The Irish pension crisis is the forgotten issue of the General Election debate
With the election upon us, little has been said about the real prospect of pensioner poverty for a generation due to retire in the next 20 years and beyond. Much focus has been placed on the so-called fiscal space and plans for government spending. But most of us are unaware of the scale of the looming pension crisis that will cost taxpayers more than 12 times the €35bn spent bailing out Anglo and Irish Nationwide.
This €440bn black hole in the state pension purse equates to the future cost of providing the state pension, plus public sector pensions. The shortfall means that those of us reaching retirement age in 20 years’ time may not be able to rely on the state pension for a reasonable retirement income. The insidious and relentless impact of financial pressure is difficult at any stage but particularly so in later years. Trying to work past retirement age or relying on the financial support of family may be the only option to help make ends meet.
Election campaign promises to increase the state pension by up to €30 per week have been made in recent weeks but, in the absence of major long term pension reform, this is simply unsustainable. Demographic change means that the ratio of employees to pensioners is expected to fall from the current level of approximately five to one, to just two to one by 2055. We have seen increases to the state pension age but, in isolation, this measure will have little overall impact. All political parties need to face this issue and develop a coherent funding plan; otherwise, even maintaining the current level of the state pension will prove difficult.
The Irish Association of Pension Funds has made a sensible suggestion for the appointment of a Pensions Minister. Such a minister, if appointed, must have concrete targets and real power to cut through the red tape and the overlapping departmental responsibility that currently exists – in essence, a mandate to simplify and streamline the entire pensions system.
Given that only 50% of employees in Ireland are members of an occupational pension scheme, more must be done to encourage or compel people to save for retirement. Setting a target to increase pension coverage to above 70% within 10 years would be a sensible step. To achieve this, the next government must urgently approve a roadmap and timelines for the introduction of a streamlined retirement savings structure, where all employees are automatically enrolled by their employer but can choose to opt out. While we lag behind the UK, Australia and New Zealand in this regard, we have the benefit of learning from their experiences to help expedite this process.
Clearly, under any auto-enrolment scheme, lower-paid workers may struggle to finance a meaningful level of contribution. A creative approach, such as an SSIA-style top-up, may be necessary for these workers. It would also make sense to link reductions in the USC rate to stepped increases in the employee contribution rate, thus allowing employees to contribute more to their pensions without experiencing a decrease in net pay. This approach supports recent arguments by IBEC to reform the tax system so that it rewards work, while also ensuring people provide for their retirement.
The revitalisation of the private sector pension system will need to be accompanied by further reform of the public sector system. Following the introduction of the Single Scheme for new public sector entrants from 1 January 2013, a wider review should be carried out to address the issue of sustainability. The aim, regardless of whether a worker is in the private or public sector, should be that individuals will have a reasonable level of pension in retirement, driven by the contributions paid by the employee and employer.
Finally, any government must take steps to restore trust in a pension system badly damaged by the raid on private sector pensions during the crash. Under the pension levy, over €2.5bn was taken away from savers who rightly expected that their assets, saved for the future in good faith, were ring-fenced from the whims of short-term political expediency. Before any auto-enrolment pension system can be successfully launched, it is vital that a binding commitment be made that this will not be repeated.
As election day approaches, it is unlikely that the politicians knocking on your door will tell you about their plans to address the funding time bomb in the Irish pension system. Yet, the truth is that this is one of the key questions you should ask: what will Ireland’s pension legacy be, and will the benefits of the end of austerity prompt the next government to plan a real long-term solution to the €440bn hole that no one wants to face?
As published by the Sunday Independent, 21 February 2016
Written by Mairéad O’Mahony, DC Leader, Mercer Ireland