Friday 6 December 2019

Brendan Keenan: Longevity is good for individuals -- but a disaster for the system

The national strategy is a faltering first step on the long road to being able to provide a decent standard of living for older citizens in years to come

YOU could have heard a pin drop when the Minister for Social Affairs etc., Mary Hanafin, announced that she was about to publish the national pensions strategy. The surprise among the audience was all the more surprising, given that this was the annual dinner of the Association of Pension Funds.

None of them seemed to know it was coming. Indeed, some of them seemed to feel that they would be drawing the pension themselves before they ever saw any such document, so long had it been in gestation.

They may also have felt that, if the Government had not produced its strategy during the boom, when Irish tax revenues were coming out of its ears and corporate safes were stuffed with cash, it would hardly do so now.

Still, never waste a good crisis. The current difficulties have shone a harsh light on the pensions problem, as formerly good private schemes with guaranteed pensions close their doors, and swelling budget deficits show the apparent impossibility of providing a decent old age for all from taxation.

After the surprise, the reactions were as expected. Nearly all were critical, and based on narrow self-interest. Employers, trade unions and opposition parties had nothing constructive to say about this most fundamental and intractable of problems.

How fundamental is the point usually missed. It seems almost a mistake to talk about "pensions". They are the instrument, not the problem. The problem is that developed economies simply do not know how they are to provide a decent standard of living for older citizens in years to come.

Looked at properly, as an accountant would, this issue dwarfs the present budget difficulties. In Germany, where the population will soon begin to fall, the accumulated estimated deficit between tax revenues and age-related costs is 270 per cent of economic output (GDP). Some calculations say the deficit in Ireland for public sector pensions alone is close to 100 per cent of GDP.

Clearly, governments will not be able to borrow that kind of money. They ought at least to prepare by having small, or zero, national debts by the time the demographics start to move against them. That means large budget surpluses now. Individuals, including those who work for government, would also have to be encouraged, or even forced, to save alongside government to meet the future bills for themselves and their children.

Instead, national debts are rocketing and pension schemes failing. In Ireland, we thought we had shared some of this "inter-generational" burden with our low national debt and payments into the national pension reserve fund. But underneath, we were merrily spending the inheritance. The debt will soon be back to 1990 levels and the reserve funds face a distinctly uncertain future as bank capital.

I accept that this sort of thing is bad news overload; being asked to worry about what will happen around 2050. There is indeed no point in worrying about such things. There is every point in starting to do something about them, on the basis that the longest journey starts with a single step.

The pensions strategy is certainly no more than a faltering first step, but the Government is to be commended for taking it. If it is regarded as work in progress, with progress coming as practical issues and problems emerge, we may begin to get somewhere.

Longevity is the key: a happy event for individuals and a disaster for financial structures. Working longer is an inescapable part of the answer and the strategy begins to address this. It is typically tentative, though, not even dealing with the technical difficulty of the gap between retirement at 65 and the proposed pension age of 68.

There will be many more technical and political difficulties. Employer contributions are an essential part of any answer; whether directly or through the tax system, and they will have to make significant contributions -- not the proposed two per cent. Choices will have to be made between tax breaks now to encourage saving and higher public spending in future to cover the shortage of savings.

It may help to deal with all these contradictory impulses if we explicitly think of pension provision in the same way as we do general redistribution in society. It is the rough and ready formula of 'from each according to means and to each according to need' -- even if different countries apply that in different ways.

Pensions are the instrument, and not the problem...

The State's formidable task is to guarantee absence of poverty in old age. Is the proposed 35 per cent of average industrial earnings enough? If not, should something higher be for everyone, or based on a proportion of retirement earnings? Should anything higher come from private savings, but with a government guaranteed pension up to a certain limit?

All these kinds of thoughts, and others, are swirling around in the strategy, but have yet to crystallise into a clear, um, strategy. That can still be done, and is perhaps all we can do. After that, posterity is on its own.

Sunday Independent

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