‘HOW LONG SHOULD a person get the State pension for?’

This has become an increasingly difficult question to answer.

Back in the day, it was easy. In 1908, when the state pension was first introduced as part of a UK law, you had to be 70 to qualify for it. A typical Irish person was expected to live until they were about 50.

Now, this was skewed by higher infant mortality. But even still, a typical person would only be expected to draw down the payments for a few years before dying – crucially, not costing the state too much money.

But there’s been three big changes since 1908.

First, we’re living much longer. Life expectancy at birth in Ireland is about 81 for men and 84 for women. So a person who reaches the current retirement age of 66 can be expected to draw down the state pension for somewhere between 15 and 20 years – far longer than in the 1900s.

But, hey, societies are meant to progress, right? Surely people being able to enjoy more time free from work is a good thing?

Well, in theory, everyone would like the retirement age to be as low as possible. But this is where Big Changes Number 2 and 3 come in.

Secondly, Irish society is aging, and thirdly, birth rates are falling. Taken together, this will mean more old people and fewer young people / workers to replace them.

The upshot is, whereas now there are four workers for every pensioner, by 2050, it’s expected there will only be two.

Timebomb

This is a big problem, because as explained previously, people don’t actually pay into a pot for their own state pension throughout their working lives.

The social security / PRSI payments of current workers are immediately used to fund the pensions of current retirees. Current workers will rely on younger workers to do the same for them in the future.

But we’ve just established – the number of workers is going to drop, significantly, relatively soon.

It means the State will then be left making payments to a much larger group of retirees, for a much longer time, with a much smaller pool of workers.

So how can this circle be squared?

There have been plenty of ideas put forward to defuse the so-called pension time bomb, but when boiled down to it, many of them amount to some variation of:

• Significantly raise taxes for younger workers
• Increase the retirement age

We’ve examined Option One before. Option Two is what we’re going to take a look at now, as the OECD has put it back on the agenda.

For those who don’t know the OECD by its acronym, or its catchy actual name – the Organisation for Economic Co-operation and Development – basically, it’s an intergovernmental organisation / club of all the richest countries in the world. While its recommendations are often ignored by national governments, they at least carry some weight.

And an OECD report from earlier this month made this suggestion: “Given Ireland’s high life expectancy at birth, linking the retirement age to life expectancy could yield large benefits.”

It’s worth recognising the ‘benefits’ here would be for the State, not the individual.

Life expectancy 

Linking pension age to life expectancy essentially means raising the qualifying age for the state pension.

Doing this would save the country money, with the tradeoff being that people would have to work for longer.

But how much longer?

Well, as you might have guessed – it would depend on life expectancy. The OECD said:

For example, Ireland could increase the pension age by 2/3 of the increase in life expectancy.

This means that, for every year of increased life expectancy, the pension age should rise by two-thirds of a year

For example, if population life expectancy rose from 81 to 84 – an increase of three years – the State pension age would rise by two years.

This change would likely save the state billions of euro every year.

The government has actually looked at doing the exact same thing – in 2021, the Department of Finance published a report which also proposed the life expectancy link.

It found that the impact of the policy would be to raise the state pension age to 72 by 2070.

This was because it assumed life expectancy will rise to 86.8 for men and 90.4 for women – a rise of just under five years for both.

It also assumed that the state pension age would first rise from 66 to 68 – something which never happened.

While the pension age was meant to rise from 66 to 68 by 2028, after this became a massive issue at the 2020 general election, the move was scrapped.

The Department of Finance report was published in 2021 – meaning with the pension age still a sensitive issue, the proposal was put on the back burner.

But the Department published a report in June which again raised the idea of linking the pension age to life expectancy.

But would creating this life expectancy link be a good idea?

Well, the Department of Finance certainly thinks so – its most recent report said – the move would be the “optimal approach” to dealing with the so-called pension ‘timebomb’.

It’s also an approach which is being examined in several other countries. Denmark has moved to such a system, with the result being that those currently aged 25 may not be able to retire until they are 74.

Finland and Sweden have also brought in similar changes.

A big problem, obviously, is that this has a much bigger impact on younger workers.

Denmark is looking at slowing the life expectancy-linked age increases in the coming decades for this reason.

The other key issue is that the changes will likely more negatively affect poorer people.

The gist of this idea is that those on lower incomes are more likely to work manual jobs which damage their bodies. Therefore, they likely won’t live as long, and so may not even reach retirement age at all.

A study published in 2021 pointed this out, finding that the disadvantage faced by those from “lower socio-economic groups” is “magnified when retirement age is linked to life expectancy”.

However, this has been called into question by other studies, including one which found that “socio-economic status poorly predicts lifespan”.

Nevertheless, Finland has already moved to address the perceived issue, letting those who have worked in “physically or mentally wearing” roles to qualify for the state pension two years earlier than the rest of the population.

But while these are worries, the money will likely be the decider.

And this is where it’s good news for Department of Finance officials – in Sweden, it appears the move will help address the state’s pension issue.

Given the stink kicked up during the 2020 election, Irish politicians are unlikely to voluntarily raise the issue of a life expectancy link in the near future.

But the latest Department of Finance report shows that state officials are still keen on the idea – and so is the OECD.

While it would be a hard sell politically, don’t be surprised if the idea makes a return at some point in the not-too-distant future.