The topic of pensions is not the most exciting matter to consider on a bright spring Monday morning. If you are below a certain age you are more likely to be preoccupied about other matters including getting employment that pays an adequate and sustainable income in the near-term. If you are above a certain age the prospect of approaching retirement might very well be the cause of some concern and anxiety given the sudden drop in income expected and the uncertainty about future cost of living, healthcare etc. In so far as pensions get an airing in public discourse it tends to be framed around three core assertions:
- Populations everywhere are getting older and Ireland is no exception with the implication that future pension payments at current rates of entitlement and eligibility are not sustainable;
- Public sector pensions are far superior to those in the private sector with the implication that the public sector should be shifted down to levels of cost and entitlement roughly equivalent in the private sector world; and
- Pensioners have been insulated from the recession and have fared much better than the rest of the population with the implication that any future austerity measures (its not over yet) should be aimed at the older population.
Lets look at these claims…
It is true that people are living longer thanks to better medicine and better lifestyles. One possible scenario is for the number of over 65’s to double from around 12% of population in the Republic of Ireland, currently, to around 24% in 2046. In other words, this population could double from around half a million to one million in the next 30 years with the result that there will be relatively fewer people working to each person in retirement. The suggestion is for the retirement age to be lifted gradually while reforms are made to pension entitlements in such a way as to reduce payments. It is certain that an ageing population will put pressure on public finances as well as pension schemes outside the public sector. To some extent this could be ameliorated by an increase in the retirement age. However, there is large scope to increase the ‘employment rate’ up from just over 60% of the 20-64 age group to 80% over the coming decades. This would be line with many other European countries and would provide the income streams to pay for pensions. Some gradual and negotiated increase in the retirement age is an option in some sectors and occupations (but surely not all). People should have the option of working beyond 65 in some cases. However, care is needed in not allowing such changes to impact negatively on youth employment.
Public sector pay and public sector pensions is a favourite target for those who wish to shrink the state and reduce wages and social transfers more generally. By focussing on claimed preferential treatment of public sector workers the agenda is to drive all ages downwards. Public sector workers do earn more, on average, than other workers. There are a number of reasons for this including the structure of employment and level of education. It is also the case that pensions paid to retired public sector workers are higher, on average, than in the private sector. However the difference is not as large as often assumed or claimed. For retired civil servants in central government (of which there were 13,000) the median pension paid was €21,500 in 2009 (PQ 48084/10) with 38% of payments falling below €12,000 per annum (or €230 a week). These are not huge sums considering that in many cases they are paid to couples. Pension payments in the health sector covering 30,000 persons are lower with a median figure of €14,800. These figures will have fallen after the public sector pay cuts in 2010 (and in 2013 for the minority of pensioners over €32,000 per annum). Comparisons of retired persons’ incomes by Jim Stewart showed an average weekly sum of €457 for public sector retirees compared to €400 in the case of other retirees (this took account of occupational pensions as well as all types of other income in the case of both public and private sector workers).
Have the retired been insulated since the onset of the crisis in 2008? It is true that many younger persons have suffered severely through unemployment, emigration, loss of employment or income as well as indebtedness in the case of those who bought houses at the wrong time (for example). However, recent data published by the Central Statistics office shows significant reductions in real disposable incomes of retired persons in 2010-2012. Added to the collapse in private pensions in some cases as well as rising costs and charges as well as additional income tax and the recent decisions to restrict medical card eligibility have all impacted on pensioners.
What is the future for pensions? A more rational and fair way of funding retirement income is through a mixture of general taxation and social insurance funded retirement that can guarantee a stable and adequate level of income for people who are retired. While better than was the case 30 or 50 years ago the state pension (whether contributory or non-contributory) is not excessive and is, in some cases, not adequate to protect older people from poverty and material deprivation as evidenced by the recent data published by the CSO.
The current arrangement is not sustainable or fair because of it reliance on the vagaries of markets. The inequality inherent in pension provision is exacerbated by tax reliefs that benefit those on above-average income who avail of relief at the top marginal rate. At the very top of the income scale there are generous tax reliefs and avoidance measures in place some of which have been taken away in recent budgets but others which remain in place. Close to one half of all workers are not in any pension scheme. Many of those who are will be faced with uncertain futures as the entire burden of market risk has been transferred to employees from employers with the winding up of ‘Defined Benefit’ schemes. Meanwhile new entrants to the public sector face different pay and conditions including retirement provision compared to other public sector workers. The entire system is ripe for an overhaul. Movement towards a properly funded and costed universal pension entitlement supplemented with social insurance contributions by employers and employees is the way to go.