Pensions: when age is more than a number

Up until relatively recently Ireland was in line with much of Europe in having a state pension age of 65. This uniformity of approach has nothing to do with European Union regulations and everything to do with a decision by 19th-century German chancellor Otto von Bismarck to set 65 as the qualifying age for Europe’s first old-age pension. The number caught on and most of Europe followed suit.

There is a problem with affordability, however. When the age was originally set people were lucky to reach 65, let alone live beyond. According to the World Bank, life expectancy stands at 81.5 years for Irish people, with women faring better at 82.7, more than four years longer than men who come in at a relatively paltry 78.3 years.

Paying pensions for these longer-living citizens is an increasing burden on countries. While it is true that most of us pay for our pension entitlements through our PRSI contributions it is also true that the government spends this as soon as it gets it and doesn’t put any of it aside to pay for our pensions in future.

Higher pension ages

The Government’s response here has been to push the pension age out first to 66 and progressively to 67 in 2021 and 68 in in 2028. The UK government is also moving out its pension age but over a longer time scale. It won’t get to 68 until 2037. Other European countries have also signalled their intention to increase the age in the foreseeable future.

“Ireland is pretty much in line with other developed economies,”says Alistair Byrne of State Street Global Advisors. “Everyone is going to 67 or 68 over the next decade or so. Life expectancy is the root of the problem. People are now living until their mid-80s and it is inevitable that pension and retirement ages will rise in line with that.”

PwC partner Munro O'Dwyer notes that the UK has already acknowledged that reality. "The UK has already put in place a specific link between the pension age and the longevity of the population." he says. "They have also abolished the compulsory retirement age."

That latter move is a natural consequence of shifting the pension age and many wonder why the Government has not followed suit. Instead, we have the absurd situation of people who have been forced by law to retire signing on for jobseekers’ benefit on the basis that they are available for and seeking work.

Peter Feighan of Davy says there is nothing unusual in the Irish move to later pension ages. “We’re all moving in the same direction as a result of increased longevity. We are living longer, statistically, and that means the pension age will have to move. The UK changes have been complicated by the gender differences in their state pension but they are eliminating them over time in the move to 68 by 2037.”