In this weeks blog, NERI Co-director Dr Tom McDonnell discusses the NERI Submission to the Pensions Commission - 'Public consultation regarding the pension sustainability'.
The government's pension commission is currently debating the long-run affordability of the Irish pension system. The NERI submission to the commission can be found here.
A meaningful analysis of pension affordability must be situated within the context of a full analysis of Ireland's future growth and demographic dynamics and the policy steps that can potentially be taken to influence those dynamics and trends.
For example, Ireland can influence its future growth potential by investing in productive capacity and facilitating access to employment. Our sustainable growth potential can be enhanced via greater investments in human capital (per pupil education spending), innovation (spending on public R&D), infrastructure, and in low-cost childcare. Similarly, we can improve our working age ratio by making Ireland an attractive place for migrants to live. This can be done by ensuring we have a vibrant, welcoming and tolerant society with an affordable cost of living, with good jobs, and with an attractive and green living environment.
In addition, any meaningful analysis of pension affordability must be situated within a comprehensive overview of the sustainability of our overall system of government revenue raising and government spending. Such a review will also need to encompass the costs and benefits of various policy options around potential savings on the spending side as well as options for expanding the revenue base. My own view is that the other high-income countries of Western Europe offer an appropriate measuring stick for sustainable per capita levels of spending and revenue raising. We need an honest discussion about the level and type of public spending we want. Similarly, we then need an honest discussion about the measures we need to take on the revenue side to match our public spending goals - whatever those goals might be. For example, I will be very surprised if the upcoming Commission of Tax and Welfare fails to identify the enormous gap between employer social contributions in Ireland and contributions in the much of the rest of Western Europe. We will need to decide if this gap is compatible with our spending goals.
The point is that the pension affordability cannot be assessed by itself. It must be assessed within the context of wider policy discussions about innovation policy, employment policy and fiscal policy.
Our main recommendations are:
1. Assessment of the future sustainability of public expenditure on pensions and indeed the future sustainability of overall public expenditure levels should only be conducted in conjunction with a full review of the sufficiency and composition of the Irish system of taxes and social contributions.
2. The review should assess the overall design of the system as well as the specific impact of particular spending and revenue raising policies in terms of growth, redistribution, poverty elimination and environmental sustainability.
3. The future sustainability of pensions will depend on the ability of the economy to maintain high levels of employment and ongoing productivity growth. Future growth can be influenced by fiscal policy. As such, assessment of the future sustainability of the pension system must also consider the potential impact of shifting fiscal policy in a more growth friendly direction.