We need flexibility that allows people to work past retirement age if they choose
There is no question that pension expenses will increase in the future. But how will raising the retirement age help us meet this cost? After going through the various metrics, benchmarks, and assumptions, the answer seems to be relatively few.
The Pensions Commission relied on projections from the Department of Finance and the Irish Fiscal Advisory Council (IFAC) based on the aim of raising the retirement age to 67 and then 68 by 2028 (these goals were abandoned by the government following the 2020 general election). By 2050, IFAC expects pension spending to increase by five percentage points of national income (GNI*). Raising the retirement age would reduce this increase by 0.7 percentage point. Indeed, raising the retirement age would save only 16% of the cost increase. Other ways of measuring this produce even smaller quantities.
But even those small savings could be inflated. The Department of Social Welfare did its own in-depth analysis of this issue and found that the savings from raising the retirement age were 21% lower than projected by IFAC. If we take into account the new benefits paid to 65-year-olds, the savings decrease even further.
Curiously, the Pensions Commission did not take into account estimates from the Department of Social Protection – especially since these estimates were included in a briefing document to political parties engaged in coalition talks in spring 2020 and in a subsequent briefing to the new Minister.
In another calculation, the commission estimated the deficit of the Social Insurance Fund in 2050 and projected that the increase in the retirement age would represent 28% of this deficit. Again, no one disputes that, given the current PRSI contribution rates, the Social Insurance Fund will eventually fall into deficit due to the increase in the number of pensions. However, the commission used estimates that were already outdated even before the pandemic. The Social Insurance Fund’s 2015 actuarial report, working with trends that emerged from years of recession and stagnation, predicted that the fund would be in deficit by 2020.
However, the unexpected economic recovery was such that the government, before the pandemic, expected the fund to enjoy a surplus for most, if not all, of this decade. Even after substantial spending on pandemic-related payments over the past two years, the fund appears to be back in surplus this year.
Miss to win
The Social Insurance Fund appears more resilient than described in the Pension Commission report. This would mean that the estimated deficit in 2050 is overestimated.
The committee has rightly focused on the revenue side of pension sustainability, namely PRSI contributions. Ireland has one of the lowest levels of social insurance income in the EU, especially when compared to employers’ PRSI. As our society ages, our PRSI rates will need to move towards the much higher EU levels, although it is highly debatable whether we need an increase in employee contributions. Irish workers are already at EU level when income tax and PRSI are combined.
On another revenue-raising measure, however, the commission missed the elephant in the room. IFAC projects that from 2030, economic growth will slow to an average annual growth rate of just 1% per year for 20 years: two decades of economic drought. Unfortunately, the projections are not outliers. They are consistent with the European Commission and other analysts.
It is important. First, a low growth scenario makes the sustainability of pensions more difficult as the economy struggles to generate revenue. Second, if we experience such chronic levels of low growth, the pressures on jobs, incomes, public service delivery and investment will be considerable. In this dismal scenario, the retirement age will be one of the least of our problems.
IFAC noted the positive impact of promoting long-term economic growth to help fund pension sustainability. In their submissions, Siptu and the Nevin Economic Research Institute urged the Pension Commission to factor policies aimed at promoting long-term economic growth into its projections. Although we do not expect the commission to detail all the necessary policy initiatives, referring to very beneficial policies could help the public debate.
These include increased spending on education to increase human capital, affordable childcare to promote labor market participation, and ending child poverty, the persistence of which degrades outcomes. long-term economic benefits as surely as it disfigures the quality of life.
Unfortunately, the commission dismissed the potential for promoting long-term growth to help promote the sustainability of pensions.
Context is important. Yes, the number of retirees will double over the next 30 years. But even by 2050, Ireland will still have the youngest population in the EU. Unlike almost every other country in the EU, Ireland will still have a growing working-age population in 2050 and beyond. And, yes, the life expectancy of people aged 65 is 20 years. However, “healthy life expectancy” – a measure used by the World Health Organization and the European Commission – is 13 years. Forcing people to work for two more years would have a negative impact on the quality of life, even more so for those working in strenuous jobs involving physical and mental fatigue.
We need a flexible retirement age, allowing people to work beyond retirement age if they wish (this is why the committee’s proposal to end compulsory retirement contracts is welcome) while allowing people with long contribution histories to retire early.
Obviously, this must be funded on a sustainable basis. This will involve facing difficult decisions. IFAC’s Eddie Casey is right when he says “the political system must support a credible and fully costed plan”.
The problem is that we don’t have such a plan yet.
Joe Cunningham is the General Secretary of Siptu