Pensions commission will have its work cut out

Nov 08, 2020

 

Originally posted on Business Post 1 November 2020.

Recent comments and actions Leo Varadkar, the Tánaiste, have drawn much public and political debate. Last week, there was the tension over his leaking of an agreement with a doctors’ representative group to a rival union. And before that, Varadkar drew controversy when he observed that, sometimes, those who advise are the least affected by their advice.

That comment followed the initial refusal by the government to follow the advice of the National Public Health Emergency Team (Nphet) and put the country on level 5 Covid-19 restrictions. Varadkar’s observations about Nphet could usefully have opened up a broader debate about the extent to which policy and decision-making is influenced by the experiences of those taking the decisions.

Whatever about health policy, pensions policy in this country has in the past been largely determined by politicians and public servants who, by virtue of the public-sector pension system, would largely be unscathed by their decisions.

In the vast majority of cases, public servants do not face the difficulties of pension funding that are routinely faced by workers in the private sector, and so there are grounds for the private sector to be sceptical about the establishment last week of yet another pensions commission.

The retirement age became a contentious general election issue earlier this year. The new commission on pensions honours a commitment made when the current coalition was formed. It is to examine whether or not the statutory pension age should be increased from its current threshold of 66 years to achieve annual social welfare savings in the order of €450 million.

In 2015, the ratio of workers to retirees was approximately five to one. By 2035, it has been projected that this ratio will sink to three to one. Without policy change, there are insufficient funds to provide adequately for the eventual retirement of our ageing population.

In this context, “adequately” does not automatically suggest people having sufficient money on retirement to live decently and with dignity – instead it is all too often taken to mean pensioners having enough to provide for healthcare and housing without obliging the state to make further provision instead.

Attempts to treat symptoms rather than causes has characterised pensions policy over the past 20 years. The symptom of an ageing population led to the increase of the pension age, initially from 65 to 66 and now to the current impasse. The symptom of inadequate access to pension savings vehicles led to the introduction of personal retirement savings accounts (PRSAs) in 2002.

Meanwhile, an initiative to cope with the symptom of poor pensions saving habits by creating schemes of automatic enrolment into pensions seems to have withered on the vine.

Other symptoms of the pension conundrum, such as unattractive annuity rates – the amount of money that has to be invested on retirement to generate a guaranteed annual return – have not been addressed. In fact, between 2011 and 2015, the reward for a prudent pension savings habit in the private sector was a levy of up to 0.75 per cent of the capital saved. This levy has now been repealed.

As against these destructive policies, the contributory old-age pension from the state over the same time has more than doubled, from typically €122 per week 20 years ago to €248 a week now. While still modest, that puts us broadly into line with many of our EU counterparts.

Yet, in the private sector, only one in three workers supplements the state pension with personal pension contributions. If many of us have not made adequate provision of our own for retirement, should the state continue to foot the bill? This is a broader social question, and one that cannot be solved by any commission focusing solely on the retirement age.

As the worker-to-retiree ratio continues to decline, savings achieved by increasing the pension age won’t be enough. The only way to ensure that fewer future workers won’t have to subsidise more future retirees is to collect more tax now to fund recurring pension requirements later.

In the midst of a pandemic, raising additional taxes for any purpose, let alone future pensions funding, is not an attractive proposition. The precedent of the National Pension Reserve Fund, where a €20 billion government pension reserve was essentially dissolved against the national debt in 2014, is not reassuring either.

If there is no political will to fix the now borderline-unconstitutional local property tax (LPT), what chance is there of introducing any new tax to raise the same amount as the LPT to solve the retirement age problem?

The new pensions commission is therefore stuck between a rock and a hard place. It will have a tough time coming up with proposals which might ever be implemented. In particular, it will have to avoid the Varadkaresque criticism that those who advise may be the least affected by their advice. After all, most of us will hopefully live to be 66.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland