Give me a crash course in . . . the €324bn pension deficit
How bad is it? At €324 billion, it’s almost twice the size of our national debt. And more than twice the GDP of the State in 2011 – that’s the value of all goods and services produced in the Irish economy last year. KPMG says this €324 billion is the likely shortfall in the Social Insurance Fund over the next 55 years.
Why haven’t we heard about this before now? We have. Before we get too alarmist, this €324 billion isn’t sitting in the debit column right now. The shortfall in the fund last year is expected to be a more moderate €1.5 billion. The problem is, unless action is taken, this annual shortfall is going to be repeated each year – and it is going to get worse. If we don’t do anything, KPMG estimates the annual shortfall in 2066 alone will be more than €30 billion, and the cumulative figure will be that €324 billion.
What’s all this money going on? The Social Insurance Fund pays a series of pensions and benefits to people who paid PRSI contributions on their earnings during their working life. The benefits include everything from the contributory State pension, maternity benefit, jobseeker’s benefit, etc to adoptive benefit and bereavement grants. The money from PRSI contributions should match the outgoings. But it doesn’t. The fund was in surplus for a few years during the Celtic Tiger but has rapidly returned to the red – not helped by some of the increases in welfare payments agreed by government during the good times.
But why is it going to balloon so dramatically? The biggest single payment from the fund is the contributory State pension, which accounts for just under a third of all payments from it.
At the moment there are more than five people paying money into the fund through PRSI for everyone in receipt of a pension. By 2066, according to KPMG, there will be just over two people paying into the fund for each pensioner; other commentators say it will be even worse.
We’re living longer, and that carries a cost, which is mostly why the Government last year announced a phased increase in the retirement age to bring it to 68. Unfortunately, the KPMG report takes accounts of this.
So, what to do? This is the easy part. Either reduce the benefits payable to people or increase the contributions. It will probably be a mix of the two. A previous report five years ago suggested if benefits were not reduced, PRSI contributions would need to be raised by three-quarters from now to meet the bill over the next 55 years. The longer you dither, the bigger the increase necessary.
Previous report? Yes, that’s right. This is not quite the shock to Government that it might be to you. The Social Insurance Fund is subject to an actuarial review every five years and the last report, done by Mercer, was even more depressing in its outlook.
That was in the good times. The problem is, politically, there’s no electoral profit in planning for events 50 years down the road.
And if you think that’s the worst of it, think again. The Social Insurance Fund may pay out more than €11 billion a year but it does not pay public-sector pensions or noncontributory State pensions. That’s a whole other story.