Siptu president Jack O’Connor has done the State some service by calling attention to the unholy mess that is the Irish pension system and demanding an urgent response from our political leaders.
The current system is riddled with flaws and anomalies at every level and is grossly unfair to boot. Politicians of all parties have for decades shirked their responsibility to tackle the problem which, as O’Connor suggests, has the capacity to do as much damage to the State’s finances in the long term as the banking crisis.
The State pension as currently constituted is unaffordable in the long term, the pensions paid to retired public servants from current expenditure are even more unaffordable and the private pension system is crumbling before our eyes.
The only significant response to date has been to increase the age at which people are eligible for the State pension to 66, leaving the people still forced to retire at 65 stranded in no man’s land for a year. The retirement age is due to increase to 67 in five year’s time and to 68 in 2028.
In tandem with this, traditional defined benefit pension schemes, which gave private sector retirees a pension related their salaries, are being steadily wound up because of the collapse in bond yields and Government regulations which demand impossible funding requirements.
By contrast, public service pensions have been maintained at close to their pre-financial crisis levels despite the fact that no funding requirements of any kind are applied and the pensions are paid out of current taxation.
Astonishing figures
An extreme example of the generosity of the public service pensions system was in evidence recently with the publication of pensions paid to office holders including former presidents, taoisigh and ministers.
One of the many astonishing revelations in the list was that former president Mary Robinson is receiving a pension of more than €120,000 a year for serving 6½ years in Áras an Uachtaráin.
It should be emphasised that her pension entitlement is calculated on the same basis as that of other office holders but it highlights the incredible generosity of the public service pension system to its highest earners.
It is arguable that the substantial pensions available to former ministers and top civil servants have blinded them to the difficulties faced by so many other people who have seen their private sector pensions squeezed in recent years.
It was against this background that the Government last week produced a report of the Interdepartmental Group on Fuller Working Lives. The nub of the report was to encourage people to work past the age of 65 and to suggest that employers should facilitate this by dropping the mandatory retirement age of 65.That is all very fine as far is it goes, but it is merely tinkering with the symptoms of the problem. O’Connor was quite right to denounce the report as “useless window-dressing”.
For a start, it did not address the problems facing those private sector workers who are contractually obliged to retire at 65 and are left for a year without a State pension.
The bigger issue, though, is the future of the entire State pensions system which will come under intolerable strain in the years ahead unless substantial extra funding is provided by workers, their employers and the State.
Because of the growing uncertainty about the value of private pensions, an increasing number of younger workers in the private sector are opting out of the system altogether and planning to rely solely on the State pension in their retirement.
O’Connor called on the Government to face up to the need for a mandatory second pillar pension scheme for all workers not already in a proper occupational scheme.
“Ireland is virtually unique in the developed world for the absence of such a scheme, which would require mandatory contributions by employers, government and employees. Instead of abolishing the universal social charge (USC), we should be redeploying it in this direction.”
The redeployment of the USC into a pension system for all is the obvious way to go, yet the Government seems intent on dismantling it. The election outcome should have been enough to convince Fine Gael Ministers that there is no great political advantage to be gained by abolishing the USC.
If it was converted into a pension system in which everybody could see that in the long term their payments were going to return to them in retirement, the sting could be taken out of the USC.
One of the big problems facing Irish democracy is that so many voters don’t have any idea where their taxes actually go. Providing a direct link from USC contributions to their own pensions could be the start of a corrective process.
Current uncertainty
The alternative to a new State system is to make it compulsory for all workers to contribute to a private pension. However, given the current uncertainty in the pensions industry, there would be little confidence in its ability to manage the sums required.
The most obvious solution is for the State to take a direct role in establishing a second pillar pension to run alongside the PRSI State system.
USC payments could also be used to help boost the funds required to pay public service pensions as the current superannuation payments made by public servants come nowhere near the level required to fund their entitlements.
The current minority Government may not be ideally placed to deal with such a huge problem but, given that its predecessors with majorities ducked the issue, a real attempt to confront the issue would be a signal that the “new politics” works.