The slow-motion explosion of the pension time bomb
ANALYSIS:Rising life expectancy means the pension problem is becoming too urgent to ignore
LIFE IS precious. It is wonderful that we are enjoying more of it. Today, an Irish woman who makes it to the traditional retirement age of 65 can, on average, look forward to 21 more years of life. Her male counterpart, statisticians say, has more than 18 years of living to do before he breathes his last.
The stretching of lifespans, owing to a range of factors – including better healthcare, drugs and diet – is an overwhelmingly positive development.
But because we are delaying departure to the hereafter does not mean that money will fall from the heavens to pay for longer lives of leisure on high-incomes. There is no such thing as a free lunch.
Societies and their political leaders in the many countries around the world facing population ageing are not doing enough to face up to the one negative consequence of greatly extended lifespans – the pensions time bomb.
The scale of the problem is huge. One part of the problem is considered in a study that has been sitting on the desk of Minister for Social Protection Joan Burton since June. It will be published any day now.
For context, the Irish State has three broad pension commitments: those to retired public servants; those to workers who pay for a pension with their social insurance contributions; and those to pretty much everyone else via the basic (ie non-contributory) old-age pension.
The soon-to-published report looks at the second of these three State pension schemes. It does not make for reassuring reading, particularly for those who intend to depend solely on the State in their autumn years.
The system is, in short, entirely unsustainable as it currently exists. The Social Insurance Fund is supposed to be able to pay for contributory State pensions (and many other benefits) using the PRSI contributions that go into it. But that has not happened since the recession began. There is now a €1.5 billion annual shortfall.
And the future looks much worse, almost entirely because the pensions time bomb is exploding in slow motion. Even taking account of the already-legislated- for increase in the age of retirement – from 65 now to 68 in 2028 – an ocean of ever-deepening red ink stretches out as far as the eye can see.
In any context, there are three ways to skin the pensions deficit cat – push up the retirement age, make higher contributions while working and/or have smaller pension income once retired. While all three will almost certainly happen, the easiest option, politically at least, is to slow the rate of pension increases.
In Ireland’s case that will mean abandoning the target of pegging State pensions at one-third of average earnings (where it now stands).
Linking future increases to inflation will mean pensions rise much more slowly, on the basis both of past experience and future projections (earnings almost always rise faster than prices).
Not to break the link with earnings would mean the under-65s giving much more to those over that age in the future because the ratio of the former to the latter is continuing to fall, and fast. The report estimates that one in four people alive in 2050 will be over 65 compared with just one in 10 now.
The long and the short of it is that the chunk of our adult lives lived over the age of 65 is rising. If we don’t work for longer we will have less income.
Mid-century seniors will be much more likely to be earning at least some income well into their 70s and have smaller pensions relative to their prime-of-life incomes than today. That’s the price to be paid for living longer in an era of population ageing.
SOCIAL INSURANCE FUND MAIN PAYMENTS
THE SOCIAL Insurance Fund is financed through PRSI contributions paid by employers and employees. The money is used to pay a range of benefits.
According to the most recent annual report for the fund (2010), the main payments are:
STATE PENSION (Contributory): €3.45bn
WIDOW’S/WIDOWERS(Contributory Pension): €1.34bn Paid to survivors on basis of PRSI contributions paid by them or spouse for as long as they do not remarry or cohabit
JOBSEEKER’S BENEFIT: €1.29bn Payable to unemployed people who have previously paid PRSI and are available for work
ILLNESS BENEFIT: €942.8m Unable to work due to illness but with previous record of PRSI contributions
INVALIDITY PENSION: €640m Incapable of work for last 12 months and likely to be unable to work for at least a further year with previous record of PRSI contributions
REDUNDANCY INSOLVENCY PAYMENTS: €490.3m
Rebates to employers of 15 per cent – 60 per cent prior to 2012 – on statutory redundancy payments to departing staff and statutory redundancy payments to staff where employer is insolvent
MATERNITY BENEFIT: €323.9m
HOUSEHOLD BENEFITS PACKAGE (PENSIONERS): €288.9m
Other benefits payable from the fund include: State pension (transition); occupational injuries benefits; deserted wife’s benefit; treatment benefit (dental, optical and medical appliances); carers benefit; guardian’s payment (contributory); bereavement grant; widowed parent grant; adoptive benefit and health and safety benefit. – DOMINIC COYLE