My Pre-Budget Submission

[Brendan Burgess]

So I have decided to focus on three areas to highlight them. If any of them get through, that would be great. I have a final draft now and will submit it tomorrow.

Brendan

Budget 2023

Pre-Budget Submission from Brendan Burgess

15 August 2022
The writer is a consumer advocate and founder of the Consumer Forum, askaboutmoney.com where these issues are frequently discussed. The opinions are my own and not the views of the contributors to Askaboutmoney. Many other Pre-Budget suggestions are discussed in a dedicated Budget forum at Askaboutmoney.com


Summary
Helping Generation Rent to get onto the Housing Ladder
• Allow First-Time Buyers to borrow the deposit from their own pension fund. Note, they are borrowing it and not cashing their pension fund early.

Helping people in Mortgage Difficulty
• Introduce a Repayable Mortgage Assistance Payment, the equivalent of HAP, for struggling mortgage holders.


A fairer and more sustainable contributory Old Age Pension
• PRSI paid by the self-employed, employees and their employers should go into an account in the individual’s name. The amount of Old Age Pension paid on retirement would depend on the amount saved in the account.
• Whatever else is done, this individual account system must be introduced for the self-employed.

 

[Brendan Burgess]

Helping Generation Rent to get onto the Housing Ladder

Allow First-Time Buyers borrow the deposit from their pension fund

Home ownership is more important than a pension in guaranteeing a comfortable retirement

During their working life the housing costs of a homeowner are lower than the housing costs of a renter. It is usually much cheaper to pay a mortgage than to pay rent.
These lower housing costs, leave the homeowner with more money to contribute to a pension over the longer term.
So, a homeowner is likely to end up with lower housing costs and a bigger pension fund in retirement.
A renter in retirement is vulnerable to
• Rental inflation
• Longevity risk – depleting the pension fund by living too long
• Investment risk – running out of money because the investment returns are too low
All of these risks are greatly reduced for a homeowner.
• They are not affected by rental inflation
• They will have the house as long as they live
• Residential property tends to be less volatile than the stock markets
Furthermore, if a homeowner runs down their pension fund in retirement, they can get a reverse mortgage, also known as a life loan, secured on their home.

We have to reverse the fall in home ownership in Ireland
The ESRI has estimated that about 50% of people who are currently in the 25 to 34 age cohort will still be renting in retirement. This compares to only 10% of those who are currently retired. This condemns a large group of citizens to uncertainty and the risk of poverty. It will also put an unsustainable burden on the Exchequer to support their rent payments.
In contrast, Singapore has a fully integrated pensions and housing system which has contributed to increasing the level of home ownership from 29.4% in 1970 to over 90% within 20 years.

Boosting home ownership requires a multi-strand approach:
• increasing the supply of housing
• reducing the price of housing
• helping First-Time Buyers access the finance for the deposit

This submission focuses on helping first-time buyers access the finance for the deposit.

This is not proposed as a quick fix to the current problems. It’s proposed to be a part of the long-term architecture of pensions and home ownership.  

Allow First-Time Buyers to borrow the deposit from their pension fund

• Allow First-time Buyers borrow up to 20% of the cost of their home from their pension fund.
• It is important to stress that they are not reducing the amount or value of assets in their pension fund. They are borrowing the deposit from their pension fund. So instead of investing in shares, the fund is investing in a loan to the pension fund holder.
• The holder of the pension fund would repay this loan

1. from their income over time, or
2. when they sell their home, or
3. from the 25% tax-free lump sum on retirement.

The advantages are huge:
• a greater proportion of the population would own their own home
• young people would get on the housing ladder much earlier
• their overall housing costs would be much lower as homeowners than as renters
• young people would be much more enthusiastic about contributing to pension funds
• in particular, it would make the proposed auto-enrolment much more attractive
• and, of course, they would not be dependent on the state for rental support in retirement.
The International Actuarial Association has a comprehensive discussion paper on the topic :
Interaction Between Pension and Housing.
This paper explains how Singapore quadrupled the supply of housing and increased the level of home ownership from 29.4% in 1970 to over 90% within 20 years.

Integrating pension policy and housing policy was a key part of this astonishing achievement.

 

[Brendan Burgess]

Helping people in Mortgage Difficulty



Introduce a Repayable Mortgage Assistance Payment

• Renters who are struggling with their rent get a Housing Assistance Payment (HAP).
• However, struggling mortgage holders get no assistance with their mortgage payments.
• Mortgage holders who meet the income criteria for HAP, should be given a Repayable Mortgage Assistance Payment – RMAP.
• This would be paid as a repayable loan secured as a second mortgage on the home.
• It would be repaid by the mortgage holder
• when their income recovers
• when they sell their house
• by their estate after they die
• Interest would be charged on it so it would be in the homeowner’s interest to repay it sooner rather than later.

The Benefits of an RMAP

• It would keep more people in their homes as it would make it easier for the lenders to restructure mortgages sustainably.
• In most cases, the cost to the Exchequer would be recovered in full as it would be a loan rather than a welfare payment.
• In cases where it is not fully recovered, the cost to the Exchequer would be low as mortgage rates are comparatively low. It certainly would cost the Exchequer much less than Mortgage to Rent.

RMAP would apply to a far wider range of people than Mortgage to Rent

• It could be paid to people in temporary difficulty but who expect their finances to recover.
• It could be paid to people with positive equity in their homes.
• It could be paid to people whose incomes are above the MTR limits.
• It could be paid to people whose houses are worth more than the MTR limits.
• It could be paid to people who would not qualify for social housing.
• It could be paid to people who qualify for social housing, but whose home is too big for their housing needs.

RMAP is a much better and much cheaper solution than Mortgage to Rent

The only government assistance available to borrowers in arrears at present is Mortgage to Rent where the borrower must sell their home to a private company which rents it back to the Local Authority at the market rent.

Mortgage to Rent is not fit for purpose

• It is very expensive for the local authority as they have to pay the market rent.
• It ties the local authority into a very expensive, very long-term lease of the property.
• The mortgage holder loses ownership of their home and becomes a local authority tenant. Even if their finances recover, they are unlikely to recover ownership of their home.
• It is very restrictive:
• the house must be in negative equity
• their income must be permanently impaired with no hope of recovery
• the house must not be too big or too small for the family
• It is administratively very complex to set up and to administer.

As a result of these restrictions, only 1,905 MTRs have been concluded in the 10 years of its existence. Given that there are about 30,000 people in long term mortgage arrears, it is clearly not fit for purpose.

RMAP would be far cheaper for the taxpayer than MTR:

• for a typical €300,000 house, the council pays around €18,000 rent whereas the interest on a €300,000 loan at market rates would be about half that. Where the borrower has a tracker mortgage, the interest would be about €3,000 a year.
• and, of course, the RMAP would be a repayable loan, so in most cases, it would cost the Exchequer nothing.

RMAP would be a huge help to people reaching retirement who still have a mortgage balance

Many people who had their mortgages restructured during the last crisis are going to reach retirement with a balance on their mortgage. These people are not in the mortgage arrears statistics at present. Many of these will be able to repay that balance from retirement income. But some will not. Typically, they might have a mortgage of €50,000 on a property worth €250,000. It makes no sense to repossess that house. There is no risk to the lender. But the Central Bank rules classify this mortgage as non-performing and the lender must either repossess it or sell it. An RMAP would make it sustainable.

 

[Brendan Burgess]

Building a fairer and more sustainable pension system



Change PRSI from a Social Insurance Fund to an Individual Account System



The current system is completely unsustainable and will end up being means-tested

The current system where contributions go into one large Social Insurance Fund to pay out Jobseekers Benefit and Contributory Old Age Pension is completely unsustainable.

Tinkering with the contribution rates or retirement age will not fix the problem. To make this fund sustainable the government would have to do some combination of the following

• Significantly increase PRSI contributions
• Significantly reduce the amount of Contributory OAP
• Significantly increase the retirement age

Politicians keep deferring these solutions. The net result will be that we will be forced to make the Contributory OAP subject to a means test. As a result, many people contributing today in the expectation of an OAP in retirement will not be getting any pension.

The 4% contribution rate for self-employed and company directors is totally inadequate for the benefits they receive.

A self-employed person with an income of €40,000 a year is paying €1,600 a year in PRSI for which they will get a Contributory Old Age Pension of up to €25,000 a year in retirement!

Something has to give. Either they pay a lot more PRSI or they get a much lower pension.

It is unfair that a PAYE employee who contributes 15% gets the same benefits that a self-employed person gets for 4%

A PAYE employee pays 4% PRSI and their employer contributes another 11% on their behalf. Yet the self-employed contributes only 4% and gets the same benefit. Neither are adequate to cover the level of benefits people demand.

The ESRI has highlighted this disparity in their Options for Raising Tax Revenue

While the lack of entitlement to certain contributory benefits has traditionally been advanced as a reason for why the self- employed pay less PRSI than employees, recent reforms have extended eligibility for the vast majority of these benefits to the self-employed. The Department of Employment Affairs and Social Protection (2020) found that these changes mean that self-employed workers now have access to around 93 per cent of the contributory benefits that employees do, in value terms, while making much fewer contributions.



An Individual Account System would make it both fairer and sustainable

Contributions made by and on behalf of people should go into an Individual Account in their name.

During periods of unemployment, they would withdraw money from their own account. They would not have the stigma of applying for Social Welfare. They would not be means-tested after 9 months. They would be getting their own money back.

When they retire, the level of pension would depend on the amount in their account. A person could choose to retire early, but they would get a lower rate of payment than someone retiring later.

The annual argument over the rate of the Contributory Pension would disappear. The person’s pension would depend on what they have in their fund.

General taxation would be used to pay welfare to people who have no pension fund or unemployment fund or other means.

A separate insurance levy could be introduced to cover maternity, sickness and disability.

If people saw a link between their contributions and their eventual benefits, they would be willing to pay more.

Under the current system where there is no link between contributions and benefits and where it is applied to all income, PRSI is rightly seen as just another tax. It would be very difficult to get people, especially the self-employed, to increase their contributions to the level required to make the fund sustainable. But if they saw that the increased contribution would go into a fund in their own name, it would be more acceptable.

If introducing this for PAYE employees is rejected, it must still be introduced for the self-employed.

It is very clear that this should be introduced for everyone, PAYE employees, the self-employed and company directors. But at the very minimum, it must be introduced for the self-employed as the benefits they get are excessive for the very low level of contributions they make.

 

[Bow tie]

Seem like three very reasoned proposals.
For the pension account; obviously, it benefits those who put in most- can I ask how it would work for those with no or low contributions re basic living standards? Would that be the existing non contributory?
Separately, would the account be invest-able like a pension or more like savings? If invested, people could benefit from gains, which may pay for periods of not working without eroding the overall fund. Although losses could prove problematic.

 

[Brendan Burgess]

it benefits those who put in most- can I ask how it would work for those with no or low contributions re basic living standards? Would that be the existing non contributory?

As with any account based system, those who put in the most, take out the most.
I don't think that the PRSI system should be used to deal with making things more equal.
Use the tax system for that.
The Exchequer could either top up contributions for the lower paid or top up the pension they take out on drawdown.

Ideally it would be invested in a superfund invested in equities. However, the problem with that is that the deficit in the Social Insurance Fund is so huge at the moment, that it would take a generation to get to that.

Brendan

 

[Cavanbhoy]

Hi Brendan, Thought your RMAP proposal on the radio today very sensible and cost efficient for both mortgage holder and state.

 

[Brendan Burgess]

Thanks Cavanbhoy

Yes. I find it frustrating that it's such an obvious thing. I met Damien English when he was the Minister of State for Housing with his officials and they all thought it was a very practical idea. But nothing happened.

Brendan