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Money Times - May 19, 2015

Posted by Jill Kerby on May 19 2015 @ 09:00

 

PART 1TOO MUCH DEBT AND LOW BIRTHRATE MEANS TROUBLE AHEAD 

It is well known that our "tax equalisation" system does not treat married/civil partnership couples very equitably: a single earner couple gets to pay the standard, 20% tax rate on income up to €42,800, while the dual income couple can earn up to €67,600, only after which the top, marginal rate of tax – 40% - kicks in.

Tax equalisation was introduced in the 1990s to encourage even more Irish women to enter the workforce. The impact was a given: with all these extra wages circulating in the market, chasing finite resources, the price of everything from housing and childcare to transport, healthcare and education went up and most young couples today have no choice but for both partners to work if they are to pay for the same bills (minus childcare) that a single income once met.

Since the transition from the single earning family (which can mainly be traced back to the early 1970s in North America) it is only the wealthy, the poor (on subsistence state benefits) or the very, financially prudent who can “afford” a stay-at-home parent.

Unfortunately, the world of finance and services – which in the West has replaced the bulk of industrial manufacturing – has also played a big part in the necessity of the dual income household.

Through the ‘magic’ of fractional reserve lending and the leveraging of bank loans over the past 30-40 years – even the stuff that you couldn’t immediately afford with two wages, such as a new car, suites of furniture or electronic goods, designer clothing or foreign holidays - could be purchased with credit.

During the property boom years of the late 1990s and 2000s, you could even maximise those discretionary loans at low interest rates (but very long repayment terms) by drawing down the credit-fuelled equity in your property.

The point was – and so many young, hard-working couples often reminded me of this during those boom years – ‘why work such long hours away from home and family, if we can’t at least drive a decent car(s), have a nice home, nice clothes and take decent holidays’?

The problem now is that western countries are addicted to credit and can’t survive without it.

Yet the growing Boomer Generation of late 50s –70 year olds have all the stuff they’ll every need and are no longer borrowers or savers. They have started drawing down their savings and pensions and are worried (rightly) about the high cost of their advanced old age.

Meanwhile, the 35-55 year olds are in serious debt and are under-pensioned.  Their childcare/lifestyle costs are still high. They can’t afford to spend much and are not particularly good credit risks.

The 20-35 year olds may have missed the property bubble and are relatively debt free (unless they have student debt), but they have no assets. High unemployment means their wages are kept relatively low and their prospects of home ownership, early offspring and a comfortable retirement are poor. They face the greatest state debt repayment burden of all.

As a powerful voting block, ageing Boomers, (I’m one of them) and their similarly ageing political representatives are hardly going to vote any time soon for this uneven playing field to be levelled.

The most obvious way would be to get rid of unsustainable universal state pensions that today’s 30-40 year olds must fund, but that few of them will ever collect (at today’s value) and replace it with universal invested defined contribution ones.

Another reform would be to end the tax-free sale or transfer (between spouses) of the family home but allow it only between older/younger generations. This would release more family sized properties onto the market, help to moderate price growth and prevent property bubbles. It might even help increase the birth rate. 

In spite of the signs of economic recovery, there is a great deal of concern among families about all these problems. They are certainly helping each other: the older, wealth-holding generation is providing lots of free childcare, they’re paying for education costs, health insurance bills, even mortgages. 

Could we be doing it in a more structured, efficient way? Next week I share the views of financial, tax and legal experts on how to best conserve, preserve and distribute family wealth to the benefit of all generations.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.      

 

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  • Jill Kerby is one of Ireland’s best known personal finance journalists 

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