OECD Review of Irish Pensions System: Statements

Wednesday, 15th May 2013

I welcome the Minister to the House. When the Minister has the opportunity, I look forward to her publishing and discussing her planned roadmap for long-term pensions policy in Ireland. This debate shows the interest we have in the policy.

As time is limited, I wish to share my initial thoughts on the OECD review. I have two major concerns regarding the manner in which the pensions system is operating – our ageing population and the State’s reliance on current expenditure to cover pension costs. I will address the latter first.

Private companies fund their pension schemes through future liabilities, but the State uses current expenditure. In the private sector many pension schemes have been adjusted, modified or even closed to new entrants and it has been necessary to cut entitlements. While I am not happy about any of this, it is the reality of what is happening. However, there is a real generational issue and the current generation is set to lose out. The ESRI report published yesterday shows clearly that those who are in their 40s or under are bearing the brunt of the recession. The national pensions framework published in March 2010 showed that there were six workers to each pensioner. However, that figure will be halved by 2032 to a ratio of 3:1 and by 2050 there will only be two workers to each pensioner. Moreover, that is not guesswork but mathematics.

The ratio in the public sector is more startling and has been exacerbated by early retirements and the recruitment moratorium. The same generation that is disproportionately affected by the recession through high unemployment, mortgage arrears and negative equity will also be obliged to pay the price of a pensions shortfall unless the issue is dealt with. By the time this generation retires, there will be nothing left in the pot. There is a social insurance fund deficit of €1.5 billion per year.

According to KPMG, the deficit will reach €324 billion in the next 55 years unless action is taken now. This sum of €324 billion is a phenomenal amount. It is nearly twice the national debt and more than twice Ireland’s GDP in 2011. Consequently, we really must get serious about talking about solutions and not simply talking about the ageing population. There must be discussions on whether benefits will be reduced or whether PRSI contributions will be increased. It has been estimated that PRSI contributions would need to be raised by three quarters from now, were that bill to be met over 55 years. That is an indication of how serious this matter is. Consideration must be given to providing an incentive for employers and employees to invest. Senator Paschal Mooney mentioned the position in Australia, but I note the Labor Party Government there introduced that scheme in 1992 with a 3% contribution. Thereafter, over a 15 year period, the Australian authorities raised the figure to 9%. Perhaps there is an opportunity to start at a figure of 1% or 2% at a low age and then to raise it. I do not suggest this is the answer, but the figures are dramatic and drastic and this is not a problem out of which one can hope the economy will naturally lift Ireland.

It is known that the earlier one starts to invest in one’s pension, the better. As the Minister stated, the basic State pension in Ireland is relatively generous when compared with that in other OECD countries, but I note retirees in other countries often receive bigger pensions overall because they contribute to mandatory pension schemes. That is their culture and the system. I also note the recent European Union White Paper, An Agenda for Adequate, Safe and Sustainable Pensions, concluded the financial pressure of an ageing population inevitably would lead to longer working lives and the need for private pension funding to fill the gap left by reductions in public pensions. One need only consider the situation in Waterford Crystal regarding its defined benefit scheme. One worker retires and receives 100%, but six months later the next one retires and receives between 18% and 20%. Is that fair or equitable?

I will move on briefly to the issue of the ageing population. Everyone is aware that in common with the rest of Europe, Ireland has an ageing population. A total of 781,000 people, or approximately 7% of the population, are aged 60 years and over. This figure is expected to double by 2050, when it will account for 29% of the population. An ageing population will have serious consequences for Ireland, including longer working lives, lower economic growth, labour shortages, reduced consumption, considerable pressure on women to fill the gaps in the labour market, alongside caring for children and elderly relatives, and a considerable reduction in the social insurance fund and the National Pensions Reserve Fund. However, Ireland does have something in its favour – its birthrate. One cannot consider these issues in isolation and Ireland must invest in children. It is our collective responsibility, given that in economic terms, children are a merit good. Children have value to others beyond their family as future taxpayers and workers whose contributions will help to fund State pensions. I will sum it up in one line from the English MP, Mr. Frank Field, who said, “I may not have children; but I need someone to have them if my pension is to be paid.” Therefore, let us invest in children also.

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