In a week when the government announced that it will be able to deliver a €6.7bn budget shortly, it is easier to see the lack of reality about some of the key fiscal and policy decisions that will have to be made in a few years’ time.
Kicking cans down the road has become a national political sport. The government is saying that it hopes to show an exchequer surplus for this year which has freed up the amount of money it has available to spend on cost-of-living measures.
That is good news in a very uncertain world.
Tánaiste Leo Varadkar said any surplus should be split between funding special measures and putting money aside for a rainy day fund. We have had two of those funds before. One was called the National Pension Reserve Fund and the other was simply referred to as the Rainy Day Fund.
Unfortunately, for both of them it rained rather heavily. The NPRF built up over €21bn in value when the financial crash hit. The Rainy Day Fund had about €1.5bn in it when Covid hit.
Any new rainy day fund would probably just cover the next major virus likely to hit in the coming years. Meanwhile, we have what the OECD last year called, a fiscal time bomb coming in relation to funding pensions.
Higher public sector pay awards carry longer term funding challenges with regards to paying those pensions.
We are one of only two countries in the OECD not to have some kind of auto-enrolment or similar pension provision system for those in the private sector. As a result we are hopelessly under-provided for when it comes to paying state pensions and the future standard of living of an aging population.
Without such a system, people will be reliant on the state pension system. State pensions are paid out of the social insurance fund, collected from PRSI payments each year.
Instead of having a dedicated investment fund for the provision of state pensions in the future, the money is paid out of a fund that also pays retired people’s electricity bills and TV licences.
Auto-enrolment is coming we are told
According to the Social Insurance Fund annual report, in 2019 it took in €12.2bn. State pension payments that year amounted to €7.1bn. The year before they were €6.7bn – a €400m increase in one year.
Auto-enrolment is coming we are told. It has been discussed for decades and the outline structure of a scheme was approved at cabinet in March of this year.
When fully operational this would see around 750,000 workers enrolled in a new workplace pension scheme. For every €3 saved by a worker, a further €4 will be credited to their pension savings account.
Employees will eventually contribute 6pc of income. Their employers will put in 6pc and the State will put in 2pc.
But it isn’t expected to start until 2024. It will introduce a gradual contribution scheme which won’t be fully implemented until 2034. That would make it more than 16 years in the making.
Auto-enrolment has been helpful elsewhere such as in the UK where 90pc of those on lower pay have stayed in the scheme rather than avail of the opt-out clause.
It will no doubt be helpful here too in offsetting some of the dependency on the state pension into the future. But it remains a long way off.
Higher inflation leads to higher wage demands
Mr Varadkar commented last week that higher inflation may persist for several years. It is hard to see the introduction of an auto enrolment scheme which will reduce take home pay in the short term, at a time when the cost of living is still depressingly high.
Equally, higher inflation leads to higher wage demands, so employers won’t be too happy about trying to give pay increases and to pay into new employee pension schemes at the same time.
The scheme will also mark a major payday for private pension fund managers when surely it would have been better to hand the whole thing over to someone like the NTMA.
Successive governments have continued to put their heads in the sand when it comes to funding future pension needs. The Commission on Taxation report, due for publication later this year, is reported to be calling for higher property taxes, congestion charges and the introduction of a site tax, in order to plug some of the revenue shortfalls that will come from factors like an ageing population in the years ahead.
Taoiseach Micheál Martin was playing a short term game again in the last week by reiterating a commitment that the state pension would be paid from age 66 and not from 67 or later as previously recommended.
Meanwhile we will continue funding state pensions from the social insurance fund. KPMG estimated back in 2017 that the net present value of future projected shortfalls in the state pension was €335bn out to 2070.
The social insurance fund at the time had a surplus of €400m. In 2019 that surplus hit €3.8bn. The fund takes in money mainly from PRSI and pays most of it back out again on state pensions and various welfare benefits.
The surplus does go into an investment account run by the NTMA but funds are also regularly withdrawn from that account too. Imagine funding pensions for an entire nation from annual revenues and not storing up large sums to benefit from investment returns and fund future needs.
What is most surprising is the fact this plan isn’t going to change. Auto-enrolment will provide a private savings scheme for workers but we will still require a state pension and there are no real plans to come up with a proper structure to fund that over a 30-year or 50-year horizon.
Government is once again talking about a rainy day fund. A gigantic deficit in funding future pensions could be one of the biggest rainy days of all.