Jill Kerby

Let us dip into pension nest-egg to crack debt crisis

 The new Minister for Social Protection, Joan Burton, acknowledged last week at the annual Irish Association of Pension Fund investment conference that pension trustees are ‘grappling with many difficulties’, that a new defined benefit pension model is necessary “if employers are to deliver the promises they’ve made to workers” and that a start in making pensions more equitable and fair has begun, starting with the way politicians, and to a lesser extent, the new public servants will be pensioned off.

It was her very first Irish public engagement after her appointment on 10 March, so she can be forgiven for not being able to fill in any details, or to even address what the new tax treatment of pensions will be, how deficits will be handled or how the insolvent state will be able to keep paying the out of control state pension bill.

But this Minister is really going to have to hit the ground running sooner than later because while the EU and IMF may be willing to keep paying her pension and that of her fellow public servants, there’s no agency or generous benefactor ready to bail out ordinary pension fund members in the private sector.  Not only have their pension funds been devastated by market losses, but the rules of their schemes are less favourable than those that apply to public sector workers and even company owners and directors.

Perhaps the Minister will read the letter in Question of Money this week from the pension fund holder who desperately needs access to the money he contributed over 15 years into his private pension fund.

This is his money, he says, not taxpayers’ and he needs it because he is in trouble with his bank and his home is at stake, but pension regulations forbid the encashment of a pension fund except for retirement, or on health grounds.

These are exceptional times.  The Minister even acknowledged that 35% of the wealth of our country has been wiped out in the past three years.  Yet there are rules, set by the state, that deprive adult citizens from acting in their own interests with their own money.

There are many very significant pension reforms to be tackled, which everyone knows will take a great deal of time that we probably don’t have anymore.  But there are also some relatively small ones that can be done quickly, such as letting the prudent saver dip into a pension fund in order to provide vital capital to a business that is being starved by their undercapitalized bank, or to keep their

Saving Grace

We are a nation of savers, or at least those of us still in employment are, though the numbers are falling slightly as the great recession continues to bite.

For example, the EBS in its latest quarterly survey, says that 84% of the population are now saving, though only 34% have a regular savings plan.  The remaining 50% put away “a little bit …when they can afford to”.  This supports Nationwide UK Ireland’s survey result in which it found that just 38% of us “save regularly”, down from 40% at the same time last year.  

Both agree that the under 50s, and particularly the 35 to 50 year olds, are struggling the most to set aside money: three out of five of this age group, according to the EBS, are now dipping into their savings to make ends meet.

The EBS says the average saver is putting away €319 a month, 7% more than saved in the previous quarter and it contradicts the Nationwide UK finding by reporting that numbers of people saving is up from 30% to 34% of its respondents.

These figures may be contradictory, but it is the findings of a third nationwide survey, from the travel and lifestyle website lastminute.com, that has shown a very different side to our reputation for thrift.

It found that one in 10 Irish people have a savings account that they keep secret from their spouse or partner; a third of them have more than €5,000 in the account and one in five say that their partner has lied to them about money. Another one in six say they’ve lied about the size of their debts.  The incidence is rising, says the company.

I’m not entirely surprised at these findings. There have always been couples who conceal their individual spending habits from each other or who leave all the financial details to just one partner.  Too often this lack of trust is more than just about money and reflects a deeper problem in their relationship.

That more couples are lying to each other about their debts and spending and hiding accounts looks like just another consequence of the deep financial distress so many people are experiencing when they can no discover they can’t meet their obligations anymore or support their families in the way they once did.

Financial advisors at the Money Advice and Budget Service have told me that many partners in a relationship only discover the precarious nature of their joint finances in the MABS office when all their income and expenses are laid out, and that it can be a very traumatic experience. 

Rising unemployment, taxes and higher food and fuel prices isn’t going to make this situation any better.  We need a national debate about our personal indebtedness – not just the banks’ indebtedness – and soon.

Workers sweat as government stalls on pension plan

I’m going to hazard a guess that reforming the way politician’s pensions are financed and paid in the future is going to be more problematic than the reform of the ministerial car fleet.

The shocking revelations during the election about the size of the pension pots and retirement incomes that were being paid to the retiring ministers and deputies suggests that eventually politicians will share similar, if not the same constraints as they rest of us do when it comes to funding our retirement. 

They will, hopefully, have to start contributing more to their pensions; ‘enjoy’ the same tax relief as everyone else; only collect their pensions at the standard retirement age and share the same restrictions to the total size of their pension fund as they seem about to impose on the private sector.  If, as suggested they substitute a 0.5% levy on all pension funds it will also apply to their own.

Surely they can’t stop there:  all pension reforms will have to be introduced for the entire civil and public service who like their political masters participate in a hugely expensive, final salary defined benefit pension scheme, the kind of which is being phased out here in Ireland and most western countries, replaced with much less attractive, but more affordable and sustainable defined contribution ones.

The problem is that while there was some hint of what Fine Gael and Labour would do by way of pension reform in their election manifestos – and the key ones for Fine Gael involved the pension levy and restricting the size of the retirement income to €60,000, they certainly haven’t been fleshed out in the co-alition’s 64 page joint programme for government.

What’s going on?  Is this that elephant in the room they propose to ignore until the bank crisis, national deficit and default risk are sorted out?  Until the new Minister for Social Protection Mrs Burton tackles the frightening – but more immediate issue of the expanding social welfare bill, the retraining of the advancing army of the unemployed AND a retiree lobby that thinks their members are immune by right of age alone from all spending cuts?

Surely all workers should be told now and not in next December’s budget if the coalition is standing over last November’s four year recovery plan and the proposal to cut pension contribution tax relief to the standard rate only by 2014?  Such payments need to be made by October 31st.

Not knowing whether you will have sufficient income left over to even keep funding a pension the government’s tax and austerity measures take hold is bad enough.  Volatile investment markets mean that everyone is second guessing those decisions.

Having no idea what are the rules of the game, or if everyone will have to play be them, just makes a bad situation worse.

The reform of the health service, meanwhile, gets its own chapter in the new programme for government, with nearly every page mentioning a wider role for the Minister for Health.  It turns the Minister into a sort of super manager with new units – like the “Special Delivery Unit” being set up “to assist the Minister in reducing waiting lists and introducing a major upgrade in the IT capabilities of the health system.”

 Really?  He is personally going to reduce waiting lists and introduce the new IT system?

That’s not all:  “The Health Service Executive will cease to exist over time. Its functions will return to the Minister for Health and the Department of Health and Children; or be taken over by the Universal Health Insurance system.”

 The Minister and his department will also have central roles in setting the terms and conditions for everyone involved, from the GPs who will be now be paid – less - by the state-cum-UHI; the new public hospital trusts and even the insurers who will have to construct the new government-designed contracts. 

 The size of the insurance payments, meanwhile, will be “related to ability to pay” with the taxpayers who can, paying “the premia for people on low incomes and subsidising premia for people on middle incomes”. 

 Isn’t that what higher taxpayers already do by funding the public health service, as well as their private health insurance premiums?  At least with the latter, under community rating, everyone pays the same premium for every plan, regardless of their income, age or state of health and if the cost gets too high, they can cancel their membership.

There are pages and pages of this insane stuff, including the proposal to keep the insolvent VHI “in public ownership to retain a public option in the UHI system” instead of breaking it up, selling it off and ending its dominant, distorting position in the private insurance market as the last Government finally admitted last May had to be done. 

 You may not the two tier health system, but 50% of the population voluntarily purchase private health insurance because they believe the private providers deliver a good service and the public health service - to which they have no choice but to also pay - does not.

The coalition’s aspiration – for a new insurance funded system that will deliver universal hospital and primary care based on medical need is very worthy.  In a very rich, highly efficient country it might even be affordable -  for a while.

How centralizing the delivery of all health services - even the parallel private ones that two million of us voluntarily pay for – back into the hands of any Minister and the existing Department of Health will provide an efficient, affordable or ‘fair’ health system is simply not possible. Not at any price.

Why keep funding a think-tank that produces poppycock?

Why do we taxpayers put up with the Economic and Social Research Institute?  Why do we allow our hard-earned money to continue to be lost to a quango that is so frequently wrong in its economic predictions and conclusions about even the most obvious things – like access to credit or banking services?

Last week, to considerable media attention, a 161 page long ESRI report on the causes of ‘Financial Exclusion and Over-indebtedness in Irish Households’, left out two of the most important – and solvent – sources of both savings and credit, the league of credit unions and the post office. Yet its main conclusion is that one in five of the population who it defines as having limited incomes, “does not have access to the basic building block of financial services, a bank current account”. 

Without this precious current account, the ‘unbanked’, as the ESRI calls them, are disadvantaged when it comes to accessing  “affordable credit, small savings facilities and insurance for home contents” and the other financial services the rest of us take for granted, like receiving wages and welfare benefits, paying utility bills, availing of short-term credit and having 24 hour access to cash. 

This is utter poppycock, yet ESRI doesn’t stop there.  There are pages and pages devoted to our higher levels of mortgage debt arrears and increasing poverty that have absolutely nothing to do with social inclusion and the lack of bank accounts.  If anything, it has been caused by too much access and too many sources of credit/debt, not too little. (It then says things like, “While indebtedness is not problematic…”)

I’ve no idea how this report ever got past the peer review stage, but just for the record, one fifth of the population are not ‘excluded’ from holding a bank account or from credit, savings or household insurance because of it.  The thinking, responsible adults who choose not to have current accounts do so because they are too expensive for the size of their income, needs or circumstances.  

However, 2.9 million people are members of 508 not-for-profit, cooperative credit unions on this island. Hundreds of thousands of them have low incomes, yet have collective savings of €11.9 billion. They also borrow billions every year, loans worth up to €38,092 or 1.5% of the credit union’s total assets at some of the lowest interest rates on the market. Every single loan is insured. 

Like An Post, another bastion of savings, credit unions allow members – at no charge - to pay their bills, transfer money to and from other accounts and creditors, buy a range of insurance products, investments and foreign exchange.

After Postbank closed last year, it facilitated its customers, including my 17 year old son, who had either a Postbank issued credit and/or ATM card to get another card from An Post affiliate banks like AIB and NIB. The latter bank still offers free banking.

Banking branches and competition might be shrinking in this country, but there are credit unions and post office branches in most communities. Like the GAA they have emerged from the financial destruction of this country with their reputations intact and, for the most part, solvent.

The policy wonks at the ESRI need to get out more.  Better still, maybe they need to fund their next report out of their own pockets.

Get out of the car

What a bunch of comedians are those fellows at the Institute of Advanced Motorists.

Last Monday morning, even my husband, who is normally mute before his second cup of tea, laughed out loud at suggestion by the man from the Institute of Advanced Motoring that by washing and polishing our cars, the advanced aerodynamic effect would help reduce our soaring petrol bills.

Emptying the boot of golf clubs, ejecting the roof rack or box, turning off the ‘air con’ AND keeping the windows shut will also help.

I have a better suggestion:  get rid of the car. If that’s not possible, car-pool.

Once you become one of the ‘uncar-ed’, as the ESRI would say, you can always use public transport, taxis, a bicycle or the power of your own two legs to get you to your destination and still savings thousands.

We need to get real in this country.

Oil is a precious, finite resource that the liberated people of the ex-kleptocracies of the Middle East and North Africa may not want to keep selling to us so cheaply. Chances are the oil price spike will recede as demand falls back (due to the higher price) but it probably won’t return to $50 per barrel again, the price it fell to after the 2008 spike.

Meanwhile, anyone with any money to spare might want to consider investing some of it in the black stuff. Two of the financial newsletters I subscribe to suggest keeping an eye on Canadian producers – they mentioned Canadian National Resources, but also the Canadian Oil Sands Trust, a pooled fund of six of the top Canadian oil companies.

Canada, is the most stable and least hostile oil producer to the world’s biggest consumer, the United States and it has no axe to grind with anyone else…which is no small achievement these days.

Insurance gender ruling must be vigourously enforced

The European Court of Justice has determined that gender has no place in the setting of insurance premiums, but no one should imagine that this means that young male and female drivers will automatically pay the same price for cover come the December 21, 2012 deadline.  Or that all older men and women, who are also going to see some other premiums adjusted due to this decision, end up paying the same for life insurance or pension annuities.

The Court’s ruling may have been blunt, but insurance pricing “is as much art as mathematical science” an actuary told me. Lots of other factors determine individual insurance premiums.  Initially young women drivers could end up paying up to 25% or even 30% more for their car insurance while the fall in the premium for the young male driver may only fall by 10%.

Meanwhile, as an older woman, my premium is unlikely to be impacted at all by this decision, said my broker.  The price differential between female and male drivers is long gone by the time you hit your 40s or 50s.  However, the cost of life insurance and pension annuities will drop because the premium all women pay for statistically living longer than men in this country will also have to go from December 22, 2012.

It is unfortunate that some people - younger women, older men - are going to be financially disadvantaged depending on the insurance contract they buy, but most commentators think the differentials will eventually balance out.

“I don’t think they meant to,” a broker told me, “but the court decision certainly means that heterosexual couples will cancel out gains or losses that used to exist while older lesbian couples – once they age out of their higher car insurance - will certainly benefit from the most from cheaper life insurance and pension annuities.  A gay couple will probably pay the most – the motor discount won’t be huge and they’ll both now pay more for life insurance and their retirement.”

Meanwhile, the policing of the new order should be interesting.  It won’t be easy to work out whether a premium is up or down once the inevitable annual price rise is factored in.  No doubt the National Consumer Agency will keep a careful eye on the insurers and will be as energetic about policing these new prices as they are about catching out the mispricing of biscuits in the nation’s corner shops.

Not safe as houses 

It’s only right that the new government should tackle the growing mortgage arrears and negative equity problem right away, but they need to stop promising that no one is going to lose their homes on their watch: that is simply not in their power to give.

Last week, new figures from the Central Bank showed that at least 10% of all Irish mortgages are in arrears or have been restructured, about twice as many as this time last year. Meanwhile, about a quarter of those that have been restructured have not be successful, and the mortgage holders have been unable to cope with the new repayment terms. 

This is also the experience in the United States, where the property bubble burst two years before ours in the summer of 2005. Despite numerous intervention programmes and billions of dollars advanced by federal and state governments to prevent further foreclosures or voluntary repossessions, the numbers keep going up as property prices keep falling.

If our economy doesn’t recover significantly over the next year the impaired mortgage figure here could again double, leaving one in five mortgages in difficulty, which will put us not far off the US figure of one in four and no closer to a resolution.  

So before any more money that we don’t have is flung into a new financial black hole, maybe the government should consult first and find other options that don’t necessarily involve another taxpayer’s bailout. 

Find a Coke float

I’ve mentioned before that adding ‘world dominator’ shares - companies that dominate their sector or global consumer market - is a good idea for anyone trying to create a well-balanced share portfolio.

Such companies which include the likes of Microsoft, Amazon, Gillette, Unilever are household names and have great moats of cash, carry low amounts of debt, have top class managers and best of all, keep paying steady dividends, regardless of what’s happening in the wider economy.

In Warren Buffett’s latest investment letter to his Berkshire Hathaway stockholders, he highlights this very issue by noting how Coca Cola, “paid us $88 million [in dividends] in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

If anyone ever needed an example of both the power of compound interest and patience, this is it. 

That doesn’t mean you should run out and buy Coke shares. The real secret to duplicating Buffett’s extraordinary success is to identify the next Coke, or Apple when they’re cheap and on their way to becoming a world dominator.

Good luck Enda. With our debts you will need it

Over the coming months we’ll all have a better picture of how much more belt-tightening will be necessary as the new administration discovers the true state of our national finances.

I wish Mr Kenny and his new cabinet the best of luck, but I’m keeping my personal expectations very low: all the good will in the world isn’t going to reverse our bad fortune or reduce our catastrophic debt burden to manageable levels.

The state is insolvent and not just because it took over billions worth of private bank debt.

Over many decades it made financial promises to all of us, but especially to a growing army of public sector workers and welfare recipients, which it cannot now keep. It also allowed a financial black hole to appear at the heart of the public health service. 

It will take decades to ‘reform’ these mistakes, when what is really needed is a wrecking ball and a blueprint of a scaled down version of state services that will be sustainable and appropriate to our new circumstances.

The Fine Gael and Labour health policy reforms, based as they are around universal health insurance, are just one case in point.

Everyone would carry health insurance, the service would be patient driven and access would be based solely on need. Labour, laughably, suggested these reforms would happen by 2014, including free GP access, but Fine Gael says it would get the process underway by 2016.

Reform of this magnitude would have been hugely complicated and monstrously expensive even during the Celtic Tiger years when there was plenty of cash sloshing around; today the state has to borrow just to meet the existing health service payroll.

Meanwhile, there is no incentive for the 300,000 health care workers to cooperate with the cutting of their jobs, pay and pensions and why would GPs, who still have control over the hours they work and the fees they charge in this bankrupt state willing become employees of the Department of Health? 

 Finally, while two million existing private health insurance customers may be deeply unhappy with the rising cost of their premiums, they are mainly satisfied with the service they get.  Would a state-run universal insurance system automatically deliver a better service at a cheaper cost? (I don’t think so.)

 Anyone who still thinks that the state should deliver all health services needs to take a good, hard look at how much the health service bosses pay themselves and then ask how many of them were ever held personally accountable for the terrible medical scandals that have occurred and the disgraceful but ongoing waste and inefficiency. 

Such people wouldn’t be allowed to run a dishwasher in the private sector, but you can bet that their biggest concern, if any of them are gently urged to consider voluntary redundancy (also a coalition policy) the unions’ biggest concern will be the size of their golden handshakes and pensions.

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No prizes here

 A reader from County Offaly has taken me up on my less than enthusiastic comments recently about Irish Prize Bonds. He discounts the inflation risk by saying that all deposits are vulnerable to inflation and that the overall return of 3.9% of the annual prize bond funds to bond holders is possibly even better than what a saver could expect, especially since prize funds are entirely tax free. 

 He’s correct about the inflation risk these days, particularly as the cost of living is going up as we import food and fuel inflation and wages and assets like our homes and pension funds keep falling.  But the prize bond return affects only a tiny number of holders, with even fewer enjoying a big payout.  Tens of thousands of small bondholders never see a penny return despite a lifetime of bond ownership; that simply isn’t case if you leave your money in a bank, even in this country.

 I’m not really anti-prize bond, except when the company insists on describing their product as an ‘investment’, which is clearly is not. Investments involve risk and reward; good ones pay a regular dividend and can produce a capital return.  Genuine investments create wealth and jobs and prosperity. 

 Prize bonds may be propping up our insolvent state, but they’re about as useful to our wider society as …money left under a mattress.

Don’t be driven to despair when seeking car finance

As anyone who needs a line of credit knows, Irish banks are keeping their cash drawers closed, especially as depositors keep emptying their accounts for safer destinations.  

The drying up of normal credit hasn’t gone unnoticed by the finance banks operated by the big car manufacturers like Volkswagon and BMW, who now extend, via their dealers, much of the credit to buy these cars that are selling due to the car scrappage scheme.

Now the SIMI, the society of the Irish motor industry has decided that something has to be done for their members who sell used cars; their business continues to contract as the scrappage scheme hoovers up much of the buyers.

In conjunction with the country’s credit unions, they’ve launched a funding scheme that allows buyers direct access to credit unions (DACU), even if the buyer is not yet a member of a credit union. To avail of any loan offer from a credit union in their ‘common bond’ area – their geographic community or employment that has a credit union - the car buyer will then have to join that credit union.

With credit union loans as cheap as 6% or 7% this is pretty good offer both parties, by-passing for the dealers the credit freeze that has paralyzed the banks and for the credit unions, the shrinking of lending (and members) because of he downturn of the economy and the propensity for everyone these days to save, not spend.

Since the banking crisis began, many credit unions have unwittingly turned themselves into savings banks, not lenders. This was never their primary purpose; credit unions are there to extend modest amounts of affordable credit to ordinary people.   A good selling point of this arrangement is that the credit union member gets a straightforward loan with interest payable only on the diminishing balance and not the usual, hire-purchase terms that constitute typical car dealer finance packages.

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A hunger for change

The Egyptian uprising that, like in Tunisia, was sparked by rising food costs among other problems. In a country where the average person will spend half their daily wages on food, it doesn’t take much price inflation to light the revolutionary fuse.

Here in the West an adult will typically spend between 10% and 15% of their income on food. Historically, the ratio has never been so favourable. Tell that to someone who is out of work and trying to feed himself on €188 unemployment benefit, not to mention the pay the rent or mortgage, electricity and fuel bills, insurance and all the other trappings of a once comfortable western lifestyle.

Fifteen percent of a €30,000 gross income for food works out at €87 a week, but just €28 a week on a jobseeker’s gross annual benefit of €9,776.  Spending a modest €87 a week for groceries now represents 45% of his weekly income.

It is any wonder that there are now families in Ireland, in which parents are unemployed (or underemployed), where eating three square meals a day can only happen if you skip paying the rent, heat and light bills regularly?

The price of staple food is rising here, just like it is in Cairo and Tunis.  It may be some time before food price inflation means we can no long absorb the higher cost or adjust our meal plans, but there’s no room for complacency.

If Cairo’s revolution was trigged by higher food prices because there simply was no more give in their meagre budgets.  How high do food and fuel prices have to go before 450,000 in Ireland with no work and subsistence incomes, decide it’s time to at least express their displeasure?

The general election is a sort of circuit breaker after months of high tension, but whoever wins the poisoned chalice in three weeks time had better come up with some immediate, practical policies to deal with the hardship of rising prices here, as well as all their lofty fiscal and political reforms.  

Maybe we have more in common with Egyptians than we think.

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Tax evasion

Meanwhile, I can’t wait to grill a few canvassers.  None of them really have a clue about the big issues, so I’ve decided to amuse myself by having at least one minor question that they might think they can answer.  This week it is, “Your party’s long term property tax policy is…?”

The consensus seems to be that we will get a property tax of some kind.

The National Recovery Plan, that masterpiece of fiction for the benefit of our friends in the IMF, claims that the interim charge will be just €100 in 2012 and €200 in 2013, but let’s stop kidding ourselves: property/ poll/ council tax in every bloated, socialised western economy inevitably comes with three zeros after the first digit. 

The prospect of a party canvasser – any canvasser - spending a few minutes vehemently insisting that no such tax will ever happen on their watch, is definitely be worth answering the door for. 

Social charge is universally unfair for the self-employed

Here is an important personal finance tip for 2011:  Avoid self-employment if your business earns you more than €100,000 a year, or else get yourself a very good tax advisor.

Last Tuesday morning, the Minister for Finance Brian Lenihan, who was under pressure to get the Finance Bill passed, unexpectedly amended the terms of the detested universal social charge, which is supposed to replace income and health levies and widen the tax net.

The previous evening, on RTE’s Frontline programme, Labour’s Sean Sherlock, a self appointed champion of the lower paid, demanded that the Bill be amended in order to “penalize high earners”.  

The widening of the nation’s tax base in the budget is clearly not popular and there is no sympathy for anyone who earns €100,000 or more in these straitened times. The USC, Sherlock insisted, is ‘regressive’ because low earners must now pay the same percentage rates as high earners who also pay the charge: 2% on their first €10,036 earnings, 4% on the next €5,980 and 7% on any earnings over €16,016.  The high earner however would see a reduction by paying the new social charge compared to the 2010 health and income levies. 

A low earner on €20,000 a year now has to pay €719 in USC while the higher earner on €200,000, will this year pay €13,319 USC compared to €16,250 a ‘savings’ that is more than offset by higher income tax.

Anyway, last Monday night, Brian Lenihan must have been impressed by Sherlock’s passionate attack on how gently he believed the new USC treats high earners, because the Finance Bill was amended the next morning.

Not only did the finance minister reduce the USC from 7% to 4% for all medical card holders with chargeable income, he increased the highest rate by 3%, from 7% to 10%, on any earnings in excess of €100,000 …but only for the self-employed.

Every higher earner was slightly advantaged by the abolishment of the old levies, but only the self-employed have been targeted to pay what is an €80 millions shortfall once medical card holders’ USC rate is reduced.

“If you want to ensure that some person doesn’t pay tax, someone else has to pay,” the Minister said. “That’s now how we’re going to operate as a State. Policies have to be costed. We can’t make promises that are not costed anymore. Politicians have to respect the fact that this country is under fiscal

discipline now. We can’t just promise money we don’t have.”

This is an astonishing admission for Lenihan. It’s too bad he and his predecessor failed to operate such lofty principles earlier, when they couldn’t resist slashing income and property taxes to unsustainable levels.

Yet it still doesn’t explain why he’s taken such an unprincipled stand now by applying a 10% universal social charge to just one set of high earners, when every other similarly renumerated private employee or civil or public servant, including Dail politicians, will only pay 7% on earnings over €100,000.

(Well off pensioners, of course, are the most special category of all:  not only is their state pension of €11,897 totally exempt from the universal social charge, but they were singled out in December’s Budget as being liable to only the lower 4% charge, regardless of the size of their total income.)

The application of the USC and the income to which it applies is riddled with such anomalies.  It is a very badly constructed tax and it should be reviewed and revoked by the new Dail.

This additional 3% surcharge  was a disgraceful, final act of tax discrimination against a single category of worker who doesn’t enjoy the same social benefits as those who are employed in the private or public sector, despite paying the same amount of PRSI. The self-employed work longer hours with less security and unlike higher paid civil servants or high paid company directors have no powerful unions to protect their interests and no financial resources to cultivate powerful political friends. 

The self-employed, about 340,500 people, have, like other categories of small business people, taken a beating in this recession.

A universal social charge of 10% lifts them into a 55% tax bracket.  It’s an ugly precedent, even if it does only apply to the self-employed, especially when the Labour Party openly advocates a third, 48% tax bracket for all earners over €100,000 and Sinn Fein is keen to introduce a wealth tax on private assets.  

We might want to consider past experience of 50% plus personal tax rates. Inevitably, once all the legal avoidance measures are exhausted, some people choose to reduce the amount they work; they turn to the black economy or shut down their businesses altogether and seek paid employment.

I doubt very much if the Revenue will collect that €80 million tax shortfall from the self-employed in 2011, but that tax burden will have be carried by someone else.

Like they say at the National Lottery, ‘it could be you’.

Houses are cheap,  but you’ll pay with peace of mind

How far do house prices need to fall before you take that financial leap of faith and buy your first home or trade up to a bigger property?

With prices down just over 15% in Dublin last year, according to the Permanent TSB/ESRI index and just over 8% in the rest of the country, and by their estimation, 38% since the end of 2006, there’s probably still some way to go if you subscribe to the theory that an economic correction “is equal and opposite to the deception that preceded it.”

The pace of decline slowing down - so is unemployment and wage reductions in the private sector.  But repossessions and emigration are still on the rise, the banks are still tightening their lending and it is expected that all the lenders will have to hike mortgage interest rates soon.

All of this simply cannot be interpreted as a sign of anything but a very unhealthy property market.

Prices will continue to decline because the huge inventory of unsold, unfinished and empty properties all over the country and consensus that some kind of property tax (and not the nonsense €100 levy being proposed for next year).  The decline will continue for as long as it takes to unwind the excess inventory. Recovery will require demand to exceed supply and banks to start lending again. Owners will need to emerge from negative equity and everyone must accept that owning a property will end up costing them, as it does most people in western societies, the equivalent of about 1% in the form of a local authority charge.

Rachel Doyle, a spokesperson for PIBA, which represents many mortgage brokers, claimed last week that the fall in house prices means it is “virtually as cheap to buy a house as rent one”. 

Well, not quite.  When you rent rather than own a place during a catastrophic economic collapse you don’t have to worry about negative equity, rising mortgage interest rates, property tax or the loss of job flexibility when you’re legally tied to a property (on top of the insurance, maintenance, security and depreciation costs associated with ownership.

If you are a young renter, count your blessings.

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Everybody hurts

The diminishing class of tax-paying earners, have just seen their incomes drop, for example, by another €30, €50, €75 a week .

Disgruntled listeners to popular radio call-in programmes like Liveline fell into at least two camps – those very low earners who thought going on dole would be better than continuing to work at a dead end, low paying job for even less money; and the middle and higher earners who bemoaned the future loss of children’s ballet lessons, and digital TV packages and private health insurance. 

This is just the first of four years of austerity, but I felt sorriest for the people who had worked out debt refinancing arrangements with their creditors over the last two years only to discover they don’t have sufficient income anymore to even honour those deals.

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A chance to change

It’s important to repeat that time is running out for the nearly 450,000 VHI customers who may want to remain with the company for another year, but don’t want to pay the 1 February increase of up to 45% Plan B and Plan B Options premiums. 

By cancelling your existing plan and renewing it with VHI before 1 February you can lock in the 2010 premium for another year.  By renewing on the corporate version of the plan at 2010 prices you can make even greater savings.  By shifting altogether to Quinn or Aviva Healthcare you will pay even lower premiums.

Too bad the same can’t be said for mortgage holders who are finding their options to change lenders or to refinance an existing loan with a lower cost provider is practically non-existent. 

Once the next round of interest rates rises starts – PTSB is expected to announce another 0.5% hike in their variable rate soon – the notion of low cost mortgages will also be a thing of the past. 

Drop private health insurance?  I’d rather sell my car

January is always the month that many of us at least try to get a handle on our personal finances.  It has nothing to do with New Year resolutions and everything to do with sleeping better once you eliminate the overdraft.

With the December budget skimming another 4% or so off your income in 2011 and no sign of wages actually rising, if you’re a typical €50,000 earner the rise in taxes and cuts in child benefit payments and other cutbacks means you need to find another couple thousand euro to eliminate from your budget if you just want to tread water.

Big ticket items are the best place to reduce overheads – rent, food, utilities and insurance.  After the recent shock announcement from the VHI about how they will raise the cost of their most popular categories of plans on 1 February by 15% in the case of family plans, and by 35%-45% for Plan B and Plan B Options, you could start tackling your budget right there.  The plan members should either be moving providers altogether or at least the very least move to the corporate equivalent of their plans.

None of the three health insurers – VHI, Quinn or Aviva – are keen on selling you the cheaper, superior versions of their individual plans, but they can’t stop you asking for them.  To start you off, you might like to know that corporate plan substitutes for VHI’s Plan B and Plan Options is Company PlanPlus Level 1 which costs €805 instead of the post February price of €1,224 and €1,430 respectively.

Quinn’s equivalent corporate plan at that level is Company Care at €785 and Aviva’s is Business Plan Extra at €799. These are adult rates, but a good health insurance advisor will be able to steer you towards the most suitable plan for your children who I am told, seldom need the higher benefits available from corporate plans.

These same experts also suggest, if budgets are tight, that you drop down to a cheaper plan or drop the outpatient ‘day to day’ cover until you really need it in order to save money.  Dropping cover altogether means you have to take your chances with the public health service again.

I would sell my car before I get rid of the private health insurance cover.

No matter how dedicated the doctors and nurses in our public hospitals, I know that if any of my loved ones developed a serious, health condition, especially one that falls into the ‘elective’ category, we’d end up languishing at the end of already very long queues.

In a country where surgery to remove a child’s festering tonsils or to replace a diseased hip is considered ‘elective’, it’s no contest between the family car and the family health insurance.

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Gap’s the way to do it

Study now, pay later, concludes the just published Hunt report on higher education.

Sounds rather like a variation on the ‘spend now, pay later’ philosophy that got us into considerable financial trouble in recent years. Nevertheless, Hunt, a former government advisor is convinced that an outsourced student bank loan scheme – the NTMA might be one of the administrators - is the most sustainable solution.

As every other country that has introduced a government-sponsored loan scheme has discovered, there’s a common outcome:  they provide immediate relief for the exchequer but kicking the real cost down the road for many years, when finally the student pays back their low interest debt with income.  That’s the good news. The bad news is that the entire scheme will eventually go deficit because some students can never repay their loans and other choose not to; either way, the taxpayer still picks up a portion of the bill.

Lower income students and their families inevitably take on a lower initial debt burden as all sorts of exemptions kick in but if family assets are also considered, clever parents find ways to hide those assets – the Irish farming community could write that brochure.  As usual, it’s the middle class kids who end up with the typical €25,000 debt anchor in exchange for a liberal arts degree that doesn’t guarantee them any job, let alone a job in their field of study.

For that, they may have to return to the university to do a debt-laden Master’s degree.

Before a college or university is allowed to sign up for the student loan scheme they should have to cut their own costs, otherwise the pain is only one sided.  They should also be obliged to build their endowment and scholarship funds to cover the fees of the brightest and the best scholars in Ireland. 

The rest – the thousands of nice, but not overly bright middle class kids (and their parents) who consider attending college a natural born right as well as a rite of teenage passage – will have to just come up with or borrow the €6,000 or €7,000 annual fees.

I am beginning to wonder if using even part of that money to fund a travel gap year abroad might be a far better investment. At least at the end of the year your child might have some idea of what they don’t want to do for the rest of their lives and know at least how much effort it would take to pay back €25,000.

Now the screw will start turning on the public sector

It’s little consolation to anyone whose taxes are rising or income falling, but we are not alone in our economic misery in this country and not only will it be worth keeping close track of how other countries handle their debt crisis, but how individuals manage as well.

The 19 December edition of CBS’s 60 Minutes, the US flagship news documentary programme, spelled out to the biggest US audience yet just how serious is the state and municipal debt problem.

“Financial meltdown” and “the biggest threat to the US economy” is how these $1 trillion deficits being experienced by just the top 15 states and municipalities, led by California, Illinois and New York are described by bond and bank analysts.

State governors like Chris Christie of New Jersey, who slashed the state budget by 26%, has cancelled building projects that would have employed 6,000, and cut $1 billion from education spending making 3000 teachers redundant is now at loggerheads with the state unions: “The bottom line is I don’t have the money [to pay people].  I literally don’t have it. The Day of Reckoning has arrived.” 

Christie says it isn’t a revenue problem they face, but a benefits one in which years of overspending and over promises by previous administrations to public sector unions has pushed New Jersey, which also has the highest state taxes in America, to the brink of insolvency.  He doesn’t expect the Federal government can afford to bail them out.

Sound familiar? 

A lot of the job loss pain has been felt by private sector workers since 2008, but 2011 is going to be the year that the 300,000 civil and public servants on the state payroll discover that there is no such thing anymore as a guaranteed job for life, an incrementally rising income or cast iron defined benefit pension. 

The pay cuts and pension contribution increases of 2009-10 are just the start of what is a rolling programme of job cuts and pension reform, assuming of course that the famous National Recovery Plan actually has the four or five years that the IMF, ECB and EU are committed to keeping us on life support if we behave ourselves and do as they say.

 Since their plans are based on the same false premise that the Irish government subscribes to – that adding more debt to already catastrophic levels of debt will reverse your state’s insolvency - every civil and public servant who is in the least bit worried that their job is expendable may want to consider their existing financial position very carefully, not to mention what would happen to them in retirement when the DB, 50% of final salary pension disappears.

When you live in a bankrupt state, the niceties of life disappear for anyone who has been relying on other people to meet the cost of your weekly pay cheque or pension payment.  That means not just dusting off your CV, but saving a chunk of whatever income you do have in a retirement fund you control yourself, ideally an ARF and PRSA that at least attracts some tax relief going forward if you are a standard rate taxpayer.  

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Tesco gold

When grocery giant Tesco starts selling gold – and not buying it – is when the metal will be in price bubble, not before.

It’s not happening here yet, but in the UK, 15 pilot Tesco Gold Exchange stores offer £7.81 per gram for 9 carat gold (€10). It must be confident it will earn significant profits by buying its customer’s cast off jewellery, which is packaged up in envelopes provided at the checkout, sent to a special address where it’s weighed and checked for its gold content.  Tesco then sends you a check plus shopping bonus points.

If Tesco thinks there’s money still to be made by buying – not selling - gold, then you should thinks so too.

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Coal adds light

Grim as the huge floods in Australia are, anyone invested in US and South African coal shares has probably seen their values spike recently.

Many coal mines in Queensland are either shut or unable to ship their coal due to the floods and with these coal stocks bound for mainly China and India, where demand is insatiable, it’s no surprise to see a rise in the share price of non-Australian coal producers. Analysts say that coal that was priced at $225 a ton for the first quarter of 2011 could reach $300; it all impacts on the cost of goods we import from the Chinese. 

The interruption in Australian coal production – just like the drought in the Ukraine this past year and the row over rare earth metals - shows just how vulnerable the world economy is to climate events or geopolitical risk. 

Energy and food shares or commodities should also have a place in your pension or investment fund this year.

Readers who would like Jill to organise a personal finance seminar for their group or organisation this year, can contact her at jill@jillkerby.ie for more information about topics, venues and cost.  Sandra Gannon, the TAB Guide co-author and tax expert is also available during the seminars to answer individual tax questions.