Can the State afford to roll back on the ‘pensions time bomb’?

Promises and auction politics will not solve the challenge of funding vast future pension costs

For the past six years, a large cohort of people have retired at 65 to find that they cannot access their State pension until they turn 66. From next year, that gap widens to 67. Video: Enda O'Dowd

 

It started with Martin Walsh’s Wednesday lunchtime call last week to RTÉ’s Liveline – a day after Leo Varadkar called the election on January 14th – to complain about his deferred pension.

His call to Joe Duffy started a wider debate about the State pension age and the phased plan to raise it, turning it – unexpectedly – into a key issue of this general election.

It has left political parties engaging in “auction politics” as they scramble to find solutions, with little or no certainty around the cost in order to appease a powerful political and outspoken bloc of citizens: 60-something voters.

“This is grey power coming out now, and the thing is that older people vote,” said Paul Kenny, a former pensions ombudsman.

The proposed rise to 67 from the start of next year was a bridge too far for many pensioners – the qualifying age is to increase again to 68 in 2028

Walsh’s story is typical of the people affected. His grievance was having to sign on the dole for the jobseeker’s allowance to tide him over until next year when his State pension kicks in at 67, despite 49 years of work. This stopgap measure would leave him €45 a week short or €2,350 a year.

Politicians reported similar anger on the doorsteps among people being forced to retire at 65 but unable to claim their public pension until 66 after the qualifying age was raised by a year in 2014.

To qualify for the allowance or means-tested payments to bridge the gap until their State pension payments start people must show that they are capable of working and are available for and genuinely seeking work. This is not something people retiring from work expect to have to do.

The proposed rise to 67 from the start of next year was a bridge too far for many pensioners – the qualifying age is to increase again to 68 in 2028.

While the Government has taken steps to protect public sector workers, private sector employees – where companies continue to force people to retire at 65 under set contracts – are exposed.

“That was like striking a match in a petrol tank. It just went viral,” said Kenny.

The anger is similar to the reaction in 2008 when, mid-crisis, Fianna Fáil minister for finance Brian Lenihan withdrew the automatic entitlement of people aged 70 and over to a medical card.

Signing on for the dole when you were expecting you pension after a lifetime of work amounted to “absolute indignity”, said Ethel Buckley, Siptu’s deputy general secretary at the trade union’s launch on Thursday of a coalition of groups hoping to stop the State pension age rising to 67 next year.

Party promises

The political reaction to the clamour for a fix made a truism of the old election saying that candidates campaign in poetry but govern in prose.

The election pledges to fix the problem came as thick and fast as rhyming couplets, in contrast to past wordy warnings in government reports about unsustainable State pension liabilities.

Taoiseach Leo Varadkar said last weekend that it was irresponsible not to increase the pension age in line with longer life expectancy, but he recognised the anomalies this caused.

To fix them Fine Gael on Friday proposed in its election manifesto a new “State transition pension” of €248 a week, at a cost of €150 million, for those retiring at 66.

The party is also planning to introduce a “State pathway pension” for those who had to retire at 65, which will maintain the same payments but eliminate all the criteria and restrictions applying in the jobseeker’s allowance.

Fianna Fáil has promised in its manifesto to pay a transition State pension for 65- and 66-year-olds, and to defer next year’s phased increase to 67 pending a review by a new commission to examine the issue.

The party’s leader, Micheál Martin, also wants to outlaw contracts that force people to retire at 65.

Sinn Féin and People Before Profit have pledged to restore the pension age to 65, at a cost of about €450 million a year, while Labour says it would not support the pension age rising to 67.

The cost of stopping the pension age rising to 67 is estimated at more than €200 million a year, with pension experts disputing the €470 million annual cost cited by Fianna Fáil’s spokesman on social protection Willie O’Dea this week as the Government’s own.

Reducing the age to 65 would cost €150 million a year, but that would be a gross cost given that the jobseeker’s allowance would be about €119 million, leaving a net cost of €31 million annually.

Given that the Social Insurance Fund – the State’s coffers into which PRSI is paid and from which State pensions are paid out – has a surplus of €1.4 billion, these costs on first glance (or at least on the surface) look manageable.

Ageing population

However, in the slow revolving world of long-term pension planning it is not the cost of paying State pension entitlements to the retired or soon-to-be retired workers that is expensive; it is the heavy financial strain of an ageing population and the cost of paying pensions for people retiring over the coming decades who will live longer, well beyond retirement age. There is potential for the fund to run out of cash.

The last Government’s Roadmap for Pension Reform 2018-2023, published in July, said the number of pensioners will more than double and the ratio of working-age people to pensioners will fall to two to one.

The population of pensioners is set to rise from 586,000 in 2015 to 1.4 million by 2055. “This presents significant funding challenges, with the Social Insurance Fund forecast to accumulate a potential deficit of up to €400 billion over the next 50 years,” the report said.

An actuarial review of the Social Insurance Fund by accountants KPMG at the end of 2015 (published in September 2017) put the net present value of future shortfalls at €335 billion.

The accountants forecast a projected shortfall in the fund of €200 million this year, rising to €3.3 billion by 2030 and €22.2 billion by 2071. Without spending cuts or PRSI increases, State subventions to the fund would need to rise to €1.7 billion by 2025, €5.6 billion by 2035, and €11.4 billion by 2045.

In 2017, the estimated cost of public sector pensions to the State – for about 155,000 workers then receiving a pension and a further 300,000 accruing benefits – rose to €114.5 billion, according to a report by John Pender of the Society of Actuaries in Ireland in a report for the Department of Finance.

This was an increase of 17 per cent or €16.5 billion in just three years.

“The proportion of workers-to-pensioners is going to go down so we have fewer and fewer people paying tax and social insurance to support an increasing population of pensioners – that’s the reality,” said Kenny.

Older people

Actuary and pensions expert Tony Gilhawley urged politicians promoting solutions “as a populist vote-getting proposal” to “think of the children and grandchildren who will have to pay for it”.

“Increasing the State pension and reducing the age now is in effect writing cheques we expect our children and children’s children to honour in the future. But this will become increasingly difficult when they are supporting more and more older people.”

As a solution he supports a means-tested bridging pension from 65 to the State pension age “for those who are genuinely in need”.

One aspect that had been overlooked amid the sweep of promises, according to Gilhawley, is that if the State pension age reverted to 65 or stalled at 66, public service employees who joined after January 1st, 2013, would have to have their terms amended, bringing a “double” cost.

On the longer-term pensions problem, Siptu researcher Michael Taft, an economist, dismissed the “myth” of the so-called “pensions time bomb” at the union’s Stop 67 launch to halt the rising pension age. He said it was intended to “close down debate” and scaremonger.

He believes that Ireland’s youngest population in Europe and one of the highest State pension ages puts the country in a good place, though he acknowledged that the State would have to increase resources to pay for pensions in the future.

He said the 2015 estimate on State pension fund deficits needed to be revised as they were based on figures in the recession when “nobody saw the strength of the recovery”. Siptu wants a “stakeholder forum” to examine ideas and evidence so as to mull new proposals to tackle the problem.

Jerry Moriarty, chief executive of the Irish Association of Pension Funds, welcomed the idea of expert groups looking at the issue to cater for options where some people are happy to work longer.

Work longer

He said it was a “myth” to think the only way of dealing with the pension challenge “is to raise the retirement date to make everyone work longer”.

However, Kenny warned that diverting money to pay pensions a year earlier than planned would inevitably take discretionary spending from other areas such as health.

Longer-term, he believes that future emigration to countries with more lucrative job prospects will lure away many younger workers, the State’s income engine who could pay for a greying population.

“There is a time bomb. Some people might go into denial about it, but the reality is that a lot of the young people who will be coming on stream, going through the educational system here, will not be working here.”

He said the election promises “distort the debate because people take these promises at face value. It may be very difficult to honour those promises.”