Column Our welfare system is wasteful – and a timebomb for our children

Aaron McKenna wrote for TheJournal.ie about the ‘Lost Decade’ Ireland is facing into, and why we need a new vision for the nation to bring us through it. In this seventh part of his series on ways forward he discusses the waste in our welfare system, and the nasty financial surprise waiting for our children.

WELFARE, GOES THE American expression, is the third rail of politics: It’s where all the power lays and you’ll be killed if you touch it. It’s also 40 per cent of Irish government spending today and regardless of reducing unemployment it will continue to grow as a share of our economy as more people retire.

In the long run some welfare programmes are constructed as a Ponzi scheme that will see our children and their children pay out more in taxes to fund commitments we made decades earlier. All the while receiving less services themselves. In the short run, welfare has lost its key focus and some significant spending is wasted thanks to maladministration and poor policy making.

In the short run we need to refocus the debate on welfare away from recrimination and nit-picking. Too much oxygen is given to the notion that unemployed people are wasters, malingerers or somehow deficient.

The majority of people unemployed today got there by way of an economic collapse after working hard and paying their taxes to be squandered by politicians and senior civil servants, none of whom lost their jobs without a golden handshake. Of the 440,000 unemployed today only around six to nine per cent were perpetual dole collectors even during the good years.

We need to deal with these people and give them a dose of cold reality. Those who chirp into any discussion of unemployment and paint the other 90 per cent of unemployed people as wasters could do with the same.

Meanwhile we see hand-wringing and nit-picking around touching any welfare programme regardless of its benefit to society. Welfare has lost its focus in places, during the rush to hand out election-winning goodies.

It’s ludicrous to see these things happening while disabled children and blind people take arbitrary cuts

The purpose of a welfare state is to provide a minimum protection of income and living standards for those who cannot provide for themselves. Think about that for a moment.

It’s then odd to witness a €2billion a year program hand out the same cash benefit to families regardless of income. It’s disheartening to hear the Department of Social Protection say that they are incapable of properly means testing to ensure people get what they really need. It’s ludicrous to see these things happening while disabled children and blind people take arbitrary cuts.

We need to come to a clear definition of what welfare is supposed to achieve and stick to it. We need to cut out spending that goes beyond these objectives. From paying for communion dresses to subsidising landlords we need to root out the payments and systems that are not adhering to the basic objective at the core of what welfare is supposed to achieve.

To do this we need a Department of Social Protection that joins the rest of us in the 21st Century.

I’ll bet my last German dollar that if we rounded up a few engineers from the great tech companies here in Dublin today and asked them to design a proper means testing system they’d get it done. I bet too they’d get it done quickly and for a decent price.

If Social Protection was as savvy at giving out money as Revenue is at collecting it there would be a lot less than 10 to 15 per cent of welfare wasted on errors and fraud. That’s the Department’s own estimate of its maladministration in interviews on RTÉ’s Prime Time and elsewhere.

We need our welfare system to modernise and we need it to focus back onto basics: Providing a minimum standard of living for people who need it.

In the long run we have a crisis that dare not speak its name: Pensions. The state pension actually makes up more of the welfare budget than unemployment. The most detailed statistics available show that 28.5 per cent of welfare spending was on pensions versus 19.6 per cent on jobseekers in 2010.

‘The famous NPRF is now funding the retirement of some bondholders’

Today we have a young population and only 17 per cent is retired. There are six workers per retiree today. In 2050 there will only be two people at work for every person retired.

Back in 2005 the Department of Finance conducted a study on the sustainability of our current pension payments. They figured that everything would be fine and our pensions perfectly affordable.

Assuming, of course, that we had perpetual economic growth and unemployment no higher than 3.4 per cent between 2010 and 2050. The annual cost of paying the state pension in 2050 will be treble what it is today in real terms, but the National Pension Reserve Fund would cushion the blow.

Yes, the famous NPRF. It’s now funding the retirement of some bondholders.

The yawning gap between what we’re putting aside for our retirements and what our children will have to pay out to support us is the third largest of any EU country.

Similarly public service pensions are an unfunded nightmare, but that’s another barrel of fish. In that case if we were to buy a private pension fund to cover public sector pensions it would cost €116 billion. (The banking bailout has cost about €70 billion.)

Government has taken steps to reduce that bill for new entrants. Similarly we need a change to the way we fund state pensions for those of us still far off retirement, and those following us.

Basically we will need to pay more for our pensions.

Steps are being taken to introduce automatic enrolment into pension funds for people working today. I believe that we need to go a step further and say that future generations have to save for their own retirements. We pay our PRSI today but in reality it is not enough to cover our pension costs when we retire. And if you set aside nothing for your own retirement the plan is that you’re entitled to the state pension without question.

There should be no automatic entitlement to a state pension in the future. We can do this by introducing a means-tested state pension that looks at one’s lifetime earnings as well as accrued pension fund as the basis of means.

A person who earns, say, double the average industrial wage might not get much or any state pension. The onus is on that individual to use their higher lifetime earnings to fund a pension. A person who has lower lifetime earnings, and less to save towards retirement themselves, should get more.

Pensioners today and those retiring in the near and even mid future are entitled to expect their state pension. That was the deal. But for those of us following the rules should change with the gradual and eventually total introduction of a lifetime earning means test.

If we don’t then it’s our children and their children who will have to meet the unsustainable promises we are making for ourselves. They will fund our retirements through higher taxes and fewer services for themselves. That is not fair and it is not sustainable.

Aaron McKenna is Managing Director of the e-commerce company Komplett.ie. He is also writing a book on the future of Ireland to be published later this year.

You can read his previous pieces on the way forward for Ireland on TheJournal.ie here.