WORK HARD ALL your life, pay your stamps and retire with your hard earned state pension… right? Wrong. By the time the youngest of us reading this column come to retirement, near enough or at 70, there will be far fewer taxpayers per retiree who will have to be paying their stamps to cover both themselves, us and the most needy on welfare benefits in their time.
As it is, our pay related social insurance is only covering 36 per cent of all social spending today. All the PRSI paid by everyone in the state and their employers is bringing in enough to pay for pensions and about half of the child benefit bill. Each year that more people return to work, we will also have more people retiring as our demographics shift into a more continental European norm of an older population with the increased bills that are associated with retirement.
A time of ever-increasing taxation, mass unemployment and economic dilapidation is a depressing one in which to tell people that they’re not saving enough for their retirements and will need to stump up more cash in future for their golden years. The OECD report into the area commissioned by Minister Joan Burton and released this week met almost cheerfully with the inevitable howls of scorn and derision at its keystone recommendation that we all be forced into pension schemes that will eat up 15 per cent of our incomes.
The idea that any sane government would make such a suggestion official policy at a time like this is of course out of the question. But so often the recommendations in these reports are a part of the careful construction of choice architecture, where the cutting edge policy is used to inoculate one to think that a less expansive one is a good compromise.
Of compulsory enrollment into pension schemes there is no doubt. It is coming government policy. Next will be the haggling over how much goes in, who contributes it and what comes out the far end. The policy debate will doubtlessly be framed in long-term thinking, with the higher contributions falling further into the future to be paid by those who are young today. It doesn’t hurt when protecting the entitlements of those already far along the road that the older one gets, the more likely one is to vote.
Joan Burton is correct to say that despite the tough times, we cannot put this issue on the long finger. We can argue about percentages, but you can’t haggle with demography. The OECD report reckons that there is a 17 per cent gap between what we’re paying today and what we need to pay in the future to get the same benefits without having to unfairly raise taxation on our children, who at that point will be trying to battle for adequate funding to school their own children and protect themselves from economic troubles and all the rest.
The government, in all its wisdom, runs a pay as you go system. You and I pay our taxes over our lifetime, with one of the promises being a state pension at the far end. But it uses our taxes to pay its current obligations and it intends to use the taxes of somebody else, perhaps not even yet born, to pay for ours. This is fundamentally wrong, removing both choice and fairness from our pensions system.
So too would it be wrong to force every citizen into strictly controlled pension arrangements, essentially controlling what people do with their own money and their own destiny. But, on the flip side of this, it would also be wrong for the state to subsidise those who refuse to make the sound financial choices necessary to prepare for retirement.
I believe that the way forward to ensure the long term prosperity of our retirees without burdening our children with unfair taxes is to create a state backed – rather than entirely state funded – pension system that is means tested.
We should all be obliged to pay what we can towards our retirements. From the time we begin working to the time we retire, our incomes are tracked by revenue. This data should be used to create a lifetime means test: if you earn more, you should be entitled to less in state benefits come your retirement and the onus is on you to make up the difference.
Depending on ones earnings, one could be entitled to zero pension, half a pension, or a full state pension. The government can have opt-out pension schemes for workers, but essentially it should be down to ones own intelligence rather than the stifling wisdom of the nanny state as to what to contribute, invest into or not.
This would be fair and in the spirit of the welfare state, rather than a state pension system one can avail of regardless of anything. People can also make choices and perhaps choose to take bets or play it safe. Investing 15 per cent of our income into a forced state run system seems like a good way to stifle people who want to bet on different investments, start their own businesses or make trade offs against their retirement for their lifestyle today.
This is a paradigm shift away from universal benefits, into a private pension system that the state implicitly guarantees by protecting those who cannot pay into it or where things go awry, as they did for so many in 2008. Those who cannot afford their own pensions will be looked after, while those who can must take personal responsibility for themselves; with the upshot being greater choice in how they do so.
The idea of universal social benefits paid to everyone is a vote winner, not the purpose of a welfare state. The purpose of a welfare state is to offer a hand up to those who are down and would otherwise be counted out. It has been the corruption of the welfare state by politicians seeking power that has led to the arithmetically impossible to sustain system we have today and which will only get worse in future, where there are more people on the wagon than there are pulling it.
Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.
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