Living long and living well?
Posted on October 12, 2015 by Tom Healy
It is widely accepted that the issue of pensions is a boring subject. Curiously, interest in pensions is found to be highly correlated with age so that someone starting out in paid work in their 20’s regards the matter as remote, distant and … boring. In any case the proportion of new hires and entrants to the labour market from among recent school leavers or graduates with some pension contribution scheme and entitlement is likely to be low. With a collapse in many private pension occupational schemes in recent years it is evident that fewer workers have access to pension schemes. Add to this the gradual upward revision in the retirement age for the purposes of eligibility for the state old age pension as well as the shift in pension arrangements for new entrants to the Irish public service since 2013 - with pension to be calculated on career average rather than final salary.
One of the very welcome features of the period of rapid economic growth, in the Republic of Ireland, between the 1990s and the period to 2007 was that social welfare pensions rose significantly in a way that removed many older people from poverty. A time in life that was once associated with poverty was now associated with relative security and income protection. During the years of recession older people did suffer the consequences of a squeeze in incomes (especially those who saw a collapse in private pension payments or a wipe-out in share values and public sector retirees who experienced cuts in pensions) as well as a curtailment of public services in certain areas of provision not to mention rising costs of health. It is frequently suggested that older people were, relative to younger age groups, protected from some of the worst effects of the recession. In particular they suffered the loss of jobs, wages and arise in personal debt . There is some truth in this. However, it would be misleading to set up a false dichotomy between older people in general and those below a certain age. Eventually, the young grow old and will need support and protection of income especially as costs arise in areas such as health and personal care.
The cost of pensions in the future will be very much influenced by population developments. While we cannot be certain about the future trends in migration or births we can be reasonably sure that the numbers of ‘over-65’s’ will rise from an estimated 625,000 next year to just somewhere between 1.4 and 1.5 million in 2050 depending on migration and mortality trends over the coming decades (see chart 1).
Chart 1 Population projections (based on CSO M0F2 scenario)
Changes in life expectancy as well as in patterns of work over a lifetime continue to change the landscape for pensions. We are likely to see a gradual but, in the long-run, dramatic changes in the rules around pensions. Broadly, at the risk of over-generalisation, we are likely to be confronted with a choice between two poles:
- A gradual levelling down in conditions and curtailment of universal benefits and services to an expanding older population – this is already in train as a result of hugely inferior pension rights and expectations for new entrants to the labour market in recent years (referred to above).
- A gradual levelling up in conditions and services so that continuing to build on the improvements in living standards of the retired experienced during the boom years people now entering the workforce can expect a better deal when they are old in 50 or 70 years’ time in line with improving economic conditions more broadly.
Put another way, we can see the circumstances of public sector retirees and private defined benefit pension recipients as overly generous and in need of pruning back whether on grounds of social equity or on grounds of claimed ‘non-affordability’ over time. Or, we can see the circumstances of other persons reliant solely or mainly on the state pension or on somewhat risky (or riskier) defined contribution pension schemes as not acceptable relative to what a just society could afford. Defining a living income taking account of local and household circumstances would be helpful in monitoring trends in pension income. In practice many households comprising the retired receive more than one source of income whether by way of pension or returns to investment or draw-down of savings. The estimated net replacement rate which measures the proportion of wages retained in post-retirment pensions is low in Ireland compared to other countries. Many Irish pensioners are reliant on a basic flat old age pension - whether the means tested 'contributory' pension of €220 per week or the slightly higher 'non-contributory' rate of €230 per week (with additional allowances for another adult in the household in both cases). Chart 2 shows the international comparative data.
Chart 2 Net pension replacement rates
Analysis by my colleague Dr Micheál Collins shows a very uneven distribution of income among pensioners with an average (median) household income for a couple of €27,600 in 2012 (Where are pensioners in the income distribution?). An estimated 60% of pensioners are below the median average for household income. There is a high concentration of pensioner households in the €10,000 to €30,000 income bracket with one half of single adult pensioners receiving €13,900 or lower (this being the median point). It is often claimed that older people are relatively well off. Yet, international comparative data dispels any notion of relative advantage in the case of the Republic of Ireland (Chart 3).
Chart 3 Relative incomes of the over 65s
Where to from here?
A major challenge is to (i) boost the number of persons covered by a pension scheme in work (Chart 4 shows a very unevent rate of coverage by age). and (ii) provide an adequate level of income for all members of society including those who are retired. There is a good and pragmatic reason to combine an adequate universal basic income provision for all citizens including pensioners with a 'top-up' based on life time earnings and channelled through an expanded social insurance model. The current complex, inequitable and fragmented system based on a combination of risky market investments, inequitable tax reliefs which favour the higher paid and a very basic level of state pension which, on its own, leavers many pensioners close to the poverty line if not below it is not acceptable. With a likely trebling in the population of over-65s we need a courageous and imaginative investment now in health, housing and training facilities to meet the long-term challenge. We also need a much expanded system of social insurance which, together with an expanded income tax system can provide the coming challenge. Otherwise, we will continue to muddle through and face very costly crisis down the road. Long-term investments are never the subject of popular measures today.
Chart 4 Pension coverage in the State for persons in employment