AN INTERNAL REPORT by Department of Public Sector Expenditure and Reform officials made its way to the world this week, showing that civil servants are fretting about the €195 million increase in pension spending they predict for each and every year between now and 2026. The demographic pressures on our welfare system are becoming less and less tomorrow’s problem, worthy of a working group report that can help gather dust in government archives. Spending on state pensions has already increased by €1.5 billion per year since the recession kicked off, as more and more folks take up retirement and the expensive habit of living longer.
When well-paid mandarins with solid gold public sector pensions in the bag turn around and tell the rest of us mere plebs that we need to cut back on the €230-a-week state pension, it will attract a predictable rebuke. The proposals for immediate cuts in the weekly rates perked up the usual ears and got the usual response: older people who have paid their taxes all their lives deserve their pensions, and shouldn’t be scared by these sorts of proposals floating around the place.
It’s a perfectly cogent argument, and one I agree with: we cannot go robbing today’s pensioners and those near retirement of what they have been promised for so long. Instead of cutting their entitlements, we will need to find savings in other areas of government spending. Punitive cuts to politicians pensions won’t cover the shortfall, and to pay for these massive pension spending increases over the coming years we will have to forego spending on other substantive things.
Increases in pension spending
To put that in context, however, is important. We have already increased pension spending by €1.5 billion per year since 2007. We will increase by a further €2 billion a year over the next decade. So, in ten years hence we will be spending €3.5 billion per year more on pensions than we were in 2007. We will also be seeing upward pressure on spending in areas like health as our population ages. All of this will mean less money for schools, or Gardai, or infrastructure projects or any one of a number of other things folks want from government. It will mean less room for tax cuts to return money taken from us as the recession hit. USC collects €4.5 billion per year. It’s hard to get rid of it not only when government is still running deficits today, but when it can foresee the likes of €3.5 billion in pension spending increases coming down the line.
There is a logical chain of thought we must follow from that: if the promises we’re making today’s retirees are unaffordable and will lead to service cuts and the cementing of tax increases, any promises we make to retirees another 20 or 30 or 40 years down the line will only become even more unaffordable to our children and their children. The demographics of the future are only heading one way, with a precipitous decline in the number of people working and paying tax for everyone retired and collecting a pension.
The issue is that the government runs a pay as you go system, using the contributions of today’s workers to cover the pensions of today’s retirees. This is not sustainable when we move from being a young country, demographically, to an increasingly old one. The current model is a ponzi scheme: people currently receiving a pension are paid by the folks below them, who in turn are promised that the folks below them in turn will pay their pensions. Eventually you run out of new taxpayers and the whole thing falls apart.
Everyone gets much the same – it is clearly unaffordable
That the welfare state runs a universal pensions system in the first place does not make much sense. It has essentially been a tool for purchasing votes, with increases to the core rate timed around elections in years gone by. The welfare state is supposed to be a safety net for those in dire need, and instead we have turned it into this universal system where everyone is entitled to get a few quid at some point in their life, from having kids to retiring. Never mind if you’re rich or poor, everyone gets much the same. It is clearly unaffordable.
The solution to our pensions ponzi scheme is to get folks to pay into their own pension funds, which is theirs and that they take with them from job to job throughout their lives. The state then should step in on the basis of a lifetime means test: if your circumstances prevented you from contributing to your own pension fund, you can be entitled to a state pension or part thereof.
Why should someone who, say, gets a good degree (mostly paid for by the state) and goes on to earn well above average, and then progressively more and more until they retire, get a state pension? An engineer or computer programmer, a manager or a successful business person can’t contribute to their own retirement fund?
A lifetime means test can take account of all the challenges one faces. A single income household with several children, even on a good wage, can’t be expected to contribute as much for a good two or three decades of a working life, and this could be reflected in the final entitlement to a state pension. Similarly though, a household with major six figure incomes should not be able to rely on the state for a nice little top up to their pensions come retirement.
A new system
The state can sit behind the pensions system, there to catch folks if they have difficulties and perhaps prop up pension funds in bad times. But it will no longer need to be on the hook for every penny. This will allow government to free up money for better services, such as in the healthcare that we’ll all be needing while we enjoy our elongated retirements; or to return to us in tax cuts that we can invest into our pension funds ourselves.
We’d need to grandfather this system in, quite literally, over several decades. A person in even their 30s or 40s can’t just be told to make up time, and if we introduced such a system overnight they would still have to get something for their contributions to date. But there’s no reason why people entering the workforce today and those just shortly in it cannot be told they’re on a new system that will kick in for them in over 40 years.
We’re going to have to suck up increased pension costs in the near term. But we can take steps today that will ease the burden on future generations. If you’re 30 today, it will be a child born in 2033 who will be facing up to pay for your retirement if the current system holds. He or she will probably have to pay even higher taxes than you do for it.
I think we’ve saddled the kids of the 2030s and 2040s with enough bills for one lifetime.
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 at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.
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