A national pensions crisis
Minister for Social Protection Joan Burton last week sketched out her proposals for a universal pension scheme, designed to ensure private sector workers had adequte pension cover in future. However well-intentioned her ideas, her timing – months before the OECD presents its report on pension provision in Ireland – must be faulted. Her ministerial colleague, Leo Varadker, by way of response, has questioned the State’s ability to fund public pensions in the future. At a time when 80 per cent of defined-benefit schemes in the private sector are in deficit, and some may not survive, this raises an obvious question of equity.
Public service pensions are also defined-benefit schemes. But these schemes are solvent, being funded mainly by taxpayers, many of whom are members of pension funds in deficit and in difficulty; and some of whom are solely reliant on the State pension in their retirement. Clearly, there is a need for a serious debate on the pensions crisis.
Indeed, no greater challenge faces the Government than that presented by the national pensions crisis. Most private sector schemes have been closed to new members, and some may be forced to wind up their operations, resulting in huge financial losses for members. In the public sector the pensions bill,which is financed mainly from tax revenue, has soared in recent years.
Public service pension costs have risen from €1.6 billion in 2008 to €2.5 billion in 2012. This rise reflects an almost two-thirds rise in pensioner numbers in four years, as more public servants have reached retirement age, while many have taken the option of early retirement. The shortfall in the social insurance fund – used to pay State pension and other welfare payments – reached €1.5 billion in 2011. And the deficit is set to rise in the years ahead. Without policy changes, the accumulated deficits, estimates indicate, could in current money terms reach €324 billion by 2066.
Against that background, the response of the Government – and its predecessor – to a developing pensions crisis has been to make a bad financial situation even worse. The National Pension Reserve Fund has been raided to recapitalise the banks. Pension schemes, already in substantial deficit, have been hit by an annual pension levy that in some cases threatens their survival.
All that, when allied to other tax changes and the poor investment returns achieved by many pension funds in recent years, has resulted in a decline in pension savings. Savers find fewer reasons to invest in a pension for their retirement, given the uncertainty that surrounds the Government’s pension policy. Just half of all taxpayers have a private pension, a figure that is more likely to fall than rise in future and which will make retireees more dependent on an inadequate State pension.