York Times (link here). What's wrong with Prof Krugman's exposition?

"Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac."

Sloppy job. Ireland had one Social Partnership and one 'last standing Socialist' Government of Bertie Ahearn (with Bertie's famous exclamation on the point as "I'm one of the last socialists left in Irish politics," (December, 2004)). This dynamic duo (see Mr Ahern's speech on the role of Social Partnership here, especially the sections on Community and Voluntary Sector incorporation into this structure - a clear sign of Social Partnership becoming over-weight on 'Social' agenda) presided over the gravy train of Exchequer (and local authorities, semi-states, Quangoes and Social Partners) feeding off the property boom. If this was not equivalent to the Federal and Local Authorities in the US fueling property boom through their policies, I am not sure what is.

Note: the World Bank confirms the 'social' nature of the Partnership here.

We had a 20% social housing 'dividend' which inflated prices and restricted supply. Local authorities had an option of either exercising the 20% allocation in full, or substituting in financial contributions from developers. They took charge of this subsidy and run with it. We had zoning and planning laws and practices (perpetuated and perpetrated by the State in its various guises) that:

• pushed development into marginal areas,
  
• reduced supply of suitable land,
  
• curtailed re-development of poorly utilized properties,
  
• supported rural small-scale build up and
  
• lavished tax breaks aligned with the National Spatial Strategies and National Development Plans on shoe-box apartments in depressed and depressing areas where few sustainable buyers would opt to live.
  

We had the Government that was taking over 40% of the value of each new unit built in this country in taxes and levies, thus directly benefiting from this artificial scarcity-driven boom.

We topped the cake with a cherry of one Grand Socialist Scheme that envisioned moving people around the country physically - the Decentralization. It required 'volunatry' relocations, but in the end boiled down to giving public sector workers a fine choice - keep your current job or get re-asigned to something else. No matter what, alongside with the State purchasing vast amounts of 'Decentralization'-bound real estate (that now sits unoccupied) the promise of tens of thousands of public sector employees moving to new locations contributed to expectations of price appreciation in remote areas.

We had some other - Stalinesque in the planning terms (not execution, fortunately) schemes - remember the promises of investment and jobs flowing to BMW, the West, the North West? The Western Rail Corridor? Hardly 'market forces' at their best, these boosted expectations of future returns on property. Taking the case of Luas driving appreciation of land in Dublin and applying this to Western Rail Corridor implies that land and property values in the relatively de-populated parts of the country along the northern arm of the route have increased by 15-20% instantaneously upon the scheme announcement.

Just because we did not have the State pushing jumbo mortgages underwritten by state-owned mortgage lenders onto low income households, does not mean that the hands of the Government and its Partners are not imprinted on the facade of our own property bubble.

Instead of all the American Acts, we had the Social Partners telling the Government "we need more construction for our constituents". The Government did as it was told and collected tax revenue in sacks. It run rings around the handsomely paid and complacent regulators and supervisory authorities, who sat on their hands as the bubble was inflating. Most were appointed into their positions as the 'retirement perk' from their life-long complacency filled civil services jobs. Others - because they were 'friends' of the regime (recall Mr Ahearn famous admission on RTE). The Social Partners weren't cheering them on, they were shouting 'We need more...'. Inchdoney Accord resulted. And appointments of their friends to the positions of power.

The new NDP - with it 'social investment' taking up a third of the funds allocated for the entire 'capital' programme followed. Social housing lists swell in response, as did the coffers of local authorities, who spent the cash on grandiose Palaces of Peoples - their own headquarters. And Gateways to Excellence - shining campuses for FAS and numerous ITs - that remain empty or half-empty. The merry-go-round was spinning.

So we pushed jumbo mortgages from our non-State banks onto ordinary folks to pay for the above largess of the 'Social' State and its 'Social Partners'. Hardly the forces of 'market capitalism' these were.

We distorted returns on every other form of capital:

• Productive physical capital carried a 25% direct rate of tax or 12.5% corporate rate, or both - depending on whether you were a small or a medium business;
• Human capital was taxed at 42%, then 41%, now up to 56% margins;
• Currently vacant apartments sit taxed at 0%.
  

The 'Left' did occasionally protest against the latter - never against the former, and often against the 'low' physical capital taxes. But these protests were not about the bubble - they were about the Irish Left's demands for even more state transfers. By 2005-2007 they were calling on the Government to start pushing property development into becoming a vehicle for financing not only domestic welfarist policies, but even the aid to foreign countries.

The squeeze on the property market was complete - the supply was artificially restricted, demand was artificially inflated and the Government was actively 'talking the market up'. The banks were encouraged to lend and the regulators were directly selected to be complacent, inactive and on some occasions - outright unsuited to run the complex world of finance. Our former Governor of the Central Bank had no idea he could do anything to alter reserve requirement ratios on Irish banks - he was a career bureaucrat, not a central banker.


Prof Krugman says that "What really mattered was free-market fundamentalism." And refers to Ronald Reagan. Ireland never had a single Ronald Reagan moment in its history. Where Reagan believed in the right of people to engage in free enterprise, Irish Government only believed in the right of the State to tax the free enterprise. Post 2002 EU ruling, most of the taxing took place through indirect means, while the Government maintained a low tax rhetoric. Before 2003, during the height of the 'free-market fundamentalism' we had two-tiered tax system, with a 10% or less tax for big MNCs and a punitive 32% for mere mortals. MNCs were encouraged into this country by the wavers and indirect subsidies that reduced their indirect taxes which were levied through the system of state-controlled bodies and companies. This can fool outsiders like Prof Krugman and some insiders (e.g. the Letter 28 authors) to believe that Ireland was some sort of the Friedmanite Happy Land of free markets, but it does not change the reality.

Let me postulate the following theorem to Prof Krugman:

"Independent of how many fingerprints a forensic analyst can collect at any economic crime scene, invariably, there will be one set of fingerprints always present - that of the State"

And a corollary:
"These fingerprints will invariably lead an investigator to something with a word 'Social' or its derivative on it as a core entity partaking in the event".

'Social' as in 'Socialist'. Doesn't really chime with 'free-market fundamentalism'...

Per arguments above, QED.


Note: Hat tip to Anonymous on typos.

Economics 11/03/2010: Debt figures confusion reigns at RTE?

Per RTE report yesterday (emphasis is mine, see original here)

“New figures from the Central Bank show that at the end of January Irish residents - mostly companies and institutions - had an outstanding debt of €1.1 trillion. Figures for issued debt securities indicate that €790 billion worth of this debt is denominated in euro, while the remaining €270 billion is denominated in foreign currencies."

This, indeed, is misleading enough for the non-economist. While RTE choice of words ‘outstanding debt’ might imply ‘total debt’, in reality, of course, the Central Bank note (available here) is dealing only with securitized debt: bonds, notes and debt securities issued, plus equity issued. But it does not include non-securitized loans, mortgages, corporate loans, over drafts, credit cards, corporate invoice-discounting, and even massive volumes of investment fund shares/units.

This, if course, explains how the figures issued today differ from our real total debt measure: the Gross External Debt of all resident sectors, published quarterly (with one quarter delay) by CSO. Q4 2009 is still due for release later this month, but per latest CSO data, in Q3 2009, the gross external debt of all resident sectors in Ireland stood at €1,637bn or €51bn down on the Q2 2009 level – some €537 billion more than what RTE’s note mistakenly labelled to be Ireland’s outstanding debt.

The liabilities of Ireland-based monetary financial institutions (aka our financial system inclusive of IFSC) were virtually unchanged quarter on quarter at €691bn with their share of total debt rising from 41% in Q2 2009 to 42% in Q3.

Similar dynamic took place in Other Sectors – comprising insurance companies and other financial enterprises, plus non-financial companies – where debt as of Q3 2009 stood at €618 billion or 38% of the total, up from 37% in Q2 2009.

Virtually all of the quarterly decrease in our indebtedness came from the Central Bank funds changes. This is why excluding the Central Bank and Government liabilities, total economy debt rose from €1.513 trillion in Q2 2009 to €1.508 trillion in Q3 2009.

Since Q3 2007, the overall debt levels in Other Sectors rose by a cumulative of 15.6%, in Direct Investment sector by 9.3%, and our total debt rose by 8.33%. At the same time, our wealth - or assets side - have collapsed by over 60%.

Only banks have so far managed to de-leverage in Ireland (down 9.8% on Q3 2007) thanks to the taxpayers’s cash. Which brings us to a sad but inevitable conclusion – while banks use our money to write down their bad debts, is it any surprise that the real debt burden in the Irish economy is not declining?

Now, paired with Central Bank information note, if we subtract from the total debt figure in Q3 2009 the approximate IFSC-related debt of €850-900 billion (reflecting both securitized and non-securitized debt held, keeping in mind that most of the IFSC debt is securitized), this leaves Irish resident companies, households, banks, financial services providers and the public sector in the hole for roughly €730-790 billion.

Take this into a perspective: this number is equivalent to

• €165,273-176,485 debt per every man, woman and child in this country – resident and citizen (per latest CSO population data, here)
• Assuming paydown in the amount of our annual public deficit projected for 2010, this debt mountain will take us 41-44 years to pay down without any interest accruing on it (just think of 44 years of austerity and you get the picture)
• At the current interest rate charged on Government borrowing, the annual interest bill relating to our economy’s debt mountain adds up to €36.85-39.35 billion or more than 50% of the total annual Exchequer expenditure (just a reminder, we are being offered a plan to borrow more by the Letter of 28 - here - because, apparently, we have not borrowed yet enough)
  
• Given the average family size in Ireland (2.82 persons per household) and the latest average house price (€242,000 per Q4 2009 daft.ie report), this level of indebtedness is equivalent to 2 houses per every family in the Republic

Shall I go on? Sadly, reading RTE report one might conclude that things are ok: most of our outstanding debt is owed by the IFSC, so no need to worry, folks. Alas, that would be as wrong as calling today’s data release from the Central Bank a true reflection of our debt mountain.

Economics 08/03/2010: 28 Alices in Wonderland of Tasc economics

Update: one of the signatories to the Letter of 28 is responding to my comment here.



After a very lengthy period of navel gazing, Irish left has produced its own platform for economic policy (here). And what a marvel it is. Right out of Alice in Wonderland.

The letter of 28 social scientists published in the Irish Times is worth a read, if only to see what passes for ‘independent thinking’ in our country. Here are few pearls.

“Consumer spending has collapsed while at the same time unemployment and emigration have soared. Crucially, investment has plummeted off the chart. Not only have Government policies failed to stem this haemorrhage, they have actively contributed to this collapse.”

No one can deny these facts. But there are serious omissions here. Investment collapse in Ireland is driven foremost by the collapse in construction sector – the sector that accounted for over 70% of total private investment in this country until 2007. So no - the Government has not contributed to this.

Investment the authors have in mind is the NDP-related allocations, which are less than 50% about real capital and more than 50% about ‘soft’ investments – in equality, poverty reductions, etc (all noble objectives, but hardly affordable in current circumstances).

Note, however, that the 28 ‘leading’ policy lights do not mention draconian tax increases here as the contributing factors. Oh, no – this article is about how good more public spending would be to our country.

“The most damaging are cuts in transfers to low-income groups which, along with general tax increases on low and average pay in 2009, have reduced spending power in the economy at a time when it was most needed.”

Really? Social welfare payments were cut by 4% in Budget 2010. They were raised by 3.3% in Budget 2009, which means that in nominal terms, post-Budget 2010 our welfare recipients are only 0.83% worse off than they were in 2008. And then there was deflation – in 2009 CPI fell 4.5% and HICP declined 1.7%. Say we use HICP, since majority of those on social welfare don’t have a mortgage – their housing costs are usually covered by the taxpayers. This means that in real terms post-Budget 2010 Ireland’s welfare recipients are still 0.883% better off than they were in December 2008. Is that so deflationary, folks?

“Equally damaging have been the cuts in public investment at a time when private investment has plummeted. This has laid the foundations for a low-growth, high-debt future where unemployment will remain high and inequality endemic.”

One can relate to this statement. The problem is that while some of the cuts were to productive investment, the real error of the Government policy has been the lack of systematic approach to assessing the value-for-money of various projects and freezing or canceling outright the ones that do not yield sufficient returns. For example, parts of road building programmes relied on the outdated and often utterly unrealistic expectations of development in remote locations. Binning these ‘investments’ is ok – they are the luxury we cannot afford. Ditto for Metro North – which in its current incarnation is a White Elephant.

And how on earth cuts in public investment are going to make income inequality endemic? During the Celtic Tiger era, income inequality rose (judging by the works of some of the 28 experts), yet public investment also rose. So public investment boosts did not work then for income inequality. Any reason they should do so now?

Irony has it, the 28 ‘wise ones’ have failed to grasp the idea that far from stimulating public investment, we should be stimulating productive private investment – that is what creates sustainable jobs and growth. And to do that we need lower taxes, and less borrowing by the Exchequer, so our banks have no Government bonds to roll over at the ECB lending window.


“Budgetary policies have been short-termist and reactive. Instead of cutting real waste in the public sector by increasing productivity and efficiency, the Government has cut public services and the living standards of those who can least afford it, further reducing domestic demand and, thus, employment.”

I agree with this. The Government has wasted a golden opportunity to have real reforms in the public sector and public spending, as well as taxation. So why would the 28 'wise ones' give even more dosh to such a wasteful Exchequer?


The authors do not understand that increasing consumption – by borrowing at 5-6% per annum to give the money to our welfare system and to pay public sector’s obese wages is taking money out of investment. Instead, they seem to think that both: welfare payments increases and public sector wages can be sustained while increasing state spending on capital projects.

So do the simple additions. To maintain NDP investment at previously planned levels, on top of the current budget deficit we will need some odd €6-7 billion more. To return welfare payments to their 2009 levels, and to reverse pay cuts in the public sector and reductions in employment there, we will need additional €3.4 billion. These are all net of receipts. So the Exchequer will be borrowing some €29 billion this year - 18% of our GDP. What would the Greeks say with their current 12.7% GDP deficit and heading for 10.7%?

What would the bond markets say? Ah, here we come to the interesting part that the folks in Tasc did not care to consider. At 18% defict, Ireland Inc's bonds would rise to a yield of ca 7.5%. Ok, let us split the difference and say, 7%. Then scroll below for some calculations...


“These policies are weakening the economy’s ability to cope with growing debt levels.”

Really? Most of the non-banking debt – almost 100% of it – in this country is held by private sector firms and ordinary workers. How is paying more in welfare payments going to help deflate this debt? How is public spending on capital projects going to do the job? Oh, by the way, read further to find what the 28 think about savings (which, remember, in the long run = investment).


“We urgently need measures to tackle five key areas which require fundamental reforms: our substantial physical infrastructure deficits; our poor social infrastructure – early childhood education, ...primary and community healthcare..., housing lists..., ...Irish public transport ...; our high levels of relative poverty and income inequality; our under-performing indigenous business sector – which needs appropriate support to contribute to our export base, RD and innovation capacity; and our unsustainable reliance on carbon-heavy resources and activities.”

Well, if that is not a shopping list we’ve seen before in the Irish Times… We do need more schools, and we do need some other capital. But simply to say ‘more!’ is not enough. One must face the reality of constraints on funding. The 28 do not seem to be bothered by the fact that Irish middle classes simply cannot bear any more of their droning about the need for more ‘public sector’ stuff and shorter housing lists. We’ve got mortgages to pay, folks, never mind your housing lists. And their environmental taxes are simply a ploy to tax income even more.

The irony is - word 'reforms' is equated in the 28 minds with 'more spending'. Again, we've heard this before from some of the signatories.

The 28 also seem to not understand where our exporting capacity comes from. Far from being the domain of domestic enterprises, it is reliant on MNCs, who would flee Ireland were the 28’s ideas implemented.


“It may seem astonishing that we face such economic and social deficits after 15 years of boom but these are the consequences of pursuing a failed low-tax, low-spend model which sought short-term gains from the speculative activity of a small but powerful golden circle.”

Really? I didn’t notice a low tax, low spend economy. The Government accounted, pre-crisis for EU-average level of spending in terms of GNP, and removing the MNCs out of Ireland’s income accounting, leaves the Irish Government in control of over 60% of the entire economy. Low tax? Our taxes are now second highest in the EU at the upper margin level. All of this before you factor in some of the highest indirect taxes and charges.

But wait, to be really wise, the 28 must have done some thinking – low taxes compared to what? To the services and benefits we receive? One has to be ignorant to suggest that given the poor quality of healthcare, the abysmal quality of our transport, and pretty much every other service supplied by the State, our taxes are low. Compared to the French and the Swedes, and the Germans, we are paying through the nose for the little service we get.


“We can employ the strength of our combined public enterprises – their off-balance sheet borrowing and investment capacity to invest in our infrastructure and create new indigenous enterprises, both public and private.”

Please, help me – does anyone actually believe that our semi-state companies are that good in creating 'new indigenous enterprises’? More CIE? ESB? Bord na Mona? Aer Lingus?


“We can further employ new funding vehicles – enterprise development bonds (eg green bonds), municipal bonds and the new National Solidarity Bonds – which can leverage our current high savings ratio and international investment.”

Again, there is apparently not a single person authoring this letter who understands basic finance. At what rate would you borrow through these bonds? Current yield is 5%. Greece at 6.3%. To make these bonds attractive to anyone, you’d have to price them around 7%. Are the 28 suggesting that returns to these bonds will be in the region of 10% (to cover issuance costs and administrative margins)?

Suppose we borrow at 7% for 10 years, invest in new private (not public) enterprises. The rate of survival for start ups in Ireland is, historically, around 25-30% over 5 years. In 10 years – it will be around 15%. To get 10% return on these bonds, the state will need to invest in new ventures that will survive through 10 years slog while yielding over 22% annually! Enterprise Ireland never had this spectacular of a record, even during the boom time. Even Michael O’Leary is not that good.


But wait, the above passage is about taking our savings and spending these on public investment and state enterprises. How is that going to help our families with their debt? And how is that going to provide financing for companies and private sector in general? What effect will this expropriation of personal savings (for it will require compulsory expropriation, given that the bonds will have to be self-financing, aka priced at yields of below 2-2.5% pa - the expected rate of real growth in the economy over the next 10 years) have on consumption? The minute we start even talking about destabilizing peoples savings, all cash will flee the country and consumers will tighten even more their expenditure. Sadly, none of the 28 'leading lights' seemed to have heard of the precautionary savings motive - the one that drives our current savings ratios.


And so they conclude – having established not a single fact or provided not a single relevant statistic or estimate that: “The resources and labour to finance this modernisation drive are there. We just need the political vision and will to make it happen.”


NB: The 28 call for reforming tax system – I agree, this is needed. They are also calling for abolition of tax breaks. I agree – they unnecessarily complicate tax code and should be yielded in exchange for simple low flat tax rate on all income. But we do not need an additional tax band for higher income – we need to bring people on lower incomes into tax net to make them real stakeholders in this society. Again, this can be done by simply dropping the income tax rate and with it – the deductions.

Economics 07/03/2010: Consensus governance and failures to compete

Yesterday I tweeted about the case of attempted suppression of academic freedom in France (see here). An interesting paper, published in February 2010 by the Department of Economics, Tilburg University, titled Academic Faculty Governance and Recruitment Decisions sheds some light on the potential impact of the practices of suppressing dissent within our Universities.

In this paper, the authors analyzed the implications of the governance structure in academic faculties for their recruitment decisions. It turns out that “the value to individual members through social interaction within the faculty depends on the average status of their fellow members.” Which, of course, can be interpreted in common English as ‘cronyism’ or ‘collusion’. “In recruitment decisions, existing [faculty] members trade off the effect of entry on average status of the faculty against alternative uses of the recruitment budget if no entry takes place [i.e. getting their own hands on the pot of cash].” The study shows that “the best candidates join the best faculties but that they receive lower wages than some lower-ranking candidates”. The main policy implication raised by the study authors is that “consensus-based faculties, such as many in Europe, could improve the well-being of their members if they liberalized their internal decision making processes.”

Now, I’ve said on many occasions that our consensus-driven model of academic staffing would have never allowed people like Friedrich Hayek, or for that matter Milton Friedman, to be given tenure in Ireland. This is true, because hiring decisions in Irish universities – and I am speaking here from evidence relayed to me over the years in a number of actual cases – are based on social cliques (often organized around political and internal agendas, with loose affiliation with certain political ideologies). Anyone falling outside consensus, or threatening to ‘rock intellectual boat’ of dogmatic thinking and vested interests would never be allowed anywhere near a permanent post.

Of course this does not mean that everyone hired through the consensus process is not up to their jobs. Certainly such an assertion would be wrong. But it does mean that Irish academia is missing on critical thinking - a key ingredient in knowledge creation.

Ditto for our public sector. One example comes to mind.

Last year, the Central Bank was hiring a very senior research director. Amongst the applicants, there was a certain senior employee of the US Fed who holds, in addition to his Fed role, several senior academic positions worldwide in the area of Central Banking-related research. This person already held an exactly comparable position in the Fed for over a decade. He also has a list of central banking-related publications that would exceed those of any other academic in Ireland. This person was not even short-listed for the CB position, which subsequently went through an internal promotion to someone who has no publications on the subject, never had academic or practical experience in the area at the same level, but is a life-timer of the Irish public sector.

Consensus-based hiring at work, folks…

Economics 07/03/2010: A long term view of the currency markets

With the euro unsteady against the dollar (post-10%+ drop in recent months from its highs over 1.50 in December 2009 to 1.35) there is a question to be asked - can dollar and euro act as reasonable hedges for each other. In other words, should euro-overweight Europeans hold dollars, while dollar-overweight Americans, Asians and Latin American hold euros? In my view – neither.

This view is formed by my belief that both currencies will continue to fluctuate along a short-term weakening of the euro rend, followed by an equally volatile, but flat trend in the medium term, moving into a dollar appreciation trend in the long run.

Why? Because two economies fundamentals are currently very similar, and only the long term view affords a potential for the US to pull away from the structurally sicker European partners.

In absolute terms, the EU27 is the largest ‘economy’ in the world – some 16.2% greater in terms of PPP-adjusted GDP than the US ($14.2 trillion) economy. But the eurozone itself is equivalent to just 74% of the US total output, despite being 10 million ahead of the US in population terms. Taken as such, one can argue that on average, the euro currency and the US dollar cores are roughly the same.

Both had pretty tough time through the downturn. 2009 US GDP was down 2.7% outperforming Eurozone where GDP fell 4.2%. Unemployment is running pretty much in line, but US unemployment is usually more willing to subside once recovery begins. On financial sector side, euro area has taken roughly 40% of the required corrections of the banks balancesheets as of Q4 2009, while the US banks have taken 60%.

Inflation in the US has been running ahead of the EU16 (2.7% as opposed to 0.6% in 2009). But this inflation differential means two things – it reflects differences in the timing and the size of fiscal and monetary interventions and it reflects the effects of devaluation of the dollar. US recovery has begun, while EU16 is still languishing at around 0% growth and there are growing signs of a possible double dip hitting Berlin, Paris, Rome and Madrid, not to mention the peripherals.

Greeks are the star performers when it comes to the circus of fiscal recklessness in the Northern Hemisphere: 12.2% deficit (more likely closer to 13%). Last week’s plan to trim 2% off that number is, assuming it actually comes into being, equivalent to being 5.875% short of the cost of financing the Greek debt annually. In other words, Greek debt is priced at 6.3% per annum. It stands at 125% of GDP, which means that 7.875% of the GDP is spent every year by the Greeks on interest payments on the debt alone. It will take Greece 4 years of consecutive 2% cuts to just cancel out the existent interest on the debt.

For Ireland, the figures are hardly more pleasant. 11.6% deficit planned for in 2010 Budget (a net cut of just 0.1% on 2009 figure) and with our debt (ex-Nama) heading for €90 billion (over €100 billion with recapitalization factored in) or 56% of expected 2010 GDP, at the latest yield of 5%, means that our debt burden is currently taking up 2.8-3.2% of GDP annually. At the current rates of budgetary adjustments (per Budget 2010), it will take Ireland Inc over 30 years to bring the budget into offsetting the interest costs on the current debt.

Ok, I hear your protests, the actual cut was closer to €3.3 billion or 2.04% of GDP, but further deterioration in expenditure due to social welfare and unemployment increases has scaled this back to 0.1%. Fine – at 2.04% cuts, it will take Ireland 1.5 years to offset the interest bill. Factoring in Nama and expected deficits in 2010-2014, 3 years of consecutive cuts of the same magnitude as Budget 2010 would do the job.

The important thing here, of course, is to remember that in both cases (Greece and Ireland) these cuts will not be denting the deficit at all, just offsetting the rising interest rate bill. And we made no assumptions about the direction of the bonds yields.

But Greece, Ireland and the rest of APIIGS aside, the EU and euro area are fiscally marginally better than the US. The EU16 average deficit will be 6.9% of GDP in 2010 – some 3.7 percentage points below that of the US. Similarly for the debt levels: euro area is currently at 84% of GDP, rising to 88% in 2011 and over 100% by 2014. In the US, current debt is already at 87% of GDP and will rise to 100% by 2012.

Of course, there are three things worth mentioning. EU forecasts are done by the EU Commission with historic accuracy record of tea leafs readers. US forecasts are done by the US Budget Office, with rather decent forecasting powers. The US is more willing to deflate out of its debt problems than the EU16.

Finally, the numbers above do not reflect the fact that there is a higher risk of a double dip in the euro area. Nor do they reflect the fact that EU16 banks are still facing severe liquidity and capital shortages amidst untaken writedowns.

In other words, expect euro area deficit and debt to go up erasing the difference between the US and EU in fiscal terms.

So what really perpetuates US dollar vastly more powerful position in the reserve vaults of the banks worldwide is the legacy. Central banks simply cannot unwind their massive holdings of the dollar without destroying their own balancesheets. This process will have to be stretched over time.

The thing is – with the latest revelations concerning Greek financial mechanics in the past and the EU’s inability to face the reality, majority of the central banks around the world which might have started reducing their dollar exposure in the recent past are now reversing that strategy. Going into dollar became fashionable once again.

But the dollar is not a safe heaven in the medium term. And neither is, per above, the euro. One analyst recently described the current shift back into the dollar as “exchanging your ticket on the Titanic for a ride on the Hindenburg”.

So really, folks, last time this happened – parallel inflation in the euro and the dollar and economic weakening of both, with public finances coming under pressure – back in 2007, the markets response was an age-old one. Gold and commodities went up, debt went down, stocks went out of the window. It looks like we are in 2006 once again, sans economic boom, but with a new rebalancing. I would expect gold to continue firming up, commodities to lag behind on the same trend and stocks and FX bouncing violently at the bottom.

Economics 06/03/2010: Pensions Plan that confirms my worst fears

Per comments to my blog posts on pensions:

Article 4.2.3. of the National Pensions Framework states (emphasis is mine):

"The individual will be provided with a range of investment choices reflecting different levels of risk, accompanied by suitable, easily understood information about the level of that risk and the benefits expected. The range of funds will include very low risk options to provide members with a high level of security on their savings. The Government will not, however, provide any guarantees on investment returns."

This resolves the issue of asymmetric nature of returns: we will be compelled to invest, but Government is not compelled to guarantee.

At the same time, provision of very low risk option plans – traditionally fixed income only funds – does not disqualify these funds from purchasing Irish Government bonds, implying that the funds are not shielded from the Government ‘borrowing’ against our pension savings. This, coupled with direct State oversight over the approved funds (see next quote) means that it will be difficult to create functional Chinese walls between the State and our cash.

“The limited number and types of funds (which will be required to have life-styling built in) available under the scheme will be provided by the private sector through a competitive process run by the State.”

So rationing is the State objective, making the funds subject to potential State interference and influence.

“Members will have the option of choosing between these approved funds or providers, or else they will be enrolled in one of the low risk default options. Charges will be kept to a minimum as marketing expenses and investment advice are minimised."

How is this automatic enrollment into ‘one of the low risk default options’ be determined – who will select a specific provider option? The State? Some proportional competitive formula? Either way, someone else will decide what to do with the money some of us will be compelled to part with. It is, therefore, a tax, especially absent guarantee of a return.

The last sentence above is beyond any belief. This the State pushing on a retail client a major financial undertaking, while promising to keep advice to a minimum?!


Per my concern with contractual aspects of the plan, the entire NPF makes no mention of any contractual arrangements under the proposed plans. This means that either the authors of the document did not understand the importance of securing pension holders’ rights, or they omitted this consideration to exempt the state from committing to any sort of a scheme-related obligations. My questions regarding the legal validity of this ‘pension’ arrangement in the future are, therefore, correct and justified.

There are no references to any value-for-money frameworks within the document, which puts it in direct contrast to the green paper on pensions (the latter being full of cheerful promises of delivering this golden fruit of all public sector schemes).

There is no economic impact assessment, and there is no actuarial evaluation of the new plan, which means that the Government has promised not to guarantee returns which may or may not resolve the problem of the pensions funds shortfall in 2030-onward. If this still qualifies as a well thought-through proposal, I am off fly-fishing for the rest of my life.


Page 19 of the NPF states: “…the Government will seek to sustain the value of the State Pension at 35 per cent of average weekly earnings and will support this through the PRSI contribution system.”

This clearly states that the Government does not contractually guarantee the benefit for which it imposes a tax. I would love to 'seek to sustain' my tax contributions to the State at the current rates, but hey, I am actually obliged to do so. The opposite is not true for the state's duties to me. Again, asymmetry inherent in the rights and obligations of taxpayers vis-à-vis the State are re-affirmed here.

Even more insulting is the NPF statement concerning the State employees Defined Benefit pensions which reads (page 46): “However, only these core benefits granted plus revaluations to date would be guaranteed, and this would be underpinned by regulation.” So while not guaranteeing ordinary taxpayers anything at all, the State guarantees a large proportion of the Defined Benefit Rolls-Royce pensions to its own employees.


With respect of tax relief ‘reform’ NPF states (page 30) that “Another reason is that people are often unsure about the value of the incentives provided by the State to encourage pension provision. By providing a matching contribution equivalent to 33 per cent tax relief, the Government will introduce more transparency to the system – allowing people to see the exact value of the Exchequer support.”

This is pure hogwash – if people are unsure about the speed limit on the road being in miles or kilometers per hour, does the state change the number on the speed signs? And why not provide relief at 41%, or better yet – at 50%, since the Government is now taking half of the paycheck for many employees in this country?

With respect to opt-outs:

Section 2.3.2 page 17 states: “If people decide that retirement saving is not feasible, they can opt-out but there will be a once-off bonus payment for people who contribute to the scheme for more than five years without a break in contributions.”

In other words, the State will restrict competition in pensions provision by subsidizing the ‘approved’ plans mentioned earlier. In effect, to discourage people from undertaking purely private pension provision.

Page 32 states: “Employees will be permitted to opt out of the auto-enrolment scheme after a period of three months. Employees can opt in again whenever they wish but, in any event, they will be automatically re-enrolled every two years... Once a person remains in the scheme for six months, their contributions will be held in a pension account and no withdrawals will be allowed.”

So I am right to state that there can be instances of double payment into pensions funds by individuals who opt-out for a private pension. And that there has not been any thought given to how this can be avoided and how duplication of pensions will be prevented.

Page 34: “To ease administration costs, contributions will be collected through the PRSI system. In addition, the opting in/opting out arrangements will be made as straightforward as possible. The Government recognises, however, that any additional labour and administration costs will have an impact on small firms, particularly in the current economic environment.”

So it is a tax that will impact more smaller firms. And it will be the State who will collect the funds and then, somehow (how – remains to be determined) disburse these funds to ‘approved’ providers and to the ‘low risk option’. The latter, of course, being some new state quango managing the new retirement tax windfall. How will our choice of provider be entered into? How can we switch from one provider to another? How can we carry our pensions out of the state if we move places of work, including with the EU? Which open up another question – is this proposal actually in compliance with EU directives on portability of benefits?


There is an amusing table 4.1 on page 32 that illustrates just how dire is both the analytical part of the NPF is and how dangerous the Government promise to provide minimal advice can be. The table calculates replacements and returns on pension savings under the new scheme using an assumption of, hold your breath, 7% investment returns per annum! This, in the view of the report authors represents a safer type of investment…

I really rest my case here. Good luck to anyone who still believes this proposal to be a well thought-through idea.

Economics 06/03/2010: Do friendships matter in a workplace?

An interesting article on workplace organization/networks and productivity of workers, forthcoming in the next month's issue of Review of Economic Studies, Vol. 77, Issue 2, pp. 417-458, April 2010 (link here; authors: Bandiera, Oriana, Barankay, Iwan and Rasul, Imran, Social Incentives in the Workplace).

The article shows evidence that social incentives in the workplace, namely the effect of the presence of those that workers are socially tied to on their own productivity, matter a great deal.
Controlling for possible workplace externalities, such as co-sharing of tasks and technology, the authors combine data on individual worker productivity with information on each worker’s social network of friends in the firm.

"We find that compared to when she has no social ties with her co-workers, a given worker’s productivity

• is "significantly higher when she works alongside friends who are more able than her", and
• significantly lower when she works with friends who are less able than her.
  

Social incentives imply that

1. workers who are more able than their friends are willing to exert less effort and forgo 10% of their earnings (in other words - they have 10% lower productivity);
   
2. workers who have at least one friend who is more able than themselves are willing to increase their effort and hence productivity by 10%.

The distribution of worker ability is such that the net effect of social incentives on the firm’s
aggregate performance is positive.

These are interesting results and have implications for organizational structure of the workplace. They suggest that

• workplace arrangements that reduce social interaction between heterogeneous workers (e.g. extremely dis-franchised workplaces with nomadic flows of temporary workers and workers who are not anchored to a specific location) might suboptimally reduce productivity;
  
• peer pressure within social networks is mean-convergent, with lower quality human capital being pushed up the quality chain and higher quality human capital being compressed downward;
• more heterogeneity in social networks would suggest a higher productivity mean; and
  
• workplaces that discourage social interactions are also potentially reducing productivity.

The aspects that are descriptive of the strength of social interactions used by the authors include pre-existing friends as co-workers, reciprocal friends, sharing in supermarket shopping, eating together, lending/borrowing money and sharing problems with each other.

Since social effects on productivity can counteract each other (e.g. due to mean convergence, better workers might reduce productivity while poorer workers might increase it), there is a clear need to align pay rewards structures with the nature of the workplace setting and the extent and nature of social interactions that can be supported by the workplace. The results suggest that:

• more depersonalized, less interactive workplace settings should use greater pay incentives geared toward lower quality workers (wage compression);
• less depersonalized and more socially interactive workplaces should reward higher performers more (to counter potential quality of worker compression through wage widening)
  

Economics 05/03/2010: More questions on pensions plan

In a recent post (here) I have asked 12 questions concerning the new Government plan for pensions.

Here are more questions to follow. But before we begin, let me state the following:

• Lack of clarity on any of the questions raised by myself and other observers,
• The fact that these questions can be raised in the first instance; and
• Two independent confirmations of my questions validity from the industry sources

show that I am right in suggesting that the entire plan is badly thought through and most likely represents a new tax with no contractually verifiable benefits.

Question 13: Given that the Government will be forcing people of all ages to save 8% of their income per annum for pensions provision, the plan is not even sufficient to provide reasonable pension protection for the 22-year olds who will be enrolled into it. How will it help to defuse the demographic (aging-induced) time bomb the Government is facing?

The Government is hoping to start enrollment in 2014. It is facing pensions system meltdown around 2030-2035, which will cover by then retired generations born between before 1965. These generations by 2014 will be of age 49 or more, with 18 years or more left to go before a pension. This, in turn means that their pension provisions should be in excess of 20% of their income, assuming they are starting anew at 2014. Massively more than 8% the Government has in mind.

At the same time, the younger generations pension savers will be facing a dependency ratio of less than 2 workers per retiree by 2050. This means their total provision for pensions as well should be around 18-20% of their income annually. With 1/4 of this delivered in a promissory Government offer of 35% AE state pension, even assuming the Government will keep its promise, the unfunded contribution required is around 13.50-15% of income annually. Not 8% set by the Government.

Then there is a third sub-component of those who are in the older (pre-1970) cohorts who are currently outside private pensions schemes. They will require savings of more than 25% of their income annually to underwrite reasonable pensions provision. Again, 8% state run pension is not going to cover their shortfalls.

Question 14: If the funds were to go into the NPRF, then the life-span of the cash in the fund is about 5-10 years before the money is spend on some new emergency, e.g. another banks bust or another fiscal crisis (potentially the one induced by the collapse of the public sector pensions scheme). How will the Government protect our money from itself? It was not able to do so with the current NPRF set up and the signs are not good for any future funds security.

Question 15: Given that public sector pensions insolvency is already a known, the best for the Government to do is to reform the Rolls-Royce pensions it provides to its own employees. Why is the Government not leading by example?

Question 16: Anyone who has been outside the state scheme for 2 years will be automatically re-enrolled into the system. In the period of time between the re-enrollment and a new opt-out (which can be months), a taxpayer will be liable to pay into two pensions simultaneously (her own private plan and her state plan). Is this the case? How will the Government compensate such families who will incur overdraft charges due to such double pension provisioning courtesy of the state? How will the state actually monitor the opt-outs and whether people in the opt-out are still in a pension plan?

Question 17: What is the feasibility of the entire proposal ever being implemented, given the logistical nightmares it would entail?

• The proposal would require massive bureaucracy (and invasion of privacy) to verify - e.g. Revenue data being used by another State agency to generate demand for enrollments, re-enrollments and clear opt-outs. Is this even legal?
  
• The proposal will require the state to engage in the areas in which it has no expertise, running an investment undertaking with retail clients. What are the implications of a massive state monopoly with statutory enrollment powers to the market for pensions and financial services in Ireland? How long and how expensive will be the state battle with the EU Competition authorities to clear this scheme?
  
• How big will the paper trail be if the state were to require continued monitoring of compliance with the opt-outs? What will be the cost of this to businesses and employees? How many paper pushers will the state need to hire to keep the track of these mountains of evidence?
  

From the point of conception, to the point of translating the new authority's documents into Irish, the undertaking cannot be envisioned as an efficient and cost-competitive operator.


So why is the Government engaging in the scheme at all?

Since 'resolving the pensions problem' is clearly not on the cards (see above), one possible explanation is to get its hands on more cash through 'borrowing' against the funds raised. Another possible explanation - to raise tax (unimaginable otherwise) on business.

Remember -

• corporate tax is a sacred cow of the State;
• personal income tax is already high and will rise again in the next Budget;
• indirect taxes are crippling and the local authorities will be coming for more of their cut in the next few years.
  

So the only means for raising new cash is to levy a new charge - on businesses and incomes - that can be called something else other than tax. A promise of a service (new pension) 20-plus years down the road is a fig leaf of decorum, especially since the Government has no contractual obligation to actually honor such a promise and has set no specific target for a return on this undertaking.

This pensions proposal is a tax on employers (+2%) and a tax on people (+4%). And this tax will have the greatest negative impact on smaller businesses and entrepreneurs, since MNCs and larger companies are already offering much better pensions.

The Government might have solved the conundrum it faced courtesy of the EU Competition rules. Unable, since 2003, to charge differential tax rates on domestic and multinational businesses, it now devised a 'pensions' scheme to charge smaller companies more through a new levy. And it didn't have to raise official corporate tax rate to do so...


Of course, there is always a better solution than what our folks in the Government Buildings can deliver. That solution would be -

1. set a flat income tax rate of 12% on all income and no exemptions except for a generous up front personal tax-free limit (to exclude the real working poor from taxation);
   
2. And then tell people - including public sector workers - that they must invest at least 10% of their income in pensions of their choice, provided privately with real international competition in place (my preference would be to avoid compulsion, though);
3. Make the entire pension contribution, up to 20% of gross income, tax deductible;
   
4. Set up self-funded insurance scheme to underwrite pensions providers;
5. Done. End of story and no need for white papers from over-paid and over-staffed task forces and for bureaucrats, lawyers, mountains of paper and pensions tzars.
   

Simple, folks. Really simple. Chile did so already.

Economics 05.03.2010: Greeks are paying the price

So you've heard by now that Greece 'escaped' the wrath of the market yesterday by placing €5bn worth of 10-year bonds. But don't be fooled - Greek's escape was nothing more than a respite: Greek taxpayers are now on the hook for paying a 6.3% yield on the 10-year paper - in line with near junk status of the bonds. This marks the highest spread for Greek debt since 2001.

Despite the issue being covered at 3x, there is a possibility for prices to tumble in the secondary markets (as happened with their 5-year paper last month) and there is an added concern that demand was underpinned by speculative investors with short-term horizons, as 'hold-to-maturity' types of investors (e.g insurance companies and pension funds) are cutting back on their holdings of PIIGS bonds. If the latter is true, then we can expect a serious pressure on yields to emerge in the next few days, with subsequent noises from the EU authorities about 'speculators' profiteering.

Big - albeit artificial - test for the euro will be March 16th when the EU Commission will rule on Greek fiscal consolidation plans. Expect approval, enthused speeches, and backroom talks on how to proceed forward with the country that

• plans to cut 2% of its GDP-worth off the deficit this year, but
  
• is unlikely to deliver on this target, whilst
• needing to cut a whooping double the planned amount just to stay afloat toward the 3% deficit goal for 2014-2015.
  

Meanwhile, Jean Claude Trichet went out of his way yesterday to tell the Greeks not to invite the IMF. During his press conference, Trichet repeatedly stressed that Europe has its own safety net for defaulting states (well, not quite in these terms) so no need to call in the big boys from the IMF. One wonders, what is Mr Trichet talking about. Papers quote Trichet saying that it is absurd to envisage scenarios of Greek exit from the euro.

All of this resembles the debates in the Afghan government in 1979 - to invite the Soviets or not... And the really, really, really funny thing is - IMF is EU-led organization (of the two supernationals: the World Bank is traditionally reserved as the leadership game for the Americans, while the IMF leadership goes to the EU appointees). While the Greek taxpayers are now set to pay over ten years €184.22 per each €100 borrowed last night - a steep price for not calling in 'Your Own Bad Guys' from Washington.

Now, put the Greek pricing into a perspective. On 14 January 2010 the NTMA issued €5 billion of a new bond, the 5% Treasury Bond 2020. If Irish debt was priced at Greek yields, the total cost to Irish taxpayer from this deficit financing would have risen €21.33 from €62.89 per €100 borrowed. In other words, our expected annual deficit for 2010 alone would be some €4,050 million more expensive over 10 years.

Economics 05/03/2010: Losing capital in a recession

Live Register additional tables are signaling that the latest 'improvement' (or as I would call it - a bounce) in LR figures for February was driven by exits of the unemployed not into gainful employment, but into emigration.

In February 2010 there were 355,690 Irish nationals and 81,266 non-Irish nationals
on the LR:

• a monthly increase of 149 (0.0%) in Irish nationals and
  
• a decrease of 129 (-0.2%) in non-Irish nationals.
  

In the year to February 2010 the number of Irish nationals on the Live Register increased by 74,549 (+26.5%), while the corresponding annual increase for non-Irish nationals was 9,954 (+14.0%). This clearly shows that most non-national unemployment did come from the earliest-hit construction sector.

Among non-Irish nationals the largest number on the Live Register, were nationals from the EU15 to EU27 States (45,649) - aka the Accession States or EU10 states - while the smallest number were from the EU15 States outside of Ireland and the UK (4,139). This is, of course, reflecting levels, not proportionate terms.

Non-Irish nationals represented 18.6% of all persons on the Live Register in February 2010 against their share of the labour force being around 14.7%.

I said earlier (here) that the Live Register improvements are driven by three factors:

1. emigration;
2. exits to Fas-led 'training' and exits from the labour force (the two are equivalent in my mind, as I see no real hope for Fas to actually provide employable skills); and
3. exits to education (a better alternative to Fas, but still not a guarantee of education).

Several community leaders recently have pointed out to me that their organizations, dealing primarily with foreign residents in Ireland, are seeing a rising tide of residents who fall out of unemployment benefits and having trouble signing for welfare benefits. It seems that the better quality workers who can emigrate are now doing exactly that - inducing a loss of human capital for Ireland.

Hence, we are now in a really tough position, whereby the recession is causing:

• fire sales and exports of capital (with banks taking posessions of machinery, equipment, stocks of goods and selling these through distressed sales - including to foreign buyers); and
• exits of human capital.

Economics 05/03/2010: Can immigration help our Smart Economy?

Does targeted immigration policy (focusing on skills and capability) deliver the results for research, science and engineering? This question is important to Ireland, since

• we have ambitious objectives in driving up R&D and science activity; and
  
• we do not have a meritocratic immigration policy here (aside from by-now virtually stifled 'green card' scheme, our immigration policy is geared toward almost exclusively on internal EU27 migration)
  

A new study published this month by NBER (here) evaluates the impact of high-skilled immigrants on US technology formation using H-1B visa admissions.

Higher H-1B visa admissions are shown to increase immigrant science and engineering employment and patenting by inventors of Indian and Chinese origin in cities and firms dependent upon the program when compared against cities and firms which do not avail of the visa.

There is only a limited effect on native science and engineering employment or patenting, ruling out displacement effects, with only small crowding-in effects. Total science & engineering employment and invention increases with higher admissions primarily through direct contributions of immigrants.

“A 10% growth in the H-1B population corresponded with a 1%-4% higher growth in Indian and Chinese invention for each standard deviation increase in city dependency”. Anglo-Saxon origin inventors continue to account for approximately 70% of all domestic patents. Crowding-in is small, with a 10% growth in the H-1B population corresponding to a 0.3%-0.7% increase in total invention for each standard deviation growth in the degree of city dependency on participation in the visa programme.

Tests also confirm that these positive results “are not due to endogenous changes in national H-1B admissions following lobbying from very dependent groups."

"Total patenting shares are highly correlated with city size, and the three largest shares of US domestic patenting for 1995-2004 are San Francisco (12%), New York City (7%), and Los Angeles (6%). Ethnic patenting is generally more concentrated, with shares for San Francisco, New York City, and Los Angeles being 22%, 10%, and 9%, respectively. Indian and Chinese inventions are even further agglomerated. San Francisco shows exceptional growth from an 8% share of total US Indian and Chinese patenting in 1975-1984 to 26% in 1995-2004, while New York City share declines from 17% to 10%."

Economics 04/03/2010: Another grab of taxpayers cash?

Update 1: 04/03/2010: 10:15pm


Yesterday, the Government announced a plan to reform pensions provision system in Ireland by creating a mandatory pension scheme with a limited opt-out clause. The announcement is covered here. While lacking specific details we can only ask questions and await for some answers, here are my top-level views.

Question 1: Will additional contributions required from the taxpayers yield additional cover over the already committed state scheme that supplies 35% of the average earnings in exchange for PRSI contributions?

Question 2: What will determine the return on top-up pension? While the state is quick at setting the cost to the taxpayer (4%) and employers (2%) there is absolutely no reference to the returns to be earned from the scheme. Is the rate of return fixed? Guaranteed? Market-related? Who will underwrite this return?

Question 3: Who will manage the assets? NPRF? NTMA? Private providers? Who will actually write the policy - if any policy will be written at all.

Question 4: The plan exempts those on defined benefit pensions - aka public sector workers. Thus, in effect, the plan opens up two massive problems:

• Defined benefit pensions are the ones that are facing the largest shortfall and they are also being managed by the agent (the State) who will control our top-up pensions. How is this conflict of interest going to be resolved? Will public sector pensions hole be plugged using top-up pension funds?
• Defined benefit pensions are contractually guaranteed, while top-up pensions are not (see below), so in effect the opt-out potentially directly exposes ordinary taxpayers to underwriting the public sector pensions through both their statutory pension (already the risk we are bearing) and through the top up. If so, the top-up element of the proposal is nothing more than a tax on ordinary income earners that can be used to cover public pensions shortfalls.

Question 5: A 4% top-up requirement for 'higher earners' (undefined level of earnings) will create a further erosion of the wage premium for higher educated and higher skilled workers in this country (on top of already punitive levels of personal income taxation). How does this square off with the Government intentions to build a Smart Economy, if Smart workers require higher wage premium?

Question 6: What are the contractual rights of the taxpayers paying top up rates with respect to the pension benefits?

A private sector pension is governed by a clear contract. This contract is fully enforceable in the court of law. State pensions (with exception of those provided to public workers) are not. If you doubt this statement - check numerous legal cases where this has been deemed to be the case.

And look no further than the change in the statutory retirement age that the Government is planning to enact. In effect, forcing retirement age 2-3 years forward means that all of us who have paid PAYE are now entitled to 2-3 years less of the benefits. If this was done by your private pension provider, you would have a legal case against a unilateral change in the terms of the contract. But because it is done by the Government and we have no written legally binding contract with the Government relating to pensions provision, the State simply can cut our benefits, while still requiring us to keep our end of the deal - continuing to pay into the PAYE pot.

So the biggest issue of all is - will the new top-up requirement be legally binding for both sides of the deal or will it remain asymmetric (and therefore subject to the risk of arbitrary changes in the terms and conditions by the Government)?

Question 7: The new pension system would re-enroll people who quit every two years. This begs a question - will this 're-enrollment' be performed with crediting for years lapsed or not. If yes, then the risk of underpayment due to interruptions will be borne by the collective pool of funding. Which means that everyone paying into the system will be at a risk of bearing the cost of higher jobs exits and unemployment. If no, how will the recovery of underpayment take place? Simply requiring people who dropped out to repay the shortfall accumulated over two years of absence will not work, as it will impose huge burden on those with uncertain employment prospects.

Question 8: How will the system manage those in part-time employment, self-employment and those with hybrid income sources (multiple jobs, etc)?

Question 9: Since top-up clause requires private pension plan with employer contribution in excess of 4%, can the new plan be deemed anti-competitive? For example, if a self-employed person obtains no contribution from the employer, does the new pension mandate commit a person to a minimum contribution of 6%, thereby forcing them out of other private pension arrangements they might have, which may include single payment/lump sum contributions?

Question 10: If a person is forced to switch away from a smaller pension plan into the 'top up' Government plan, given that Government plan is not comparable in terms of risk of payout to a private plan, will this not in effect reduce the quality of pension that the employee will obtain? In other words, the Government scheme might result in a reduced quality of pensions for some savers.

Question 11: Will the new top-up arrangement cancel out PRSI contributions, or will it be on-top of the PRSI levies? If the former, who will fund the 35% promisory note of statutory state pensions? If the latter, this constitutes a massive increase in taxation burden in this economy.

Question 12: How will the Government reimburse those of us who might have higher pensions contributions by employers, but whose employers will now opt for a default position and drop their contribution to the effective minimum of 2%?

So far, the proposal is yielding more questions than answers. Which, of course, simply indicates that there is a good chance that the Government has not thought through the whole scheme and might be risking entering into another 'Policy-based evidence' scenario for which we, as a country, are so well known around the world.

On the net, however, given the nature of the top-up arrangement, unsecured contractual status of the proposal and the fact that the State decided to exempt its own employees from the obligation, the whole proposal looks like another tax by the Exchequer.