“Generation rent” aka the Irish middle class, and its problems. June 15, 2016Posted by WorldbyStorm in Uncategorized.
Meant to post this up last week, but you know, events… Michael Murray in the SBP financial section – well it’s all financial, but the Money Plus section, wrote about ‘Generation rent’ and how it faces injustices… ‘the cohort in the 20-35 age group si likely to be the first generation of young Irish adults that will go through adult life poorer than their parent, facing greater difficulty in accumulating wealth for home purchase and provision for old age’.
He doesn’t initially quite address the reasons he regards for why this might be. He suggests ‘this phenomenon has arisen from a number of factors that have influenced the respective living standards and prospective living standards of the current adult generations in Ireland – and in some of the other developed Anglo Saxon economies too’. This is bad though, to him, because ‘ “it is a probable that risk – and has already begun to manifest itself in – a ‘progressive’ move to the political extremes. This in turn gives rise to increased political instability. That in turn threatens negative effects on foreign direct investment, on trade, on entrepreneurship and risk taking and hence on national economic performance generally. It thus undermines prosperity and future security and growth for ‘generation rent'”.
Note how it is the political and social responses to the ‘phenomenon’ that he blames rather than engaging with the phenomenon itself. nor is it clear why those responses would ‘undermine’ future security and growth given that the growth functions independent of the state and other means of addressing security issues.
Indeed he’s clear that he is antagonistic to ‘a more penal tax system, which is an inevitable consequence of the growing popularity of the left in politics – which risks undermining the more privileged older generation too in due course – with few winners once wealth destroying socialist tendencies take hold.’
So what is the ‘main’ cause of these problems?
For him it is… ‘ultra low interest rates’. He looks back at the 70s and 80s and 90s as a time when ‘having bought property in high interest rate environment(s)… we rejoiced when interest rates started trending downwards’. ‘Our salaries typically rose in decent high single or double digit percentages every year’.
“Contrast that with more recent years where interest rates have been persistently hovering close to zero for deposits and sub-5% for mortgages, stimulating the buy to let market for the lucky older generation siting on now unmortgaged first homes and buying their second to top up their pension funds from the rising rents paid by ‘generation rent’.”
At the same time the older generation has had little to worry about pension wise. Most blue chip employer offered generous defined benefit pension scheme – usually totally no-contribuotry or substantially so. They seem very affordable back a few decades ago as average life expectancy was shower and the discount rate used to calculate the estimated net present value of future liabilities was a lot higher…
However all that change utterly as inflation and gilt yields began to track down in parallel with life expectancy creeping up. And there were more factors that contributed to the change too. They included pension portability in the event of a change of job as well a as big shift over those decades in the nature and scale of rewards that started following on a performance related basis to the top executives in almost all pics.
Note though that he is confusing the situation of most workers with the situation of those at the top of company structures. The reality is, and it’s remarkable that he doesn’t address this, that fewer than 50% of private companies offered any contributory pension provision at all to its workers whether DC or DB in nature. And that at its height and prodded by government legislation in the 2000s in relation to PRSAs, etc. I worked in the private sector in Ireland continuously from 1991 to 2004 and thereafter on contract. At no time was I offered a private pension by an employer. I wasnt alone. In the companies I worked for those who were given such pensions were higher management. That was a pattern replicated across many many companies in the economy, indeed most it would seem from the statistics.
It makes his line that:
…today ‘generation rent’ has been excluded (from pensions) altogether. At best it gets offered contributions to personal plans which offer a much less prospect of security or anything near commensurate benefits in retirement…
…seem oddly irrelevant. Most workers haven’t been in that situation. Only a small layer have had such benefits, usually in older larger companies. Indeed this is no glitch, it’s a feature for private enterprise in this state, sub-contracting out pension provision to the state.
Curiously, despite his complaints about socialism in relation to tax he has to accept that:
Combined with compression of their earn gins growth rate- – due to the competitive pressures imposed by a combinatoin of technology and globalisation and the reduced power of organised labour – this leaves ‘generation rent’ with hopeless pension prospects.
But truth is it was, for most, ever thus. The difference, perhaps the reason he’s taking note, is that this is reaching into the so-called ‘middle class’ in a way that wasn’t necessarily apparent in the past (or at least during the heyday of the 1950s on to the 1990s).
He is, at least, open later in the piece about the class tilt of the analysis. Check this out:
I don’t suggest that there are easy solutions to this problem. But when its full impact dawns, and as generational inequalities widen among the middle classes, the ground is likely to become even more fertile for a significant move to the left among the ‘generation rent’ segment of the electorate.
Does one applaud him for recognising the problem, or criticise him for the manner in which it only becomes a problem when the ‘middle classes’ feel the pinch? Or perhaps both. What’s fascinating is that he simply cannot accept that leftward solutions might actually hold some means of ameliorating the situation.
A leftward drift in response to all this, not just here, but in many countries across Europe – threatens both political stability and personal prosperity of the aggrieved younger generation. But it threatens the well-to-do property owning pension-drawing population.
A leftist drift force by the alienation of the hunger generation risks deeply damaging macroeconomic consequences for investment, for savings, for pensions and for employment – with slower growth and higher taxes bringing generations rent down further their parents and grandparents down with them.
But what alternative does he offer? The rightward ‘drift’ has delivered us to this point. There’s no sense in denying that, a rightward drift that has all but ensured that structural issues, in relation to technology and so forth, are exacerbated. It is all very well to identify a problem – there’s much in what he says that many of us on the left would agree with, even if the focus on the middle class is irritating in the extreme. But what does he suggest? Nothing. At least not here.
Kind of fascinating in its own way.