A third of us will have to cut back after retirement
Published 01/10/2015 | 02:30
A survey of 2,000 households has found that almost a third are facing a drop in income when they retire and will have to spend less.
Large numbers of people face this squeeze in what they can spend when they stop working because of inadequate pension provision, the report by international management consultants McKinsey has found.
Some 29pc of households in this country are likely to be forced to materially reduce consumption levels when they hit retirement age.
Lower-income households will not be hit so hard. This is because the State pension, which is roughly €12,000 a year, will largely replace the income of this segment.
But middle-income and higher-income households are set to be forced to adjust their spending when retirement hits.
The imposition of higher taxes and charges and cuts to benefits over the seven years of austerity has prevented thousands of workers from funding pensions. And large numbers of private sector pension schemes have been restructured, with benefits being lowered.
McKinsey says: "Households with medium-to-high incomes are much more likely to be exposed to a standard-of-living adjustment when they retire."
These households require a high retirement income to keep up the relatively higher spending levels that they have before leaving the workforce.
"While many of these households are members of private pension plans, most of those who are among the less-prepared 29pc of households do not have access to a pension plan or do not contribute sufficiently to it," according to the McKinsey report, which is entitled 'Is Ireland's population ready for retirement?'
The study also found that Irish households have low levels of poverty in retirement compared with other developed countries. It says Ireland performs well when it comes to the ability of retired households to meet basic financial needs.
The poverty rate is 6.9pc, which is lower than most large countries that are members of the Organisation for Economic Co-operation and Development.
"The poverty rate in retirement in Ireland is also lower than the average poverty rate across all age groups," the report found.
McKinsey also questions the sustainability of the pensions system. There is concern about the ability of the system to keep State pensions payments at current levels.
The consultants say that the amount of money being paid into the social insurance fund is not sufficient.
The fund, into which every worker pays PRSI, is used to pay unemployment benefit, State pensions, maternity benefit and redundancy and insolvency payments.
The options are either higher PRSI (pay-related social insurance) payments being made by those still in work or a lower State pension being paid in future.
The report warns: "In almost all cases, individuals will need to shift how they think about the State pension system - from viewing it as a system that guarantees an adequate income in retirement to a system that provides a basic minimum level of retirement income that needs to be supplemented with private savings."