OPINION:Superannuation looks set to be affordable only if we continue to work beyond the age of 65, writes DONAL CASEY
THE GLOBAL economic crisis has created a veritable iceberg of problems for Ireland Inc. Above the waterline, we can see a daunting fiscal imbalance, the unprecedented destruction of accumulated wealth, rampant job losses and a wholesale loss in consumer confidence.
Below the waterline are a host of long-term problems, exemplified by our yawning infrastructure deficit. The biggest problem, financially, centres on our national pensions system. Specifically, the defined-benefit system of pensions provision is under threat of collapse.
The defined-benefit pension expectations created over decades are now unsustainable and unaffordable. The security of defined-benefit promises are far less “guaranteed” than employees believe. In a sudden wind-up scenario, defined-benefit arrangements can resemble pyramid schemes where the current members receive only a fraction of their expected benefit.
All of the risks have crystallised, creating large deficits at a time when employers cannot afford to pay extra contributions.
Those calling for a regulatory response must remember that private pension provision is voluntary – our primary need from enterprise right now is jobs, not pensions. Nationalising the problem is not an option. Pension economics is one area with the potential to dwarf the cost of bailing out our ailing banks.
The national balance sheet cannot be expected to shoulder €40 billion of private sector pension deficits, and the fair value of the past service liability for public sector pensions is already €100 billion.
The national pensions debate has been under way since the publication of a Green Paper in 2007. The subsequent consultation process received 380 separate submissions, but no consensus has emerged.
The crux of pensions policy is that it forces us to answer some deeply philosophical questions about our society. Positions tend to polarise into the left/right extremes of the political spectrum.
Are we willing to pay higher taxes to fund higher retirement incomes for older citizens? Do we prioritise jobs and enterprise over pension savings?
What blend of compulsion and personal liberty is appropriate in the retirement savings process? The last White Paper on pensions was in 1976 and it appears that retirement provision is the economic policy equivalent of grappling with abortion.
The din of this debate threatens to drown out the best news story of our time. We are all living longer, healthier lives and overall life expectancy has improved at a faster rate than we ever dreamed possible.
This extension in the length and quality of our lives is apparent in the world around us. Grandparents are belying the elderly stereotype and assuming a hugely active role in the lives of their grandchildren. Higher energy levels are enabling older people to start businesses, complete university qualifications and traverse the globe. The much-touted “third age” of new experiences has become a reality.
Financially, the current sixtysomething generation have had some great breaks. David McWilliams covered this in The Generation Game, citing the intergenerational transfer of wealth via property values, allied to the growth in second incomes and the elimination of third-level fees. Another significant transfer of wealth has occurred within defined-benefit pension schemes. This generation has received their promised benefits in full (enhanced benefits in many cases) at the expense of the benefit security for 30 and 40 year olds.
There are no win:win alternatives in the division of these scarce resources but the current rules for allocating defined-benefit pension funds appear generous to pensioners and penal for employees.
The significantly higher pension liabilities created by longer lives are only affordable if most of us continue working beyond 65. Making this compulsory by extending the State retirement age to say 70 is political dynamite.
A different way of achieving the same policy objective is to reconstitute pension schemes as income insurance between the ages of 65 and 75.
Benefits would only become payable in this interim period to the extent that current year earnings were below the income underpin. Work would be incentivised by only deducting 80 per cent of income earned from the pension payment. The pension becomes guaranteed for life from age 75.
The essential idea is that those with the skills, health and capacity to continue working postpone pension drawdown until it is needed.
Radical solutions are required to tackle this crisis and we must return to the core principles of pension provision – need and poverty avoidance. Tens of thousands of people are receiving benefits they do not need from our stressed pension system. They remain economically active, earning incomes on the basis of their accumulated knowledge, wisdom and experience.
I believe this idea has the potential to create sustainable retirement expectations, while enabling us to preserve the key feature of risk-sharing in our pension system. Phasing in this switch from “pension” to “income insurance” will be a complex task, but it would make the funding challenge affordable for employers.
The unifying idea here is that work is a good thing. Apart from the financial aspects, work gives our lives a sense of purpose, routine and social engagement. Flow, a seminal book on happiness by Mihaly Csikszentmihalyi, established the counter-intuitive finding that we are at our happiest when we work.
Our negative conditioning regarding work is misaligned with the experienced reality as studied in Flow. Work needs to be viewed through a new lens, appreciating more fully the hidden benefits in the process of working. We would all be better off if a fraction of the cost of pension provision was diverted into an investment in lifelong learning and workplace reform.
This replaces a divisive battle between the generations with a policy consensus around the need to make our workplaces more accommodating of older workers. Currently, only 53 per cent of people aged 55-64 are in active employment. This is a luxury we can no longer afford and the organisational norm that currently sets age 60 as the sell-by date for older workers must be changed.
We talk all the time about retirement as a goal. A smarter goal would be to never retire but rather change the mix of work, responsibility and leisure in our lives.
It is welcome that our emergency budget did not contain any kneejerk response to our pensions crisis. The law of unintended consequences plays out over decades in the area of pension policy. Consider the example of approved retirement funds (ARFs), introduced almost overnight by Charlie McCreevy in 1999. The policy objective of giving retirees control over their own money was well-intended and the decision looked inspired for almost a decade.
However, over the past 18 months, collapsing asset values have savaged many thousands of individual retirement funds. The unintended consequence of ARFs has been to expose older people to much higher levels of investment risk than they could reasonably bear.
Autonomy is not always a good thing, especially when trying to second-guess the global financial markets.
In considering the options for our pension system, policymakers could do worse than heed the paraphrased advice of WB Yeats: tread softly because you tread on our futures.
Donal Casey is an actuary. He is a former chief executive of Irish Life Corporate Business and works for Aon Consulting. The views expressed here are his own