June 15, 2003

Save us savers, someone, please!

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Wanted: political party looking for easy, readymade votes. GSOH, non-scene, solvency optional as new constituency is financially solid. M/F aged 45-85. No gimmicks. Phone 1800-SAVERS.

Seriously, if the opposition could only open their eyes they would see a large and financially solvent constituency looking for a home. Irish savers – those over 50 – are being ignored.

Savers are the huddled, unwanted mass of Irish voters whose plight has worsened every time interest rates fall. This week, Bertie Ahern impoverished them further by insisting that banks pass on the full interest rate cut.

With deposit rates as low as 0.01 per cent on some accounts and inflation hovering around 4 per cent, it actually costs close to 3 per cent per year to save. Every time you put money into the bank you are losing.

What is the saver to do? Property is overvalued, with post-tax yields of close to 2 per cent, and rents are falling. After stamp duty, there is little or no reward for the risk other than increased capital values without any income.

What about stocks? Well, as we argued here a month ago at least, the market is poised for a nice rally that might sustain well (given the rate-cutting stance of global central banks) into the summer. Yet here again, fees are exorbitant. On average it costs about 4 per cent to get in and out of trades as a private individual, so you might be looking for serious rallies to keep you in clover.

The dividend yield of many good Irish companies is between 3 and 7 per cent. This is historically very attractive, yet the fees bring this gross yield down yet again. Also, the searing experience with Eircom has ensured that many virgin investors will never again bet on the promise of goodies tomorrow via stocks.

What about bonds? Again, the more the interest rate falls, so too does the bond rate.Sowe are back to square one. Many brokers are now offering guaranteed income products. But these are simply dressed up options, where the signing on fee can be up to 6 per cent and the early exit fees equally prohibitive.

Also, many older people want their assets to be as liquid as possible. What’s the point in tying up your savings for 15 years when you are close to retirement?

The SSIAs, which may well bankrupt the rest of us, are yesterday’s game. They were introduced to take the steam out of the boom at a time when even the hard of hearing could easily discern the hiss of an economic slow puncture. The fact that they mature in April 2006, a month before the last possible date for the next election, is surely coincidental! But as an easy money option they are out.

Therefore, the saver is faced with the reality that, over the coming years, there is likely to be little or no income from savings. The stock market looks the best bet, but, traumatised from the earlier privatisation blunders, ordinaryJoes will not be flocking to that particular party in a hurry.

Most people with savings have benefited greatly from the property boom, but they don’t want to sell their house to realise that cash. After all, what’s the point in being rich if you have to move from the house you lived in for years? Equally, many parents are still wedded to the idea of passing on bricks and mortar to the kids rather than selling up prematurely. So what are they to do?

The problem for society is that this is not likely to get better over the coming years. Most savers have already seen the value of their pensions fall dramatically from the highs of the late 1990s. These days, defined contribution pensions are the norm.This simplymeans that your firm actsasa middleman between you and the market with the financial institutions taking their cut. Thus the idea of a pension being a `benefit’ is questionable. So where to next?

Unfortunately, we are in a bit of a cul-de-sac here in Ireland. First, to raise income from savings, real interest rates have to become positive, and significantly so.This means that either inflation needs to fall continuously or nominal interest rates need to rise.

Yet if rates turn positive, the property high-wire act will come tumbling down. Even property bulls now admit that their case is based on interest rates remaining low. So the flipside of increased income from savings is wealth destruction from falling property values.

Biggertrendsare also worrying. People are getting older and living healthily for longer. This implies that we’ll all need more money for longer. The greying of the consumer has clear implications for savings and income, but, as discussed last week, demographic development on the continent will be paramount. As long as the Germans and French are getting older, interest rates will be low.

The strikes in France over pensions in the past few weeks are evidence that the French unions have not grasped the idea that retirement at 52 when a man’s life expectancy is nearly 80 is financial suicide. In Ireland, rates will remain low for some time,barring another wirtschaftwunder in Germany.

This poses a number of dilemmas for political parties. At the moment, as a result of demographic circumstance, the tyranny of the 20 and 30- somethings continues to grip Ireland’s political establishment.

Politicians fall over themselves to court this constituency in the same way that brand managers salivate over 22-year-old male car drivers when all evidence suggests that men in their 50s buy most cars.

Politicians’ infatuation with the first-time buyer is equally bizarre, as 20-somethings rarely vote in significant numbers. Yet all political parties are in thrall to the mantra of “lower interest rates at all costs” to cushion the rather excessive expectations of the young to the detriment of a readymade and increasingly ignored constituency – Irish savers.

Why is this? Maybe it is down to the age-old cult of youth and vigour. Maybe party strategists have deciphered enormous brand loyalty in voters. However, it is clear that the next election will fight for the hearts and minds of the `middle young’ as well as the `aftershock generation’.

There are a number of things the state could do to satisfy both generations. Most importantly, the state could harness today’s economic development to tomorrow’s pensions. For example, the state could begin with tolled roads, massive rail programmes, waste charges and statesponsored broadband for all.

The aim should be to price all these charges and tolls at 3 per cent above the rate of inflation, and to raise finance at today’s historically low interest rates. For example, the Irish state could borrow today in yen at 0.5 per cent for 30 years and cover its exchange rate exposure with a euro/yen call option. So we have our money for 0.5 per cent, plus the option price. Let us say we priced the tolls etc at 6 per cent per annum. This implies that the state would be making 5 per cent per year profit and getting the infrastructure built. This income could be used to pay pensions to those savers who decided to buy the infrastructure bonds.

At the end of the 30 or 40 years, the state could sell the paid-for assets to the private sector if it wished, ensuring a huge windfall for all of us that could be doled out in pension parcels.

What better way to bridge the gap between the generations? They pay for our roads and we pay for their pensions! Maybe an opposition party will realise that the saving generation as much as the first-time buyers constitutes the government’s Achilles heel. Watch this space. 


  1. jamie

    sir, firstly i must thank you for the excellent and thought-
    provoking articles to be found on this site. secondly, i
    must encourage you to not only increase your public
    appearances and broadcasting output, but to consider a
    career in politics, as your intelligent and coherent
    articles inspire a confidence that no politician in the
    state today can match. as a member of the “pope’s
    generation” i cannot thank you enough for the invaluable
    insight into the political incompetence and financial
    slavery to which i am subjected. keep up the good work.

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