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Dan White: Sure, it'll hurt but pensions hike was the only way to go

The Government's plan for a shake-up of the the country's pension system is drastic but necessary.

Among the changes are compulsory pension contributions for private sector workers and their employers, along with a progressive increase in the age at which we can draw the state pension, from the current 65 to 68 by 2028.

With unemployment still rising, taxes going up and many people who still have jobs having taken pay cuts, this week's announcement could not have been more badly timed.

Unfortunately the Government didn't have any choice. With only just over half of all private sector workers having made any provision for their pension and most of the traditional employer-supported pension schemes suffering from huge deficits, doing nothing was not an option.

A simple figure illustrates the extent of the problem we are now facing. At the time of the 2006 census, there were 467,000 people aged 65 or over in this country. This will have trebled to almost 1.4 million by 2050.

How can the State continue to pay all of these extra over-65s their pensions? The answer, of course, is that it can't and that any attempt to do so would quickly raise taxes to ruinous levels and eventually bankrupt the country.

If the outlook is bleak for the State pension system, things are even worse for private sector pensions.

Despite most employers having closed their traditional defined benefit pensions schemes, which pay retirees a guaranteed percentage of their previous income, the Department of Social, Community and Family Affairs estimated in 2008 that Irish private sector pension funds had a combined deficit of between €20bn and €30bn in 2008.

Things aren't likely to have got any better in the meantime.

It's difficult to avoid a certain sense of deja vu following yesterday's announcement. As far back as 2006 the then Minister for Social, Community and Family Affairs, the late Seamus Brennan, was floating the idea of compulsory pension contributions.

However, with a General Election looming, his Cabinet colleagues didn't want to know. Instead a decision was put on the long finger and it was left to the present minister, Mary Hanafin, to publish firm proposals for compulsory pension contributions and later retirement ages. Even so the changes proposed yesterday won't come into force until well after the next General Election.

Under the plans published this week, private sector workers who are not already members of a employer-supported defined benefit pension scheme will be automatically enrolled in a pension scheme from 2014 onwards. Employees will contribute the equivalent 4pc of their earnings to the scheme with the state and employees contributing a further 2pc each.

The Government also plans to increase the retirement age for the state pension to 68 by 2028. Just for good measure, the pensions paid to all workers entering the public sector from this year onwards will be calculated on the basis of average career earnings rather than their final salary.

By way of consolation, the Government promises that the level of the state contributory pension would be maintained at 35pc of the average industrial wage. Unfortunately, no-one outside of official circles believes that it will be possible to do this for more than the very short term.

Compulsory private sector pension contributions, later retirement, the partial dismantling of public sector pensions. Can things get any worse for anyone hoping to retire over the next 20 years?

Yes they can. Unpalatable as yesterday's measures were they were very much the least worse option. With both public and private sector pension systems rapidly going bust, the Government could no longer ignore the rapidly worsening pensions crisis.