State pension is affordable without increasing the pension age

That pension expenditure will rise in the future is not in question. But how will raising the pension age help us meet this cost? After wading through the various measurements, benchmarks and assumptions, the answer would appear to be relatively little.

The Commission on Pensions relied on projections from the Department of Finance and the Irish Fiscal Advisory Council (IFAC) based on the target of raising the pension age to 67 and then 68 by 2028 (these targets were abandoned by the Government following the 2020 general election). Between now and 2050, IFAC expects pension expenditure to increase by five percentage points of national income (GNI*). Increasing the pension age would reduce this increase by 0.7 percentage points. In effect, raising the pension age would save only 16 per cent of the increased cost. Alternative ways of measuring this produces even lower amounts.

But even these small savings could be inflated. The Department of Social Protection did its own deep dive into this issue and found that the savings from raising the pension age were 21 per cent less than that projected by IFAC. When the new benefit payments for 65-year-olds are taken into account, the savings fall even further.

Curiously, the Pensions Commission did not consider the Department of Social Protection estimates – especially as these estimates were included in a briefing document to the political parties engaged in coalition talks in the spring of 2020 and in a subsequent briefing to the incoming Minister.

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In an alternative calculation the commission estimated the shortfall in the Social Insurance Fund in 2050 and projected that increasing the pension age would make up 28 per cent of this shortfall. Again, no one disputes that, on current PRSI contribution rates, the Social Insurance Fund will eventually fall into deficit due to rising pension numbers. However, the commission used estimates that were already out of date even before the pandemic. The 2015 Actuarial Report of the Social Insurance Fund, working with trends that emerged from years of recession and stagnation, predicted the fund would go into deficit by 2020.

However, such was the unexpected economic recovery that the Government, prior to the pandemic, projected the fund would enjoy a surplus for most, if not all, of this decade. Even after the substantial expenditure on pandemic-related payments during the past two years, the fund looks like returning to surplus this year.

Shortfall

The Social Insurance Fund appears more resilient than described in the Pensions Commission report. This would mean the estimated shortfall in 2050 is overstated.

The commission rightly put considerable emphasis on the revenue side of pension sustainability – namely PRSI contributions. Ireland has one of the lowest levels of social insurance revenue in the EU and particularly in relation to employers’ PRSI. As our society ages our PRSI rates will need to move towards the much higher EU levels though it is highly debatable whether we need increased contributions from employees. Irish workers are already at EU levels when income tax and PRSI are combined.

Regarding another revenue-raising measure, though, the commission missed the elephant in the room. IFAC projects that from 2030 economic growth will slow to an average annual growth rate of just 1 per cent per year for 20 years: two decades of an economic drought. Unfortunately the projections are not an outlier. They are consistent with the EU Commission and other analysts.

This matters. First, a low-growth scenario makes pension sustainability more difficult as the economy struggles to generate revenue. Second, if we do experience such chronic levels of low-growth, pressures on employment, incomes, public service delivery and investment will be substantial. In this dismal scenario the pension age will be one of the least of our problems.

Sustainability

IFAC has noted the positive impact of promoting long-term economic growth to help finance pension sustainability. In their submissions Siptu and the Nevin Economic Research Institute urged the Pensions Commission to factor in policies to promote long-term economic growth in its projections. While we wouldn’t expect the commission to detail all the policy initiatives needed, referencing highly-beneficial policies could assist the public debate.

These include boosting educational expenditure to increase human capital, affordable childcare to promote labour force participation, and the abolition of child poverty, the persistence of which degrades long-term economic outcomes as surely as it disfigures quality of life.

Unfortunately the commission dismissed the potential of promoting long-term growth to help promote pension sustainability.

Context is important. Yes, the number of pensioners will double over the next 30 years. But even by 2050 Ireland will still have the youngest population in the EU. Unlike almost all other EU countries, Ireland will still have a growing working-age population in 2050 and beyond. And, yes, life expectancy for those aged 65 is 20 years. However, “healthy life expectancy” – a measurement utilised by the World Health Organisation and the EU Commission – is 13 years. Requiring people to work for an additional two years would have a negative impact on life quality, even more so for those in arduous occupations involving physical and mental strain.

We need a flexible pension age, allowing people to work beyond the pension age if they wish (that’s why the commission’s proposal to end mandatory retirement contracts are welcome) while allowing people with long contribution records to retire early.

Obviously, this has to be financed on a sustainable basis. This will mean facing up to challenging decisions. IFAC’s Eddie Casey is right when he says “the political system needs to get behind a credible and fully-costed plan.”

The problem is that we don’t yet have a such a plan.

Joe Cunningham is the general secretary of Siptu