Extension of pension age should be a priority

It is the job of our politicians and senior civil servants to plan how to improve public services and social provisions within…

It is the job of our politicians and senior civil servants to plan how to improve public services and social provisions within the constraints of available resources, writes Garret FitzGerald.

And, although this is never reported in the media, for some years our budget material has included a significant amount of data on the likely evolution of our economy and public finances for three years ahead.

Last December's budget for the first time looked even further ahead, attempting to assess the impact upon our public finances of the pension and health needs of a soon-to-be-older population right out to 2050.

Some weeks earlier, a similar exercise was presented by Alan Barrett and Adele Bergin of the ESRI at the institute's Budget Perspectives Conference.

READ MORE

That study attempted to assess the possible evolution of public spending up to 2050, including the likely impact of having an older population.

The conclusions of these studies are broadly similar - both emphasising the uncertainty inherent in all such long-term projections.

Both suggest, however, that this older population will not begin to demand additional public resources for pensions and health services until about a decade or so hence.

Bearing this time span in mind, there is some urgency about using the breathing space of the next decade or so to make other necessary improvements in our social and public health services.

Towards this end it would seem to me important that whatever government may emerge after the next election it should commit itself to preparing a comprehensive analysis of what will need to be done during the next decade to remedy the many deficiencies in our social and public services.

This should be done before having to face into a process that will involve by 2050 a 2½ times increase in the volume of resources required to cater for the needs of a much larger older generation.

Unless this is done, successive administrations may waste scarce resources by coming under pressure to respond in a higgledy-piggledy way to ad hoc demands of particular interests, each pressing its own claim.

The scale of the strain likely to be imposed on public resources by a rapidly-ageing population is now only vaguely understood by most of our people.

However, the ESRI study shows that the proportion of our output of goods and services likely to be needed to cater for the health and pension requirements of those now entering employment is likely to rise by over half by 2050.

There could, it is true, be several offsetting factors.

First of all, with a smaller young population in 45 years' time the share of resources absorbed by education might be less than at present.

However, the ESRI article recognises that this drop in numbers will probably be offset by increased participation in education and by improvements in the scale and quality of the education provided.

A more likely source of relief will be the sharp drop in the current very high level of provision for public investment.

This will take place when, between 2015 and 2020, we complete the current exceptional process of catching up on our grossly-deficient physical infrastructure.

That should release some €5 billion a year in today's money terms which could be deployed to help finance the rising costs of what by then will be a rapidly-growing ageing population.

Yet even allowing for this relief, the increase in the share of national output needed for this purpose in 2050 would require a level of taxation in 2050 that would be about one-fifth higher than today. That does not seem sustainable.

There are, however, two ways by which this required increase in taxation by 2050 might be reduced to a sustainable level.

The first of these would involve introducing a much more modest increase in taxation at a much earlier stage - quite soon in fact.

The proceeds of this could then be used to build up a reserve which could be drawn down later to finance the much higher cost of health provision and pensions in and after 2050.

It is estimated that an increase of 7 per cent in taxation at an early point, maintained throughout subsequent decades, would obviate the need for a two to three times greater tax increase in or around 2050.

Yet all this assumes that no change is made in the age at which pensions become payable.

And that is, of course, the issue that should first be addressed.

At present, public servants can retire at 60, and if at that age they have served for 40 years, as very often will be the case, they will receive a full pension. Steps are being taken to modify that arrangement in the case of new entrants to the public service.

Social welfare pensions used to be payable at age 70, but since 1977 the pension age has been 66, a change made in the mid-1970s.

These pension provisions date back to a time when the expectation of life was well below its preset level.

When I was born in 1926 the expectation of life for a man entering employment at 18 to 20 years of age was just over 66, so on average, the cost of pensions would have been quite small.

Today the expectation of life for men entering employment at around that age - and many now do so later than that - is 76. Thus within my lifetime the cost of pensions has already risen by a huge amount.

Yet, with greatly-improved health, so also has the capacity of many people to work from 65 up to 70 and beyond.

Whatever about those who are already at work - they have an expectation of a pension at 65 or 66 - it would be absurd to impose tax increases on this and subsequent generations to provide for people who have yet to start work, given that their periods of pension will be many times longer than in the past. This is especially so as most of these people will be able to work well beyond the present out-of-date pension age of 65.

Accordingly, an extension of the pension age for those who have yet to enter employment should be the first priority of our next government.