As we battle our way through the Covid-19 pandemic the Government has had to deal with an extraordinary crisis with no advance warning or time for preparation. However, there is another major issue that has been gathering pace for some time and which also affects everyone in this country – and that is the “pension crisis”.
In this case the Government has had time to plan, be prepared and act and that time is now. Luckily, much of the work identifying what needs to be done is already there. The last government set out a detailed plan when it published its Pensions Roadmap almost three years ago. There were a number of different strands to the roadmap but the main ones included reforming the State pension, introducing an automatic enrolment savings system, and improving governance and regulation of private sector pensions.
It is in every one’s interest that this Government gets ahead with implementing the recommendations of the Pensions Roadmap so that we prevent another crisis being visited on us in the near future.
The good news is that we have done all the analysis and now just need to focus on taking the actions already identified. The crisis that is predicted relates to the sharp increase in our elderly population that will take place over the coming years.
Less time to save enough
Ireland has one of the fastest ageing populations in Europe. Over the next 30 years our population over the age of 65 is set to more than double from 22 per cent of the adult population to 47 per cent. In addition, as life expectancy has been consistently improving, the fertility rate has been declining. With people living longer and fewer births the balance of our population is changing. Workers are also joining the workforce later as more people partake in third-level education. The net result of all this is, if we work to the traditional retirement age of 65, we have less time to save enough to provide a pension for what is a longer retirement than we have had in the past.
What can we do now to address these issues?
Firstly, it is important that Covid is not used by the Government as a reason to put off the pensions issue. It is tempting to focus only on the immediate issues but the problem with that is a long-term issue that is ignored will eventually become an immediate one and will then be much harder to deal with.
The Irish Fiscal Advisory Council (IFAC) highlighted this point last year when it referred to the pensions challenge that is set to confront us. The comparison with climate action is highly relevant and the longer we fail to deal with the issue the bigger a problem it becomes.
Fortunately, a detailed Pensions Roadmap exists. And while progress has been slower than anticipated, that offers a comprehensive pathway to doing the necessary preparation.
The State pension should continue to be the bedrock of the system. However, the challenge here is considerable as evidenced by last week’s CSO study which found that the State pension liability is rising by 10 per cent each year. It has become very complex with lots of qualifying conditions that are not always fair.
More needs to be done to reflect the work done by carers and homemakers. We also need to decide, as a society, how it should be funded. There is a lot of commentary that the cost is not sustainable. That is partly based on the fact that we do not pre-fund the State pension. We use PRSI contributions from current workers to pay the pensions of those who have now retired.
We have five people of working age for every one person aver 65. In 30 years’ time that will be just two workers for every person over 65. Will the PRSI system generate enough funding to cover the pensions that need to be paid out? Referring back to IFAC’s report last year, it made the stark observation that public spending will begin to rise above the amount of money that the State is bringing in to the exchequer.
Want to work beyond 65?
Whether or not it is sustainable is a choice we can make. We could start pre-funding now, our expenditure on State pensions is lower than many other countries. We also need to facilitate and encourage people to work longer. Many want to work past the traditional retirement age of 65. Others may not want to, or may not be able to, because of the types of jobs they have. We need to have a system that is more flexible and caters for all options in a way that is practical and treats people with dignity.
Private sector pensions also need to be simplified and made less complex. People need to be able to understand them and know their money is going to be properly looked after. As the state pension will only help people avoid poverty, other savings will be required to give people a retirement they can enjoy. The automatic enrolment savings system will ensure that anyone who works for an employer that does not have a pension will be enrolled to save for retirement and their employer will also pay towards that.
In that context, it is disappointing that more progress has not been made on auto-enrolment. Last week it was announced that the introduction of auto-enrolment would not be implemented until at least 2023.
If people have been putting off planning for retirement, now is the time to give it some attention. If your employer has a pension plan that you have not yet joined, do so. It means that you and your employer will now be saving for your retirement. Many people are in the lucky position of being able to save money but find it hard to get a return on it with interest rates low. Investing in your pension may be the best thing to do with your cash.
Covid has shown us that we can think about life in a different way. It has also shown us that, with sufficient urgency, we can make decisions quickly and move on. The time to address the pensions issue is now so that we can avoid a crisis in the future.
Jerry Moriarty is chief executive of the Irish Association of Pension Funds
