THE OECD in its recent review of the Irish economy examines the many challenges involved in planning for the future. A major one relates to pension provision where it suggests that systemic changes are needed now to ensure adequate pension benefits in future. By 2050, the cost of public pensions will rise more rapidly here than in most other EU countries.
At present, Ireland has a relatively young population. The level of government debt is low and the public finances are healthy enough to allow for some pre-funding of public pensions. Therefore, the OECD's concern might seem premature and somewhat alarmist. Nevertheless its warning should be heeded. As the population ages, the current pension system, it advises, will become financially unsustainable. Fewer in the working age groups will be supporting more people in retirement. At present, four workers contribute to the support of each pensioner. But by 2030, three workers will be supporting those of pensionable age and those aged over 65 will double to almost one million. A rising imbalance in the age structure of the population would present some difficult choices which could involve higher taxes, lower spending or even reductions in pension benefits.
The OECD argues that this can be avoided if the Government makes pensions a policy priority. The recent Green Paper on pensions, it suggests, offers the Government an opportunity to regain the pensions initiative by adopting a coherent package of reform measures. That requires the Government to take some tough decisions which it has shirked so far.
As the OECD points out, the gap between the State pension, which amounts to one third of the average industrial wage, and an adequate replacement income in retirement, is huge. Half the country's workforce has no private pensions to help bridge the post-retirement income gap. And for those who hope to use private pensions to supplement the State pension, the position is far from encouraging. More and more defined benefit schemes, where pensions are based on final salary, are closing to new members. By next year two thirds of such schemes, it is estimated, may be confined to existing members.
These realities stand in stark contrast to pension provision in the public service where benefits, which are indexed to public service pay rates, remain far superior. But that too, suggests the OECD, requires reassessment, not least the estimated €75 billion cost to fund the public service pension bill.