New auto-enrolment pension scheme faces the problem that many people have made no provision for old age
Too many people in Ireland make too little provision for their old age. Last week the Cabinet started to address this by approving a scheme that will automatically make contributions to a personal pension.
It will ensure pensions for the estimated 750,000 employees between 23 and 60 who currently have no pension.
As in so many matters, Ireland is still much more similar to the US than the EU. We remain a country where many people feel they should neither give too much to the Government, in terms of tax and control, nor expect much from them either. This is changing, because it has to.
Many are still oblivious to how different Ireland still is to the rest of Europe. Government social protection expenditure varies across EU member states from nearly a quarter of GDP in Finland and France to less than a tenth in Ireland.
This is well-reflected in the area of pensions. On average, EU countries spend about 15pc of GDP on pensions, compared to the US which spent about 7pc in 2021 — very similar to Ireland which spent 7.8pc.
Most of the EU is older than Ireland, with a median age of 43 and ageing fast. So, there is widespread concern to ensure that there will be enough money to pay pensions to longer-living people.
Ireland, by contrast, is a young country, with a median age of only 38 and more importantly, we have about five persons of working age for every older person. We currently have one of the EU’s lowest dependency ratios — only two-thirds that of places like Italy, Greece, Finland, Portugal and Germany.
However, this is likely to change quite quickly. Irish women are now having their first child at an older age (30.5) than the EU average. By 2100, there will be fewer than two persons of working age for each person aged 65 and over.
There can be a lot of unnecessary scaremongering around the issue of future pensions and changing age structures within a population. Much of this happens because people overlook how our world is changing.
Changing dependency ratios happen because of two factors. Yes, people are having fewer babies, but the apparent ageing of the population overlooks the reality that age itself is changing.
Life expectancy has increased in Ireland by over a decade since 1970. People are not just living longer, but they are also able to remain active for far longer than ever before, thanks to improved healthcare, awareness and lifestyle. Longer and healthier lives will upend much received wisdom about workforce participation and pension demands.
Already in the US, for example, the workforce participation rate of those over 75 in 2026 is projected to be 10.8pc, compared to 4.7pc in 1996. This will happen for a wide range of reasons, including a growing phenomenon that is sometimes called a “Third Act” — which involves people starting entirely new careers in their 60s, a time when people traditionally retired.
Meanwhile other large social changes are also underway, often driven by life choices. Some of these have more serious, and potentially worrying effects that need to be planned and provided for. Many of these revolve around housing.
Ireland, like much of the rest of the world, is experiencing a surge of “household formation” — a jargon word to mean people setting up their own homes. Many are surprised to learn how common it was in the past for many generations to share the same home. Older relatives, especially the elderly, unmarried, or bereaved, shared with a younger generation. At the same time younger people usually used to live at home until marriage.
Today’s world is very different. For a wide range of reasons more and more people are now living alone. Already, in some Scandinavian countries, single person homes account for nearly half of all households. In some cities they are already the majority. Ireland will soon be similar. Add the transition to single person accommodation to a society in which the majority rent, then suddenly the issue of affordability in old age becomes a much bigger issue — especially for those on a pension.
For these reasons, increasing pension provisions by so-called “auto-enrolment” is a wise and welcome development that will help to address a lot of these concerns.
Let us not forget that this progress will soon be accompanied by a similarly expensive State-funded universal childcare as well as continually increasing expenditure requirements for health, housing and infrastructure. These are all part of our growing State-funded public services that are needed to meet changing social expectations.
These will drive Ireland’s pattern of increasing taxation and Government intervention. As a general rule, as a country gets wealthier, its citizens expect more social services, this results in increasing taxation. By international norms, we in Ireland can expect to double our expenditure on Government social protection in coming years.
This will have two effects. Obviously taxation will have to increase to support these expectations. Less obviously, as more income is taxed, there will be an increasing demand for scrutiny and accountability of public spending. This can be a big driver of institutional reform.
Ireland is changing at many levels. We are increasingly converging with EU norms across a wide range of issues from policy matters such as welfare provision and taxation, to social practices such as life choices like renting and family size.
Changes create new demands that can be accepted and accommodated, or resisted until they become inescapable. We can react to these changes by resisting them, claiming that every new change is an imposition on some imaginary personal independence as so many do in the US, or we can accept responsibility and choose to adapt in advance and prosper.
We are defined by our choices. Last week we chose wisely.