A large pot of public money, €7.4bn a year, is spent on supporting a woefully inadequate pension system, writes FINTAN O'TOOLE
SEX AND violence. This column is about neither of these things, but if I had mentioned the National Pensions Review which Mary Hanafin is to publish shortly, you probably would not have read even this far.
And yet that review will be extremely significant, both in itself and for what it tells us about the capacity of the Government to even begin to think its way out of the current crisis.
It will either tell us that our leaders are still in hock to the financial services industry and a failed ideology or it will show that they are beginning to grapple with the possibility that fairness and the efficient use of resources can go hand in hand.
Let’s start with the bloody obvious – current pensions policy is a disaster. The State pension is considered by 80 per cent of people to be inadequate to their retirement needs but just 50 per cent of women and 56 per cent of men in the workforce have a personal pension.
Defined benefit pension schemes are being replaced wholesale by much riskier defined contribution schemes. The losses incurred since 2007 by the typical Irish pension investment were greater than in any other OECD country because far too much has been put into stocks and property.
The Government’s big idea for increasing pension coverage in the private sector, Personal Retirement Savings Accounts (PRSAs), has been an almost complete failure.
Gerard Hughes and Jim Stewart, in a new book, Personal Provision of Retirement Income, point out that "there are just about 6 per cent of firms in which employees have availed of the opportunity to contribute to a PRSA. The average number of contributors per firm is just three and a half."
Even these figures mask the full extent of the problem – the average contributor to a PRSA is paying far too little to ensure an adequate income in retirement. Yet, to support this failing system, Ireland spends more on tax relief for private pensions than any other OECD country.
What we’ve got therefore is a very expensive system that does not work, that is deeply insecure and that is storing up huge problems for an ageing population. (The ratio of those aged 65 years and over to those aged 18 to 64 will rise from 20 per cent at present to about 50 per cent in 2061.) Leaving aside both public sector pensions and the National Pension Reserve Fund (NPRF), the State spends €3.4 billion on the contributory pension, €950 million on the non-contributory pension and about €3 billion on tax relief for private pensions (80 per cent of which goes to the top 20 per cent of earners).
That adds up to something in the region of €7.4 billion.
This is a very large pot of money and it can be made considerably bigger if the 1 per cent of GNP that goes into the NPRF and significant savings in the public sector pensions bill (which we’ll come to shortly) were included. Yet we have a system in which Ireland ranks 27th of 30 OECD countries for pensioner poverty and has a massive dependence on very risky private schemes.
The most effective and fair way to change this system – and also the one that would deliver the huge benefits of giving people a sense of security – is to use all public funding of pensions to increase (arguably to double) the State pension and to make it universally available as a guaranteed retirement income for all. Any worker or employer who wants to save or invest to top up this pension could of course continue to do so – but without public subsidy.
The advantages of doing this would be enormous. Poverty for current pensioners would be eliminated. The sense of security for today’s workers would be greatly increased, making for a more flexible, adaptable and optimistic workforce. The long-term problem of public sector pensions could be tackled by moving towards a system in which all workers, public or private, got the same guaranteed benefits. The exposure of so many people to the ups and downs of the stock market would be reduced and fewer people would feel pressure to invest in untrustworthy assets like bank shares. And the sense of equal citizenship in a republic would be greatly enhanced.
Who, though, would lose out? The very wealthy would certainly miss their current facility for excluding large parts of their income from tax. The best-paid public servants would see some reduction in their guaranteed pensions (though most public servants, especially at the lower end of the scale, would benefit greatly). And above all the huge pensions industry would feel the pain.
Even though the performance of pension funds has ranged from poor to disastrous, the fees charged by fund managers are massive. Stewart and Hughes cite the charges on one type of private pension as ranging from 12 per cent to 20 per cent of the entire contribution. Not surprisingly, the pensions industry lobbies furiously against any real change in the current system.
Thank goodness we have a government that is deaf to such vested interests.