# Borrowing to fund the state pension



## rainyday (16 Nov 2001)

Is Mr McCreevy right to borrow a billion quid this year to invest in the state's pension fund? I don't think I'd fancy borrowing myself to fund my pension contributions. If he's convinced that he can get a rate of return on his pension investments that will exceed the interest rate on the borrowings, surely he should go all out and borrow ten or twenty billion and use his gains to improve services for all of us?

Regards - RainyDay


----------



## UDS (16 Nov 2001)

*Re: Borrowing to fund pension*

<!--EZCODE ITALIC START-->_ "If he's convinced that he can get a rate of return on his pension investments that will exceed the interest rate on the borrowings, surely he should go all out and borrow ten or twenty billion and use his gains to improve services for all of us?"_<!--EZCODE ITALIC END-->

Only if you assume that the ten or twenty billion spent on "services for all of us" is going to generate the same return as the pension investments.


----------



## Grundy (16 Nov 2001)

*Gearing up the Country's Balance Sheet*

Iunderstand your point, Rainyday, if UDS has somewhat missed it.

If the Government is borrowing to make investments in a pension fund it is a pure investment call - it is clearly not a case of putting aside some of today's consumption for future needs.

The Governement is simply borrowing £1Bn and investing it in equities.  It is gearing up the country's Balance Sheet or, for the cynics, having a bit of a punt with £1Bn on behalf of the citizenry.

Rainyday's point is (I think) that if this is such a good bet why doesn't be borrow £20Bn and risk it on the old Equity Roulette Wheel.  If Equities bounce by 25% we've made a cool £5Bn or so which could be spent on services.8)


----------



## Brendan Burgess (17 Nov 2001)

*Re: Gearing up the Country's Balance Sheet*

It is usually a bad strategy have borrowings while saving at the same time.

But Charlie McCreevy's strategy is correct for this reason: Funding future pensions is a current cost. If he didn't invest £1b in the pension fund, it would appear that we had no budget deficit and there would be further calls for increased spending and reduced taxation. 

By contributing the £1b to pensions, he is giving us a good scorecard of where we are at.

Brendan


----------



## Galileo (18 Nov 2001)

*Re: An Phoblacht get it wrong again*

The Insider, writing in today's <!--EZCODE ITALIC START-->_ An Phoblacht/SBP_<!--EZCODE ITALIC END-->, has a right old lash at poor old Ruarie Quinn on this whole subject of the national pension fund.

Amongst The Insider's many howling naivetes was a comparison with a company investing in the staff pension fund whilst still having borrowings on its balance sheet.

This analogy is totally off the wall.  A company's pension fund is held in trust for its employees.  If in the future the company goes belly up the accrued pensions are secure even though all the current employees may be sacked. 

If at some future date Ireland goes belly up (say in the sense of having 25% unemployed) there is no security at all for the pensioners of the day in the fact that there is a fund ostensibly built up for them.  The ultimate security of tomorrow's pensioners is in the success of tomorrow's workers to enable Ireland to afford its dependancy bill.  

Why does America not have a pension fund?  Why not the UK?  Why not any other country in Europe?  I think Charlie has a few fellow travellers in Singapore or Chile but by and large this idea of a national pension fund is shunned as an irrelevancy.   It is a book-keeping illusion that a country can save for its future pensions just like an individual.:|


----------



## UDS (19 Nov 2001)

*National Pension Fund*

No, Galileo, it depends on how the fund is invested.

If it is invested in world markets in rough proportion to their capitalisation, only a tiny, tiny fraction of it will be invested in Ireland.  Hence if the Irish economy goes belly-up the fund will be largely unaffected.

Small economies like Ireland, Singapore and Chile have this luxury.  Large ones like the US do not.


----------



## Galileo (19 Nov 2001)

*Re: National Pension Fund*

I take that point UDS.  <!--EZCODE BOLD START-->* If*<!--EZCODE BOLD END--> the NPF is invested in foreign assets or domestic capital projects, yes the country will be accumulating true assets for the future.

But there is still no way that a situation would be politically sustainable that in say 2030 the workers were being taxed to the hilt whilst pensioners were doing quite nicely from the NPF.  

Rather the State would be forced to cut back on the 70% of its pension bill that was unfunded, but even if fully funded there is no guarantee that a future Government wouldn't draw on the NPF for more pressing needs.  

This is the crucial difference between the NPF and a private Occupational Pension Scheme.:|


----------



## UDS (19 Nov 2001)

*Re: National Pension Fund*

Yes, this is true.  But the pensioners are clearly better off than if there is no fund.

For that matter, so are the taxpayers. Even if the fund is used to pay pensioners and is not "raided" for other purposes, the taxpayers are relieved of the burden of making the payments that the fund makes, and the scope for reduding tax, or maintaining public expenditure in other areas, is higher than it would have been without the fund.

As long as the fund is invested outside Ireland, it is an asset which we can draw on when times are leaner than they are now.


----------



## Galileo (19 Nov 2001)

*Re: Borrowing to invest in the NPF*

But, <!--EZCODE ITALIC START-->_ UDS_<!--EZCODE ITALIC END-->, getting back to the original query, if the borrowing was also substantially from foreigners there is effectively no national saving happening, merely a gamble that foreign equities will outperform the interest rate at which foreigners are prepared to lend to us.  And if that looks like a sure thing why not go the whole hog as <!--EZCODE ITALIC START-->_ Rainyday_<!--EZCODE ITALIC END--> suggests.


----------



## UDS (19 Nov 2001)

*Re: Borrowing to invest in the NPF*

There is also the point that the borrowing and the investment are not necssarily for the same term.  The state pension fund will not be drawn down or so for thirty years; any borrowings we undertake now will be repaid in considerably less time.    Hence we are still transferring expenditure from  30 years hence, not to today, but perhaps to five years time.  We are recognising the need to make provision for future expenditure commitments, but spreading the burden of that commitment over a period.  The analogy is borrowing on overdraft or on short-term loan to make individual pension contributions.  The justification is that, were we to raise taxes to make the necessary pension contribution, we might tip the economy into recession/accelerate the coming downturn or whatever, and we avoid this with short-term borrowing.

The same result could be crudely achieved by making no contributions for a couple of years and then doubling (or slightly more) the contributions for the next couple of years.  But do we trust future Ministers of Finance to do this?  It’s a bit like suspending your mortgage payments for a limited period – you need to be absolutely confident of your ability and willingness to resume them when you intend, and to make up the shortfall.  By doing this through government debt we effectively give ourselves no option – government debt must be repaid, whereas a moratorium on contributions to the pension fund could be continued indefinitely.


----------



## Galileo (21 Nov 2001)

*Re: Borrowing to invest in the NPF*

Hi <!--EZCODE ITALIC START-->_   UDS_<!--EZCODE ITALIC END-->,

You argue your case well, for an earthling.  I had to consult with Sir Isaac, hence the delay in replying. 

We are firmly of the view that there is a total illusion about this whole NPF thing.

Unless economic behaviour <!--EZCODE BOLD START-->*   actually changes*<!--EZCODE BOLD END-->, in the sense of diverting from consumption to capital accumulation, how can mere engineering of the national balance sheet make any difference?

Let us imagine that the Government suddenly found the budgetary Holy Grail, the way to tame the economic cycle and run a balanced budget every year.  

In these circumstances, Charlie's NPF would imply that although the budget was otherwise balanced we should borrow 1% of GNP to invest in the NPF because of the demographic timebomb.

But nothing of any economic impact would be happening; all that would be happening is that a hugely geared national balance sheet would be built up.   Whether that is a good thing or not depends on whether the NPF outpaces the cost of borrowing - and if we are so sure of that why not wallow in it.  Borrow as much as you dare and punt it on the world stockmarkets.:eek   

No, there is a Law of Gravity operating here.  True economic saving is about behavioural change - cutting down on current consumption to build up future capital.  

The fact that Charlie has so quickly decided to borrow to meet his NPF obligations proves that the NPF does not represent any change in budgetary policy or economic behaviour - it is a self-serving, pompous, naive sham. :no


----------



## Brendan Burgess (21 Nov 2001)

*Re: Borrowing to invest in the NPF*

Let's say that Charlie listens to you all. What will happen?

We will end up with a balanced budget i.e. no borrowing. 

If we have no borrowing, there will be huge pressure for additional expenditure or tax cuts. Charlie is giving us the impression that we have a huge budget deficit. This is very important in maintaining the pressure for controlling our expenditure.

I think it is a reasonable long term expectation that the return on the pension fund will be in excess of the cost of state borrowing. But this doesn't mean that he should play the markets by going the whole hog. Reasonable borrowing within our repayment capacity is  perfectly acceptable risk to take. Betting the shop is not a good idea.

Brendan


----------



## Galileo (7 Dec 2001)

*Re: Who was right after all?*

Extract from <!--EZCODE ITALIC START-->_ Charlie's_<!--EZCODE ITALIC END--> Budget Speech:
<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE ITALIC START-->_ <!--EZCODE BOLD START-->* "I am a firm believer in investing for the future.  I will be meeting the statutory requirement of providing 1 per cent of GNP for the National Pension Reserve Fund out of currently available resources."*<!--EZCODE BOLD END-->_<!--EZCODE ITALIC END--><hr></blockquote><!--EZCODE QUOTE END--> So even <!--EZCODE ITALIC START-->_ Charlie_<!--EZCODE ITALIC END--> recognises that borrowing to fund the NPRF is a sham.  Eat your heart out <!--EZCODE ITALIC START-->_ UDS_<!--EZCODE ITALIC END--> and <!--EZCODE ITALIC START-->_ BB_<!--EZCODE ITALIC END--> :b 

The fact  that he didn't use currently available resources but merely raided a few pockets in the National Balance Sheet that we hadn't noticed before and shifted them around simply shows that <!--EZCODE ITALIC START-->_ Charlie_<!--EZCODE ITALIC END--> does seem to be have that unique talent of hoodwinking ALL of the people ALL of the time.:rolleyes


----------



## UDS (7 Dec 2001)

*Re: Who was right after all?*

Hi Galileo

On this occasion, of course, Charlie avoided borrowing by cannibalising a few assets instead.  As everyone has pointed out, he can’t do that forever.  There is a finite – very finite – supply of assets to be cannibalised.

Suppose in a year or two he’s still finance Minister, and he’s burned the last stick or two of furniture.  Now he has to borrow.

From a pure economic point of view, whether the borrowing will pay, as you rightly say, depends on whether the return on the NPRF exceeds the interest cost.  If we are confident that it will, we should borrow truckloads of money; otherwise we should not borrow at all.

But maybe the borrowing is not an attempt to find the cheapest way to fund our pension obligations.  Maybe it is borne of a belief that, when we incur an obligation, we should recognise the cost of the that obligation and make provision for it, even if we are not actually going to have to meet the obligation for some time.

If we accept that, then we <!--EZCODE ITALIC START-->_ should_<!--EZCODE ITALIC END--> borrow to fund our pension commitments.  Otherwise we will pretend to ourselves that we are running a balanced budget when we are doing nothing of the kind.  We are raising £x in taxes, spending £x <!--EZCODE ITALIC START-->_ and committing ourselves to the subsequent expenditure of a further £y_<!--EZCODE ITALIC END-->.

This implies a fully-funded national pension system, and Charlie is not in fact aiming for that.  What he is intending to do is, broadly speaking, to establish an equalisation fund.  Some of this years tax revenue is going on pension commitments made in previous years but not funded – quite a large chunk of it, in fact. It is reasonable that, in the future, some of future years’ tax revenue will go to meet pension commitments made this year.  But if we leave it at that, the proportion of tax revenue which is committed in this way will vary wildly over time.  Right now it is fairly low because, for demographic reasons and Celtic Tigerish reasons we have a relatively large workforce paying lots of tax, and a relatively small population of pensioners drawing low pensions.  In a generation that could be reversed.  The purpose of the NPRF, as I understand it, is to smooth the effects of demographic trends and economic cycles so that the prorportion of each year’s tax revenue which is committed in this way will remain broadly stable.

If you accept this logic, then the contributions which should be made to the NPRF depend on demographic issues and on pension commitments, but not on whether the budget is in surplus, in deficit or in balance in any particular year.

Eppur si muove.


----------



## CM (8 Dec 2001)

*It's all Greek to me!*

<!--EZCODE BOLD START-->* Eppur si muove.*<!--EZCODE BOLD END-->

That's easy for you to say! 8o  (sorry Greek - not Geek!).


----------



## Galileo (8 Dec 2001)

*Re: Eppur si muove.*

I never said that!  It is unfair of you to remind me of a very painful experience. 

Back to the topic.

Imagine three Greek guys, Alpha, Beta and Gamma.  They are identical in every respect, age, income etc. except in their approach to pension funding.  <!--EZCODE ITALIC START-->_  (Also for sake of argument assume that the return on assets equals the cost of borrowing)_<!--EZCODE ITALIC END-->

Alpha spends everything he earns, he is aware that he will one day be old but he reckons somebody will look after him.

Beta spends everything as well.  However he is seriously worried about who is going to pay his pension so he starts accumulating a fund.  He borrows from the bank to  build up this fund.

Gamma hates borrowing and is also fully aware that he, and only he, can provide for himself in his old age.  Gamma cuts down on the pints and uses the money he saves to build up a pension fund.

Which of the three will have a financially secure retirement? :\


----------



## UDS (8 Dec 2001)

*Re: It's all Greek to me!*

Hi CM

Come with me to Rome, on the 22nd of June, 1633.   The seventy-year old Galileo Galilei kneels in the Dominican Convent of the Minerva under the magnificent frescos of Allegrini, depicting the victory of Catholic forces over Albigensian heretics at the battle of Muret in 1213.  The symbolism is not lost on him.  Before him sit Cardinal Bellarmino and other officers of the Holy Inquisition.  Galileo places his hand on an open bible and formally abandons the “false opinion” that the sun is the center of the universe, and that the earth revolves around it.  The church will allow this view to be put forward as a hypothesis, but Galileo has stated it as a fact.  He has been tried by the Inquisition and found to be “vehemently suspected of heresy”.  He makes this declaration in order to avoid being found guilty of heresy itself.

He rises painfully to his knees and turns to leave the room.  And as he leaves, some say he is heard – or is he? – to mutter “eppur si muove” – Italian for “and yet it [the earth] does move”.  Cardinal Bellarmino, who is wiser than some of his colleagues, finds it convenient not to hear this.

The moral:  the truth is the truth, regardless of what those in authority may say or do.

The other moral:  Actually, from the perspective of modern science, the church’s position was closer to the truth than Galileo’s and in some respects was more reasonable.  Galileo believed as an absolute fact that the sun was the centre of the universe, and that the earth revolved around it.  Only the second of these beliefs was correct.  The church believed that the earth was the centre of the universe, which was wrong, but did not insist that this was necessarily true and was willing to allow other hypotheses to be explored.  Galileo had better evidence for his position, but neither party had actually arrived at the full truth and – ironically – only the church was willing to admit that this might be so.


----------



## CM (8 Dec 2001)

*Space the final frontier*

In infinite (and expanding space) surely any arbitrary point can be considered to be the centre. Discuss.

<!--EZCODE BOLD START-->* He rises painfully to his knees and turns to leave the room.*<!--EZCODE BOLD END-->

Tell me (a) where was he before this and (b) why wouldn't they let him stand up? :lol


----------



## Galileo (8 Dec 2001)

*Re: Where is the centre*

You will realise that this is very painful stuff for me - I much prefer discussing that nonsense, the NPRF.

If A moves round B then so too must B move round A.  Consider a couple waltzing.

So the Earth moves round the Sun from the perspective of someone standing on the Sun.  Equally the Sun moves round the Earth from the perspective of someone standing on Earth.  But what Copernicus and Keppler spotted was that from the perspective of someone standing on Earth the Planets were revolving around the Sun and not the Earth.  Thus on balance the Sun had more claim to be the centre as only it revolved around Earth whilst a dozen or so planets revolved around the Sun.  This is all in the mind of humans and, as I now know, humans are the only form of intellectual life in the Universe, it is their perspective that rules.  So the score is 12-1 in favour of the Sun.


----------



## CM (8 Dec 2001)

*It's all relative*

I guess Einstein wasn't around in dem days? :lol


----------



## Grundy (12 Jan 2002)

*National Pension Fund*

As I understand it, a proportion of the NPF is invested in € bonds.


From a macro economic point of view this is ridiculous.  The most economic way for the country to invest in bonds is to pay off the national debt.

The only winners out of this are the fund managers who get the mandate to invest in the bonds. :rolleyes


----------



## Brendan Burgess (14 Jan 2002)

*Re: Eppur si muove.*

Galileo said

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> Which of the three will have a financially secure retirement? <hr></blockquote><!--EZCODE QUOTE END-->

Gamma will have the most secure retirement.

Beta might not be that far behind. He will see that he is running a deficit which will show up in high borrowings and may well alter his behaviour.

Alpha is in the worst position, because he has no appreciation of the problem. 

Brendan


----------



## Troy (27 Mar 2002)

*National Pension Fund is actually counterproductive*

Till now, my view was that the NPRF was a smoke and mirrors jobbie.  Investing in assets whilst still having a National Debt - balance sheet bloating doing nothing really for bad or for worse.

Now I think it is actually psychologicaly counterproductive. We are already hearing demands from Labour  and the IMO and others to spend the fund on more worthy immediate projects than future pensions and indeed these projects are more worthy.

If there was no such fund and instead we simply reduced our debt, there wouldn't be such an obvious target for greedy eyes.  So, far from finishing up as a fund for pensions, it will become an ever increasing temptation to be put to more immediate and arguably more deserving use.  This temptation would be very much less if we simply reduced the National Debt.

And another thing, what's all this about future Finance Ministers can't touch it.  Is Ho Chi Quinn just bluffing - simple legislative change seems to be all that is needed.  If they really wanted to make this Fund secure they should have had a Constitutional Amendment which says it can't be touched until 2030 and furthermore that, unlike other Amendments, it itself could not be overturned even by Referendum.:rolleyes


----------



## Brendan Burgess (28 Mar 2002)

*Re: National Pension Fund is actually counterproductive*

Hi Troy

I agree with your criticisms of the Labour Party's attitude to the NPF.

But to be fair, I think that Fine Gael has a similar attitude. 

And I think a FF led coalition government would probably raid it if they needed to.

Brendan


----------

