Friday 28 November 2014

First rule of government? You should never let a good crisis 
go to waste

Ronan Lyons

Published 17/08/2014 | 02:30

OPTIONS: The difference between a student equity stake and a student loan is that there is no fixed amount owed - it goes up and down with the graduate's wages
OPTIONS: The difference between a student equity stake and a student loan is that there is no fixed amount owed - it goes up and down with the graduate's wages

Following the complete failure of the credit-fuelled economic model adopted by Ireland Inc in the early 2000s, the security blanket offered by troika funding gave Irish policymakers a unique opportunity to reshape how the State raises - and spends - money.

It is unfortunate, then, that we have left troika funding with more or less the same system for provision of public services as the one we entered it with. The reason is obvious, even understandable.

With politicians and policymakers in fire-fighting mode, they were not interested in the bigger picture or in ensuring that part of their legacy is a system that can serve our grandchildren.

Instead, their primary aim was in ensuring the deficit was closed as fast as possible and - on the politicians' front - in getting re-elected.

However, none of that changes the challenges we face in the decades ahead. The areas of pensions, health and education each show a system creaking under the weight of an out-of-date model.

At the heart of our public services is a crisis about ageing. Favourable demographics in the 20th Century - not just in Ireland, but across the developed world - allowed governments to bring in systems that washed their faces on one condition: the young outnumbered the old.

We are moving to a world, however, where populations are stabilising and even falling and the old make up a greater chunk of the population. We need a system of public services that is future-proof. While this sounds like jargon, here it means something very specific: would a particular public service survive if we had twice as many retirees as workers?

The defined benefit pension fails this test abysmally. This is not so much a pension, as a salary until death. The worker has not had to stash away assets during their work for their old age; instead, when they worked, they paid retirees' pensions, expecting there to be an even greater number of workers when they retired to return the favour.

However, in coming decades, Ireland faces the prospect of a stabilising or falling population.

This is compounded by people working a far smaller fraction of their lives than before. Whereas our grandfathers probably worked from 15 until 65 before dying around 70, those entering the workforce today do so closer to 25, expecting to retire before 70 and live until 90. The ratio of working years to retired years has gone from 10:1 to closer to 2:1. But the resources to provide for each retiree still have to come from somewhere - there is no free lunch.

It is clear that the day of the defined benefit pension is over, although it still remains the default in the public service. Greater contributions - as brought about by the pensions levy - do not come close to addressing the funding gap. Some paying the pensions levy believe that they are already contributing to their pension pot and the levy is a form of double-taxation - unfortunately, they have not been putting aside money into their own pension pot, they are merely paying for the current crop of pensioners.

This is directly relevant for our healthcare system too. The death of James Reilly's plan of universal health insurance leaves a void regarding the long-term vision for healthcare in Ireland. While I wasn't a huge fan of his scheme, the former minister was right to look abroad and try and learn from best practice. Often, we forget that there are dozens of other developed countries grappling with the same issues as ourselves, whose experiences can help us choose wisely.

A future-proof healthcare system is one where the typical person provides over the course of their lifetime enough resources to pay for their healthcare. In Singapore, this is achieved by giving everyone what amounts to a second pension, one devoted entirely to their healthcare.

When people are young, they are typically healthier, so their contributions build up over time and are invested, giving them the resources to cover larger healthcare bills when they are older. For a certain number of very costly procedures, the State steps in and covers the costs. For the rest, the system does not require a growing population to work.

Sustainable funding of higher education is also sadly lacking. With the Government paying fees for EU undergrads but also setting the price, it is no surprise that they have settled on a low price.

The colleges' attempt to bridge the gap with "administration" and "registration" fees plus income from non-EU students - but Irish higher education desperately needs a funding system that works.

This is often framed as free fees versus student loans as the only two options. But organisations in North and Latin America are exploring a third option, that of an equity stake.

The idea is simple: if going to college increases your earnings by 10pc a year, then you should be prepared to pay, say, 3pc of your wages for 10 years to go.

The difference between this and a student loan is that there is no fixed amount owed - it goes up and down with your wages. The difference between this and a graduate tax is that the equity stake is a fixed amount, which you can buy out (for example with a sign-on bonus).

With this kind of system, colleges are then free to set fees that reflect the cost of instruction, while the State avoids the trap of student loans: the social groups suffering most from a lack of access to higher education are also those most likely to be averse to taking on debt.

These are the kinds of options - across pensions, healthcare and education - that we should be exploring to make sure we are not just fighting fires, we are planning for the future.

The good news is that while it would have been easier to make these reforms while under troika protection, these options can still be explored. The bad news is that it seems there is no appetite at Cabinet level for the sort of root-and-branch reform required.

Ronan Lyons is Assistant Professor of Economics at Trinity College Dublin and editor, with Ed Burke, of 'Next Generation Ireland' (Orpen Press)

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