OPINION:SUPPOSE I were to give you €100 on certain simple conditions. You have to share it with a stranger. You can offer them as much, or as little, of the money as you like.
If the stranger, who knows the rules and how much I’ve given you, accepts your offer, both of you can keep the agreed sums. If the stranger rejects the offer, I get the money back and you both walk away with nothing.
This is actually a standard experiment called the Ultimatum Game. (Pete Lunn explains it very well in his terrific recent book, Basic Instincts.) It has been played thousands of times in many different cultures, and the results are always broadly the same.
Standard economic models would suggest that the stranger simply has to take whatever you offer since, say, €20 of the €100 is much better than the sweet FA that results from saying “no”.
In fact, though, most accept nothing less than €30 and many will walk away from anything less than €50.
People will actually sacrifice their narrowly defined economic self-interest if they feel they’re being cheated or taken for a ride. Even when the sums of money are very large (one test in Indonesia involved an offer of three months’ income), justice matters at least as much as the money does.
We’re damned if we’re going to let some brass-necked chancer walk away with the bulk of the cash, even if we have to take an economic hit ourselves to make sure they don’t.
Ireland is currently one big Ultimatum Game, though with a twist. The twist is that instead of dividing up monetary gains, the players are dividing up losses. It’s not about how much money we gain but how much we don’t lose. Yet the principle is exactly the same.
One of the fascinating things about the Ultimatum Game is that most of those who are given the money to divide instinctively understand that fairness is in their own interests. Rather than take the risk of their offer being rejected by the stranger, they play it straight. Very few offer less than €30. The most common offer is exactly €50.
A fair deal has the best chance of being accepted and everyone walks away with a decent gain. Or, in our less happy case, with a tolerable level of pain.
The big problem in Ireland right now is that our rulers simply don’t understand this central human instinct. They believe that they can offer relatively badly off people 80 per cent of the pain with the argument that, if they refuse to accept it, we’ll all get 100 per cent of nothing.
On a level of narrow economic rationality, that may sound like an offer they can’t refuse. Why bring everything tumbling down, when, by swallowing your pride and accepting a profound injustice, you may end up with a better long-term outcome?
But, as the Ultimatum Game tells us, the response to such an offer almost always takes the form of forthright advice on where best to stick it.
Fairness isn’t an optional extra, but a crucial precondition for a deal.
Take the so-called public sector pension levy, for example. Objectively, it may be rational for the workers who are affected to take the pain, since they have most to lose if the State is bankrupted. But they won’t do so if they feel they’re being given an unfair ultimatum. And they’re absolutely right to feel that way. For one thing, the 92,000 lower-paid public servants, earning less than €35,000 a year, will pay more than those who earn twice as much. The internal balance of the levy is grossly unjust.
Even more unjust, however, is the basic logic of the levy. It may seem obvious that public sector pensions are a problem because they’re paid for from a declining public purse. But they’re not the only pensions that are subsidised by public money. My most recent pay slip reminds me, for example, that I paid nearly €400 in additional voluntary contributions (AVCs) to my pension scheme.
These AVCs are deducted before tax, meaning, in effect, that the State is giving me about €160 a month towards my pension. That alone is one tenth of the total monthly salary of a cleaner in the public service.
Why should she pay a 3 per cent levy on her measly income, while I continue to get these handouts?
A brochure on AVCs published by National City Brokers is headed “There IS such a thing as a free lunch!” and asks “Isn’t it a wonderful feeling to know that the taxman is making such a significant contribution to your retirement fund?”
Last week, the head of the Revenue Josephine Feehily told the Public Accounts Committee that she has simply no idea how much the pension schemes for 6,500 very wealthy individuals cost in tax reliefs.
The overall cost of private pension subsidies, which overwhelmingly benefit the top 20 per cent of earners, has been variously put at between €2.5 and €3 billion a year – between twice and three times what public servants are being forced to stump up.