No time to waste, the pensions time bomb is ticking
LAST YEAR George Lee presented a programme on RTÉ that focused on the “Pension Time Bomb”. It was dripping with ominous music and menacing pauses. Alfred Hitchcick could scarcely have made it any more unsettling.Before sitting down to watch, many of us might have been rather pleased to know that due to medical advances, a healthier lifestyle and improved road safety – to name just three key factors – we are all likely to live a lot longer than our grandparents, at least 10 years longer, in fact. The news is even better for many children born in this century as they are expected to live well into the next one (as long, that is, as they were lucky enough to be born in the developed world).
George was not, however, pleased. In fact, he seemed rather cross.
He made this increased life-expectancy seem like an out-and-out catastrophe and one that would bring the pensions industry crashing down and have us all living out our twilight years scrabbling in bins for food like cast offs from The Road. (Okay, okay we’re exaggerating a bit here, but he was still quite scary with all his talk of funds running out and governments losing the plot and the like).
While he might have scared the bejaysus out of viewers, George was on the money. We are living through the worst economic turbulence in the history of the State and hundreds of thousands of Irish people are living day-to-day and can’t even imagine putting money aside for their future. And even if they did, where would they put it, given the number of privately run pension funds that are technically insolvent?
When it comes to the State’s pensions, the scenario is arguably worse and the gap between future pension and social welfare liabilities and revenues to fund them stands at €324 billion, according to an unpublished report commissioned by the Government.
The review of the Social Insurance Fund – the pot into which about €8 billion in pay-related social insurance contributions (PRSI) go to fund a range of benefits – was commissioned by the Department of Social Protection. Last year the fund’s annual shortfall stood at €1.5 billion, or 1.1 per cent of gross national product and the study said that in the absence of policy changes, the shortfall will rise to more than 6 per cent annually by the middle of the century which will be about €324 billion in 2012 prices.
When it comes to planning for life after work, things have been made all the more difficult because of a combination of reduced salaries – thanks to pay cuts and tax hikes – and dramatic changes to the pension systems. Pension contributions are no longer deductible for PRSI purposes and they are not deductible for the universal social charge (USC), which has replaced the health levy and income levy.
But despite all the horrendous news, pensions still matter. In fact, they matter more than ever.
They are not, by any measure, sexy and talk of them will never keep people entertained at a dinner party but they are something that everyone needs to think about – except, perhaps, Lotto winners and those in the public sector who have their gilt-edged golden handshake already sewn up.
WHEN SHOULD I START SAVING FOR MY PENSION?
If you haven’t started already then start now and if you have started already start saving more. Around half the working population has a pension but most of us are not saving nearly enough.
When you are considering your pension it is important to have a target fund size in mind and aim for that with a steely resolve. “When considering pensions you need to think of a few things,” says Karl Deeter, a leading financial advisor with Irish Mortgage Brokers. “First of all you have to start early. That may seem boring but it makes a big difference.”
Deeter says for a 30-year-old who wants to fund a private pension which will return just €8,000 a year when they retire at 68, they need to make monthly contributions of about €120 – a figure which comes down due to tax relief.
“If you wait until 45 that monthly figure jumps to €285 a month. While €8,000 is not very much at all it can be used to top up the State pension which would give you €20,000 a year (in future values).”
WILL THAT BE ENOUGH?
It depends. There is not one set answer and few people seem to have a handle on just how much they need for a good retirement.
Right now the State pension pays €230.30 a week for a single person. That is just under €12,000 a year - or €6,000 less than someone gets working 40 hours a week on the minimum wage.
It is not a lot by any measure. It is important to have a realistic expectation of what you need. “Older people live cheaper due to having less debt (typically mortgage free), fewer family expenses or childcare costs,” says Deeter. “Having a paid for house as an asset can cover costs if you ever needed a nursing home or the like and while we are living longer those under age 50 will be retiring later.”
The real key is to make sure you save for the future but do your sums “and don’t try to retire too rich because, apart from sacrificing current income, you may well find that the additional gain could be swallowed up by taxation (from the pension levy to income taxes). Good old fashioned common sense is critical,” he adds.