This article was originally published on InvestorOnline.ie
Ireland’s banks are facing a major looming crisis. Not in terms of the Mediterranean bonds, where the bank exposure is low, but because of defaults in the domestic mortgage market which are increasing monthly.
Up to now, the government has focused on bracing the banks by essentially resorting to direct injections of cash, which add to the government’s liabilities and ultimately land on the taxpayer. Given the severity of the cuts imposed to date and the further €3.6-€4bn that needs to be taken out of the economy in this year’s budget, the ability of the government to support the mortgage market, and ultimately the banks, is decreasing rapidly.
In this context, the private pension funds are a tempting target and have already been eyed up by the government as a source of funds, with plans to impose a levy directly across the funds of 0.6% for the next five years. This is a major disincentive to save for people who have already seen how the national pension reserves have been soaked up to support the banks, with reserves falling to €14.9 billion in October 2011 from a high of over €21 billion in 2007. Many fear that the government will keep coming back to hit private pension funds to the same devastating effect.
The government needs to change tack. In taxing the private pension funds, they are hurting the very citizens who are doing what the government wants by taking responsibility for their own future. Taxing savings will discourage people from saving and will revert the responsibility for their support in retirement back onto the government.
A far better approach is to allow people who are in mortgage difficulties and who have pension funds to tap into those pension funds for monthly mortgage payments only. At the moment, they can only do this by taking their whole fund out and paying the tax on it. However, a means by which they could use it to pay monthly mortgage payments would prevent the whole fund from being unnecessarily diluted and would take pressure off the individuals who have genuine fears of losing their house. In this scenario, they would have more time and energy to focus on looking for employment or establishing new businesses.
It will also remove some of the strain on the banks as their bad-debt provisions could be lowered and their balance sheets strengthened, reducing the need for taxpayer subsidy.
Although this will reduce the amount of pension savings in the country, it will not have a negative effect on savings in general. Those who don’t need to draw it down will still have their pension fund, while those who did will feel very happy about the fact that their own prudence over the years was paying off, relieving them from the nightmare scenario of losing their home. They will most likely have some of the fund left when they resume earning and are likely to start saving again, as they have just experienced the benefit of having ‘rainy day’ reserves.
There will need to be safeguards to prevent people using the fund for day-to-day consumption but it cannot be beyond the ken of our civil service to devise a set of rules for the direct monthly payment of mortgage amounts from pension funds to the mortgage provider.
At least Government efforts could then be focused on those who are in real danger of losing their home.