Post-budget, Irish disposable incomes will remain vulnerable

In 2012 the average Irish household had a disposable income – once rent or mortgages had been taken care of – of €1,516 a month, according to the Central Statistics Office.

A new round of figures to be published this week will almost certainly show an increase but – even in a best-case scenario – disposable income is unlikely to have climbed by more than 10 per cent since the earlier set of figures.

A 10 per cent increase would take the average to €1,666 and it might be in excess of €1,800 once changes set to be rolled out in next week’s budget, which will add up to €150 to the monthly pot, are taken into account.

But how far is that going to go? According to an annual survey published by the AA, when routine bills including lighting, heating, television, broadband, communications and home insurance are totted up, €528 of that €1,800 will have disappeared.

That means that even post-budget, the average Irish household will have €1,272 every month, to cover food, clothes, running a car, education, childcare, entertainment and many of the other monthly expenses considered normal by most people.

It is not a lot. But it could be much worse in the years ahead if the chips don’t fall our way, and in recent years they have fallen quite helpfully for many Irish people.

Tracker mortgages

Holders of tracker mortgages have enjoyed a mortgage honeymoon as the European Central Bank has kept rates at historic lows. This has stopped tens of thousands of people from drowning in the debt swamp.

For every €100,000 owed on a 30-year tracker mortgage of 1.5 per cent plus the ECB rate, an increase of just quarter of one per cent would add €13.12 to the monthly repayments. That may not sound like a great deal, but a person with a €300,000 tracker mortgage would need a further €40 monthly, or €480 each year, if the ECB raised its rates by just quarter of a point.

In June 2008 the main ECB rate was 4.25 per cent. Were it to reach that high again – and history suggests it will, perhaps not in the short or even the medium term – that €300,000 mortgage would cost almost €700 extra a month, or €8,400 a year.

And that’s after tax. A person would need to earn about €17,000 more just to cover the extra payments. The ECB increases would also hit put- upon standard variable rate mortgage holders in a similar way.

Pensions

Another factor in any future conversation about disposable income is likely to centre on pensions. One in two Irish adults does not have a private pension.

People struggling to get by day to day can hardly be blamed for not thinking too much about the future. But putting a portion of disposable income into a pension fund is an imperative that too many people will continue to ignore at their peril.

Someone without a private pension will in theory be able to rely on the State when retirement comes. The State pension is now €230.30 a week – and may be increased slightly next week.

But the State pension comes with no guarantees. At present there are more than 420,000 Irish people aged over 65. By the end of 2049 there will be almost two million retirees.

The State will struggle to pay pensions for all these people, not least because the proportions working and retired will have shifted.

Five years ago there were six working people for each retired person. In 2050 there will be only two working people for every retiree.

So people will have to bear the costs themselves. The National Pension Policy Initiative of 1998 suggested an “adequate” gross retirement income of 50 per cent of gross pre-retirement income.

That figure has not changed much in the intervening years. A person who wants a retirement income (including the State pension of €12,000) of €30,000 needs an annual private pension of €18,000. For that they need a fund of about €350,000.

Someone who starts a pension at 25 will need to save €238 every month. A person who starts 10 years later will have to find €432, while someone who puts off their pension until 45 will need to put €864 into their pot every month for 20 years to reach that sum (which is based on 6 per cent growth a year).

Small savings

That is not to dismiss the wisdom of pension savings. Putting money aside now is one of the best things someone can do with any genuinely disposable income they have, says Fiona Daly of Rubicon Investments.

If you can make small savings to your monthly outgoings, as advised to the people who have spoken to Pricewatch for this series, and put that into a pension instead, it will give you a greater level of disposable income later on.

“A lot of people don’t understand the tax benefits of investing in a pension,” says Ms Daly.

“For a start, a person on the marginal rate who invests €100 gets €50 back. If their company matches their investment, €200 goes into their pension pot but it is only costing them €50. I can’t think of any other product that offers that level of return.”

But have we become a more financially prudent people? How chastened are we as a result of the recent recession, and how will it affect our spending habits longer term?

Systemic change

Stephen Kinsella

is a senior lecturer in economics at the University of Limerick and he is not at all convinced Irish consumers’ attitudes have changed significantly.

“My sense is that nothing is ever learned for long,” he says. “We will see a systemic change in people who are highly indebted but just about everyone else will return to old habits, which is kind of depressing.”

Gerard O’Neill of the consultancy firm Amárach has been analysing Irish consumer behaviour and attitudes since before the crash and has an opposing view to Dr Kinsella’s. He thinks Irish consumers have been permanently changed by the crash.

“In the 1990s Irish consumers were seen by some brands and retailers as a soft touch, and that is most definitely no longer the case,” he says.

“We are seeing a hesitancy on the part of businesses to put up prices. We are not going to go back to the way we were. Consumer culture has changed too much.”

Series concluded