Pensions get kicked around but we keep scoring own goals

Personal finance columnist Jill Kerby returns to the topic of pension provision...

The biggest political football in this State is pensions and who pays for them. Sometime in June, the latest Commission on Pensions, headed by the former Revenue Commissioner, Josephine Feehily, will recommend whether the government continues to extend the age at which the State pension can be claimed, or whether it should remain at age 66 (or even revert to age 65, the age at which most private sector pensions are still paid, a view supported by Sinn Féin).

The pushing out of the pension age, first to 66 from 2014, to 67 in 2021 and to 68 from 2028 is a consequence of the financial crash and was implemented at the instigation of the Troika in an effort to get the public finances back in line. Even they knew, in 2010, that our pension system was unsustainable.

After a transition period that began that year, in which 65 year olds were paid the equivalent of the State pension, by 2014, the retirement age rose to 66 years.

Readers may recall that it was during the 2020 General Election 65 year olds realised that it would only be from 2021 that they would be collecting their State retirement income and they would have to collect the dole for two years. Without an occupational pension or sufficient savings to tide them over, many realised they were facing considerable financial distress.

Politicians got an earful as they knocked on doors looking for votes. The really dim ones were unaware that the pension age had been raised and that most occupational pension plans still hadn’t adjusted their retirement ages in tandem with the State one.

Once the coalition government was formed, it was agreed that yet another commission would be set up to investigate what had been agreed a decade earlier – whether Ireland needed to keep pushing forward the State retirement age.

In its just-published submission to the Commission on Pensions, the Department of Finance, the single most important ‘stakeholder’, made its position clear: “Ireland’s old-age dependency ratio is set to nearly double over the next 30 years, increasing from 24% at present to 47% by the middle of this century.”

If nothing is done, the report stated, the extra €50 billion a year cost of nearly half the population being retired (and in receipt of expensive medical and care benefits) would be catastrophic: by 2070 the national debt would be 90% higher.

Even now, nearly half of all today’s pensioners say they are totally dependent on the State pension. Fewer than half the working population have an occupational or private pension and the size of contributions is falling.

I’m going to guess that Josephine Feehily will recommend that the earlier formula to increase the State retirement age be resumed.

While she’s at it, she should probably suggest that another two age rungs be added to the State pension ladder: to 69 in 2035 and to 70 in 2042 in order to ensure that today’s 50-year-olds will actually get to collect a benefit when they retire and that today’s 30-year-olds are not left pouring compulsory PRSI contributions into a black hole.

Meanwhile, extra effort has to be made by unions and employers to get the plan for an auto-enrolment pension back on course. The 2022 target date was always complete nonsense – think of it is as the pension equivalent of Sláintecare.

Universal, ‘pay-as-you-go’ pension systems, like ours, which involve cash going in and cash going out on a daily basis, only work if there are always more workers paying in versus the growing number of benefit recipients. As the ratio of workers to retirees falls to 2:5, you run out of contributors. You’d think that even the dimmest politician would understand that the State has been operating a ‘rob-Peter-to-pay-Paul’ pension system all along.

The pandemic and its financial aftermath (plus the housing crisis) are going to make it even more difficult to convince young workers that they need to invest in well-managed, low-cost, widely-diversified private pensions, or for companies to do the right thing by offering such savings vehicles.

Pensions have been one of the greatest political challenges and failures… along with the public health system and housing. Young workers need to engage independent, impartial financial advisers as a priority.

As for the 65-66-year-olds? Tough luck. I’m guessing you’ll be collecting the dole till you turn 67. But you had a choice, just like I did 40 years ago, to start building a retirement fund.

Housing prices for us were affordable; we lived through the longest stock market boom in history, even with the odd crash. We were raised by prudent parents and should never have allowed politicians to keep putting pension reform on the long finger.

Still. There is a silver lining. You can always rent rooms in your mortgage-free homes and earn €14k a year, tax free.

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