Special Report
A special report is content that is edited and produced by the special reports unit within The Irish Times Content Studio. It is supported by advertisers who may contribute to the report but do not have editorial control.

How will State pensions be funded if people are living longer?

Most westernised countries now have a retirement age for State benefits of 67 or 68, but many still think in terms of 65

Retirement age ‘will probably increase to 70 and above in the coming years’
Retirement age ‘will probably increase to 70 and above in the coming years’

With retirement age for the State pension set to rise to 68 by 2028, and very few people able to retire with a private pension at 65 anymore, we look at the implications of this for the future.

In terms of the State pension, which most people rely on, the normal retirement age up to now has been 65, but in 2014 the State pension age increased to 66, it will further increase to 67 in 2021 and to 68 in 2028.

But ask anyone on the street, the most common age they expect to retire is still 65. This was historically the age that most contracts for employment ended.

Globally, the trend for the age at which State pension benefits are received is increasing upwards. Most westernised countries now have a normal retirement age for State benefits of 67 or 68.

READ MORE

Brian Kingston, Retirement and Financial Planning Manager at Investec, says this age will probably increase to 70 and above in the coming years.

“There is only one way for it to move and that is up. We are all living longer due to medical advances and healthier lifestyles. This means we will be ‘paid’ State pensions for longer, possibly up to age 100. Birth rates are also falling so there will be less ‘workers’ paying social taxes to fund State pensions,” he says.

The Department of Public Expenditure and Reform says expenditure on State pensions and relevant supplementary payments is set to rise from €7 billion in 2016 to €8.7 billion in 2026, assuming no rate changes – notwithstanding the rise in the age of eligibility for the State pension from 66 to 67 in 2021 (and 68 in 2028).

So how will State pensions be funded if people are living longer with less workers paying into the pot to fund these pensions?

Kingston says some of the solutions include; reduced pension rates, changing (increasing) the age at which benefits become available or a complete overhaul of the current pension system.

In January, the Government agreed to the establishment of a Working Group to consider policy around retirement age in both the public and private sectors. The Group was charged with examining the implications arising from retirement ages now and in the future and making recommendations on a policy framework to address the issues identified and to support fuller working lives.

A report of the Interdepartmental Group on Fuller Working Lives was published in August this year

Within this, consideration was given to the mental and social, as well as the economic benefits associated with supporting people to work later in life.

The Group found that if the increases in the State pension age are not matched by longer working, future incomes for those retiring before reaching the age of eligibility for the State pension will become an increasingly prevalent issue, with implications across a number of policy areas.

“In a positive ageing environment, workers should, to the greatest extent possible, be facilitated with the option to work beyond normal retirement age. This should be done with a degree of flexibility and certainty for staff which should be clearly communicated by management,” the report stated.

The Report also recognised the fact that appropriate training and other supports for older workers may be needed to enable them to remain active participants in the labour market and in communities.

“The Social Welfare system should continue to provide a safety net for those who, for health or other reasons, are not in a position to work longer,” it said.

In terms of private pensions, Kingston says a compulsory or “opt out” retirement option, being considered by the Government, will help but it may not get the will of the nation on board.

“Australia has had their superannuation system in place for approximately 25 years now. The aim is to get every citizen to save for income in retirement. The government set minimum contributions for employers on top of employees’ salaries. Employees are also encouraged to save. “Ireland has muted plans to change the impact of this in the form of opt out schemes whereby everyone makes a contribution; the government, your employer and each employee.”