Retire young! Retire poor….

The age of retirement is going to rise, within the next five years it has to. There are several reasons, the most immediate being that the state doesn’t have the money to fund retirement at present, other factors are that people are living longer and the combined increase in health care costs to the elderly with the weight of funding pensions means one or the other has to give in eventually.

In October of 2005 Seamus Brennan gave a talk at the Merrion Hotel on the subject of the ‘Issues facing an ageing population’. The statistics are particularly relevant as they have not changed much since then.

(Excerpt) ‘The facts speak for themselves, in 2002 almost half a million people were aged 65 or over. The latest population projections suggest this may increase to 1.1 million people aged 65 and over by 2036. Right now we have almost 5 people working for every pensioner, when the demographic challenges are at their height this will decline to two workers for every pensioner. This fact has implications for two major areas, pensions and long term care. Clearly, future workers face an increased cost to cater for our older population unless, that is, we put in place a system which is sustainable and affordable.’

‘Currently out of a workforce of about 2 million approximately 900,000 do not have a private or occupational pension’.

So there you have it, almost 45% of the people at that time had zero provision, and despite the states best efforts with ‘pensions week’ and the like the figures have probably not changed significantly. This means that more and more people will be coming to retirement with their full income expectation resting on the state.

This is a mistake for several reasons, firstly, if the state runs short of money pensions will become increasingly under pressure as voters grapple for money to be spent on schools or hospitals, they might become means tested across the board, relying on the state for anything other than collecting tax from you is (in my opinion anyway) an error of judgement, the person who best knows how to take care of you is the same person reading this article.

Pensions are largely unfunded, this means there is not a ‘special reserve’ sitting around waiting to pay for it, instead governments generally rely on an expanding population and on people dying fast enough to make sure that the money is collected faster than it is paid out.

While Ireland does have the NPRF (national pension reserve fund) it is important to remember, it wasn’t set up with ‘state pension’ beneficiaries in mind, rather it was there to fund an increased public sector pension responsibility that had/has gone beyond that of being possible to run unfunded. If there was ever anything left it was a bonus but the core reason it exists is not for regular state pensions.

When pensions were first introduced they were meant to be a ‘reward’ to those who were fortunate enough to live so long as to retire, they came about in the late 1800’s and were available for people over (for instance) age 70, when life expectancy was about 50. Prior to this working life had no formal stopping point outside of death. In the USA when Social Security was introduced, retirement was set at 65 when life expectancy was 62, the issue is that we all started to live longer individually and collectively but the age of retirement didn’t change with it.

Today in Ireland a male can expect to live to c. 76 and a female to about 81, that’s the ‘average’ life expectancy, which means that for all the people who die prior to 75 (which will encompass a figure captured by both men and women’s life expectancy) that many must be living well beyond that. With retirement coming at age 65 you can start to find that 20 years and more are being funded for those with good longevity.

It’s a balancing act, you need to balance the people who die young having paid taxes, with those who live to 90 and more who claim pensions for 25 years and more, the only way to change the direction of the coming pensions bubble is to move the goalposts toward something close to what they used to be, in other words, make pensions something that you need to live close to your absolute life expectancy to receive.

A 65 year old today is also in much better shape (in general) than one who turned 65 in the 1940’s and that needs to be reflected in our attitudes to workers and working life as well, I have often wondered if the ‘ageism’ campaign had an ulterior motive!

The age of retirement needs to increase in line with the changing world we live in, for a start the age of retirement should move to 70.

Retirement -at least that part funded by the state- should, like many things be progressive, if you retire older you should be able to claim a higher payment, this is a system that could make a difference because it would allow people to stay in the workforce (and many people are happy working, being put out of the workforce isn’t necessarily for everybody), and lower the cost of provision because invariably many people would not claim retirement for longer periods and they would also pass away leaving their entitlements untouched, this might sound callous, but it isn’t because this is precisely the way pensions work now, I’m just laying out the facts as they stand with some minor tweaking on elements of the existing system.

You could also encourage pension provision (reducing state funding because universal means testing will likely become a part of the system in the future) by allowing people who fund their own pension to retire from 60 – 65 onwards, this would give an incentive to people, ensure that they are saving for their retirement.

A better system would be that of changing our entire tax system, rather than having PRSI going into a pooled collection, the use of personal accounts would be better. What I mean is that every person would have their own Pension/Unemployment/Health account, and a fixed amount of your tax goes into it, divided accordingly across it and invested in different ways depending on the sector (ie: you couldn’t invest your health money in high risk stocks).

This account could be supplemented by additional contributions which would deservingly be given preferential tax treatment, but essentially it would belong to the person, the backup plan -if for instance you were out of work and used up the portion you had put aside for unemployment- would be a means tested state system. It would also be something that you can pass on to others, it makes sense that a person who saved, didn’t get sick, and cost the state very little would be able to bequeath their money to another (under standard CAT rules) when they die.

The issue is really that of statism, one in which we divest key personal responsibilities to that of a centra authority under the belief they can do a better job of taking care of the individual than the individual can themselves.

If, instead of PRSI we had a system that puts your tax money into an account you could manage yourself (to make a claim you’d still have to go through a process) in terms of investing in corporate grade bonds or deposit with some scope for higher risk on retirement provision, it would encourage active planning of the individuals future, it would eradicate the need for huge swathes of state lead substitution for this responsibility and free up resources in the existing mechanism to concentrate on helping those most in need, and the most vulnerable rather than wasting energy on those that don’t.

The name of this post ‘retire young! retire poor!’ is based on the belief that soon, anybody who retires young will increasingly be paid less or not at all because the age of retirement will change, that, matched with insufficient pension planning means we will face a pensions bubble eventually, we are not replicating fast enough to make the current system work by replacing old workers with new ones. Change is needed, it is just a question of what will change and when.

Trackbacks for this post

  1. Ageing of the workforce to wreck economies? - Page 2 -

Leave a Comment

Awesome! You've decided to leave a comment. Please keep in mind that comments are moderated.