Young generations face lower standard of living in retirement, study indicates

Younger generations are likely to face significant challenges funding their retirement and may face a lower standard of living than their predecessors, a research paper from the Central Bank has indicated.

The study assessed the impact of changing population dynamics on the economy, tapping into a wider debate about intergenerational inequality.

Demographic changes mean that many developed economies are transitioning to an inverted population pyramid, it said, with a greater number of older people than younger people. This not only increases the amount of wealth concentrated among older populations but leads to a decline in the rate of return on wealth, as there is more wealth relative to the working population.

This makes it more difficult for younger people to build up wealth for retirement through the accumulation of returns. The study noted that households typically start their working life with limited assets or in debt, gradually building up their wealth through the years by accumulating savings from their incomes, which also typically rise through the working years, reaching a peak after their 50s. Then they slowly run down their assets once they retire.

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“While younger cohorts might benefit from higher wages compared to previous generations, the negative effect of lower returns means they may not be able to accumulate as much wealth out of their savings as previous generations,” it said.

Future retirees will likely face a progressively lower standard of living as a result, the study concludes.

“This in turn may be exacerbated by the need to fund a longer retirement (due to increased life expectancies) and by potential changes in public policy. With public finances coming under increasing strain from pension provision, younger generations may face higher taxes during their working life and/or reduced income from the State at retirement,” it said.

A report by the Irish Fiscal Advisory Council, published on Wednesday, warned that younger workers here face significantly bigger tax burdens in the future so that older people can retire at 66.

It also warned the Government that apart from the financial pressure it faces to allay the current cost-of-living squeeze, longer-term pressures on the public finances due to ageing, climate goals and the sustainability of certain tax revenues are mounting.

The Central Bank’s study — entitled Wealth Accumulation and Intergenerational Inequality with Inverted Population Pyramids and authored by Simone Cima — examined potential policy measures to address the challenges of an ageing population, including investing in technology to counteract the decrease in returns due to demographics and improving financial education to equip households with the skills to invest more widely.

An increase in the pension age, given longer life expectancies, is another potential consideration, it noted. The Pensions Commission has recommended an increase in the State pension age to 67 between 2028 and 2031, rising to 68 by 2039.