Rebuilding pensions on a sustainable foundation
The current €2 billion taxpayer subvention to the social insurance fund will almost treble by 2030 and increase by a factor of six by 2040.
Over the past five years in pensions, as in many other areas, tough decisions have been made and unpalatable realities have been faced. Sadly many people now know that their pension expectations are out of reach and they will have to work longer or save more to achieve a financially-secure retirement.
This is not an outcome that any of us are happy about, but the challenge now, assuming the worst of the immediate crisis has passed, is to ensure that similar disappointments don’t happen in the future. To start we need a solid and realistic foundation.
For the majority of the 2.2 million people of working age who expect to retire over the next 10 to 40 years the financial foundation upon which their retirement security will be built is the State contributory pension. At its current level of €230 a week (or about 34 per cent of average earnings) it has helped, as an OECD review has recently confirmed, reduce significantly the risk of poverty in old age.
In fact, unless something changes, such as the introduction of mandatory retirement savings, more than half the working population will have to depend solely on the State pension.
For the rest, who are already saving towards retirement, it will still be a core part of their retirement income.
So the key question is: can people rely on the State to continue to deliver pensions at current levels in the future? The answer is not straightforward.
State pensions face two major demographic challenges. First, people are living longer. The life expectancy of a 45-year-old male in 1994 was 75 while today a man of that age can reasonably expect to celebrate his 81st birthday. That’s a six-year improvement in just 20 years. This is a great gift but it does have obvious cost implications.
Second, the State pension operates on a pay-as-you-go premise: that the current generation of workers pays the pensions of the retired generation in the expectation that the same will happen for them when their time comes. That’s fine if the population profile is reasonably stable but ours isn’t. Generally as a nation we are ageing rapidly.
Today for every 100 people of working age there are 21 over 65s. This number will grow steadily and will be not far off 50 by the time it starts to stabilise in 35 years’ time. That will be one pensioner for every two workers.
The €230 weekly payment has been protected through the crisis but nonetheless some major reforms, prompted by the Troika, have been announced. These include most visibly raising the age from which the pension starts in stages to 68 by 2028 – starting this year with a move to age 66. As an aside, a similar proposal in France in 2010 was shelved when more than a million protesters took to the boulevards.
Even after taking into account these reforms, State pensions still face a very serious funding crisis. An actuarial review by KPMG has projected that the current €2 billion taxpayer subvention to the social insurance fund – the pension funding vehicle – will almost treble by 2030 and increase by a factor of six by 2040.