In the long run, Ireland faces two apparently unrelated challenges. First, our infrastructural deficit will grow due to repeated government cutbacks. Secondly, as our population ages, our society will struggle to pay for pensions of a greyer society. The two problems of pensions provision, and infrastructural investment, are intertwined.

They can both be alleviated using municipal bonds.

In essence, individuals buy bonds issued by the government or even a local authority, which the government will honour in, say,45 years or longer, when the individual retires. The government uses the flow of funds from the bonds to build roads, bridges and levies today. Citizens should not trust the bulk of their retirement incomes, and indeed their wealth, to come from stock markets. Stocks and shares are inherently risky investment products.

While stocks may generate a higher return for the retiree than bonds, the reduction in uncertainty that would come from a continued investment in a guaranteed payback mechanism like a municipal bond would compensate for that potentially higher return. Two facts convince us of the need for a structure like municipal bonds to be implemented in the next five years. First, our society will get older in the next 40 years. By 2036, there will only be two people working for every pensioner. By 2050, one in four of our population will be over 65, one in ten will be over 80. Regardless of the year of retirement of these workers, and the replacement rate of the old by the young, the implications of this demographic shift for our pension and healthcare systems alone are enormous.

Pension provision may bankrupt the state unless private provision is instituted on a mandatory basis. Cash-strapped local authorities and governments can use funds generated by these bond issues on a yearly basis to reduce our infrastructural deficit s in transport , water provision, port equipment, broadband provision and community initiatives. Secondly, Ireland’s infrastructure ranks as one of the worst in the industrialised world. Out of the OECD-30 nation group, Ireland ranks 26th.

A systematic over-investment is required to bring Ireland up in these rankings. The current ‘tax and transfer’ system for the provision of funding for infrastructure means that potential willing investors are not included. This error of omission is compounded by the money lost in extraction costs: getting money off the taxpayer and into these projects is a costly exercise. It would make more sense to have a government-led web based clearing house (along the lines of treasurydirect.gov), where people or pension funds can participate in various proposed projects such as broadband fibre rings, tram lines, or roads, and in return receive a future cashflow from the operation of the project in addition to the guaranteed payout from their retirement bonds once those bonds mature.

Dublin’s Luas project could have been funded in this manner. Instead, the state spent more to get a tram on a track in Dublin than it cost to put the Beagle Spacecraft onto Mars, 400 million kilometres away. We simply have no way of closing the infrastructure gap using our current funding methods, in the current economic climate of fiscal retrenchment. Municipal bond issuances are one of the few ways we can change that. Bond issuances would also allow significant private savings to be utilised for the public good, with positive spillovers from the built environment to the real economy via increased investment and jobs created because of world-class infrastructure.

The number of non-resident stocks the average pension fund invests in ensures that the bulk of private Irish saving is not spent on capital creation within our own borders and, while this article is far from a call for protectionism, it must be noted that we need inward investment in order to become the ‘knowledge economy’ we claim to be aiming for. If the income from a municipal bond was tax-free, as it is in the US, it would make for lower funding costs, as higher yields wouldn’t be required by investors. Well-run bond issuances would attract additional non pension savings as well, perhaps drawing international capital to them as well.

Published in the Sunday Business Post.

We could simultaneously address part of our pensions problem and our infrastructural deficit using municipal bonds. The tools and regulations to issue these bonds exist in other countries, and can be brought into Ireland relatively easily. We lack the foresight and political will to implement them.