Notes on the Front

First, the military mucked up the English language. What used to be called ‘retreat’ is now called ‘retrograde motion’. And what used to be called destroying is now called saving (as in the US General’s assertion during the Vietnam war that ‘we had to destroy the village to save the village’). That one is still playing nicely in Iraq until the US is forced to ‘retrograde’ out of there.

Now, international capitalists want in on the act. The latest example is ‘correction’. In the past when stock markets declined words like ‘slumps’, ‘downturns’, ‘plunged’, etc. were used. Nowadays, the worldly-wise anchorperson on CNBC news assures us: ‘The market is in the process of correcting itself.’ Whatever.

The international equity markets are in a flutter these days. It presumably started with a fall in the Shanghai stock market – plunging/correcting 9% in one day. The scapegoat was initially a little scheme whereby investors borrow in a low-interest rate country to invest in another high-interest rate country. It came unstuck when these ‘carry-trades’ didn’t foresee or appreciate the currency risks they were exposing themselves to.

But there’s more to it. Richard Delevan lists a number of factors behind the week of travails in the stock markets (Mr. Delevan still retains a sense of the language: he uses words like ‘cratered’ and ‘tanked’): it was Alan Greenspan, former chairperson of the US Federal Reserve, musing on a possible ‘slowdown’ in the US economy (not a good word to use in the company of hyper-sensitive investors). Or the rising number of defaults among US mortgages. Or that Chinese investors were alarmed by rumours that the People’s Republic was introducing a capital gains tax. Or that investors, believing the market had peaked, were cashing in their shares. Take your pick. Think up more.

Let’s look at one impact of all this ‘correction’: SSIAs and pensions. Stories were published in last week’s paper about how the fall in the equity markets was wiping vast sums off people’s projected SSIA returns – in these cases with only a few weeks to go. This is true, if the SSIA instrument was primarily equity based. And pensions: in February pension funds went into the red and struggled to make any gains this year.

With the Greens and the PDs proposing new SSIA-style savings schemes for old age, and Labour rumoured to be coming up with one of its own, recent events should throw some cold water on their proposals. Proponents may argue, with some justification, that such ‘corrections’ are inevitable and that, over the long-term, markets will experience this growth. Therefore, someone saving in pension funds, or SSIA-style pension schemes, will benefit over the long-term. Let’s examine that argument.

It’s true there is a long-term growth trajectory, but it isn’t a straight line. It suffers troughs and peaks. For instance, in the US, someone retiring just before the dot.com bubble burst / 9/11 period would have been fine, all things being equal. Those who hadn’t yet retired, however, found whole swathes of their pension savings wiped out. In the long-term equity growth may even out, but people don’t retire in the long-term; they retire every day, without reference to the troughs and peaks in the equity market.

For the last 10 years Irish pension funds have grown by an average 8% per year. However, this compares poorly to GNP growth – which has more than trebled. When equity markets and pension funds were taking a massive hit only a few years ago, GNP growth at home and internationally was still increasing.

A study recently released in the UK shows the long-term deterioration in the quality of pension schemes. Consultants Watson Wyatt claimed that someone retiring now with a personal pension would be much worse off than someone paying the same contributions each month but retiring 10 years ago.

‘Lower returns on investments mean that pension pots after savings for 20 years are less than half that the level they would have been ten years ago and annuity rates – used to convert pension pots into income – have also fallen by nearly half over the same period. Once these two cuts are combined, the resulting income is down by 78% for a man and 76% for a woman, for savings of identical amounts.’

With direct benefit / final salary schemes on the decline in the private sector, people are being asked to move en masse to personal pensions of one form or another. Even where employers chip in, these schemes do not guarantee a benefit at the end of the day. It all depends on the markets, and if a pension fund manager is a bit slow in bailing out of a market that has peaked, god help you.

To tie long-term savings to developments in the equity market is a dodgy thing at best. And certainly second best. The better course would be to link pension benefits to economic growth in a democratic manner. For a variety of reasons which I detailed in a previous post, a state earnings-related pension is the only guarantor of certainty in old age. All the rest, barring direct benefit / final salary schemes, are daily trips to the equity bookies.

This issue, of course, should be part of the election debate. Instead we get promises of a €300 weekly social insurance payment – which is less than what it appears (it only promises what the Government has been doing for the last five years and still falls short of the Pension Board target in five years). Oh, and we get arguments over which tax to cut, and by how much.

But we’re not getting a debate, never mind workable proposals, on how to ‘avoid uncertainty’ in old age. I suppose we’ll have to wait until after the election to get a real political debate going. If not we’ll have to learn a whole new vocabulary:

‘No, Grandfather, your pension savings didn’t ‘slump’ or ‘plunge’. It ‘corrected’ itself. That’s why you don’t have any money.’