Good IT article: "Five ways your State pension benefits may be cut..."

[Sarenco]

From 2017, under new EU rules, the Irish government will be obliged to calculate the total amount they must pay current and future pensioners. This will put the pension time bomb firmly on the agenda, but what will happen is not yet clear.

Five ways your State pension benefits may be cut:

http://www.irishtimes.com/business/...on-five-ways-the-benefit-may-be-cut-1.2597941

 

[Merowig]

And this doesn't sound good either:

http://www.independent.ie/business/...face-a-pension-shock-in-old-age-34613010.html

"The average man will retire with a pension equivalent to 17pc of his final salary, according to a recent study of DC pensions by Irish Life."

 

[Gerry Canning]

Sarenco,

It is positive that EU from 2017 forces our (leaders?) to face this obvious issue.
It will be interesting to see how they can dance round this one ?

Merowig.
Is that 17% + state pension.
If so state pension @230 ,plus private of 17% of say k30 = circa 100 per week , so in retirement average Joe gets 330 .
That wouldn,t be bad , provided retiree has no debt/mortgage.

 

[oysterman]

This is one of those (many) cases where the argument should not be framed around averages.

Who cares what the average retiree receives as retirement income?

The relevant question is simply: how many retirees will have inadequate income?

Public policy should not concern itself with raising average incomes but rather finding mechanisms to raise the incomes of however many people would be living in poverty.

 

[Merowig]

Sarenco,

It is positive that EU from 2017 forces our (leaders?) to face this obvious issue.
It will be interesting to see how they can dance round this one ?

Merowig.
Is that 17% + state pension.
If so state pension @230 ,plus private of 17% of say k30 = circa 100 per week , so in retirement average Joe gets 330 .
That wouldn,t be bad , provided retiree has no debt/mortgage.

Yes the 17% are excluding the state pension - which comes on top.

 

[Sarenco]

Yes the 17% are excluding the state pension - which comes on top.

...assuming the contributory pension continues to exist in its current form at that time.

In my opinion, Fiona Reddan's article contains a fair summary of the available options to address this looming issue but there is an almost complete lack of public debate about what option, or what combination of options, would be the fairest and most effective way to proceed. Which seems a pity.

 

[Merowig]

Seems people are more upset / worried about water charges than pensions.
That funding retirement will be problematic is widely known - though people often don't act or act too late - as this is something concerning the far future.
When you are young you study, have often just a small income and want to see the world, later you have a mortage, then perhaps kids and you might need to take care of your parents - and then you are 50 and start to panic or hope that the state pension will be suficient...

It is partly the classic conflict about consuming now vs consuming later. And yes there are enough people who don't want to save because they like to spend now.
Though I would expect that Aesops fable of the Grasshoper and the Ant is known...


Another part of the problem is that people expect to get a state pension from children, which they never had. Ireland has a fertility rate of less of 2.1% (so still below replacement level) and the demographics in many Western countries are much worse than here.
In my opinion the article addresses the symptoms but not the underlying cause. The German demographics started to change with Bismarcks introduction of the pension scheme. So if one of the main problems of the crisis is demographics - any real solution has to address this. E.g. one idea floated would be that a full state pension (or as an alternative a significantly increased state pension) is only given to people who had three children.
On the other side then the state would also need to make childcare much more affordable and support families more.

Tweaking around with increasing retirement age, contributions, cutting the pension value etc is not addressing the underlying problem/cause - though it will keep the system running for a bit longer.
The current system is causing the problems - tweaking it won't fix it.

 

[moneybox]

Ah they will prob wait and implement the firebrigade response when the prob is on the doorstep like twenty years down the line when the older population will have quadrupled in size to what it is now, then they will enforce savage cuts all roumd or maybe they will eliminate the need for compulsory retirement age like their did in the UK.

 

[Sarenco]

E.g. one idea floated would be that a full state pension (or as an alternative a significantly increased state pension) is only given to people who had three children.

The idea of calibrating State pension payments according to an individual's virility/fertility, rather than the number or value of contributions made to the social fund, is an interesting idea.

Would any offspring have to be paying taxes in Ireland to be taken into account? Would the fact that we insist that children receive an education, at a significant cost to society, be taken into account? Is it wise to unduly incentivise procreation from an environmental perspective?

You are absolutely right that the nub of this issue is changing demographics but I am personally very nervous about any proposal or solution that necessitates or implies an element of social engineering. It's not a huge intellectual jump to justify some really unpleasant practices/policies.

 

[Merowig]

The idea of calibrating State pension payments according to an individual's virility/fertility, rather than the number or value of contributions made to the social fund, is an interesting idea.

And sooner or later this has to happen.

Would any offspring have to be paying taxes in Ireland to be taken into account? Would the fact that we insist that children receive an education, at a significant cost to society, be taken into account?

Future taxation of the children in Ireland should not be taken into account. Nor education costs. Children are an investment not a liability. Education is increasing human capital - which has more value economically speaking than machines/infrastructure....
Children are future soldiers, workers, taxpayers.

Is it wise to unduly incentivise procreation from an environmental perspective?

It is not unduly.

You are absolutely right that the nub of this issue is changing demographics but I am personally very nervous about any proposal or solution that necessitates or implies an element of social engineering. It's not a huge intellectual jump to justify some really unpleasant practices/policies.

The current policies / the way state pensions are handled already results in massive social engineering. This is a fact!

In case of further interest you can check following studies:
Ehrlich, I. & J.-G. Chong (1998), "Social Security and the Real Economy: An Inquiry into Some Neglected Issues", American Economic Review 88, p. 151–157.
Ehrlich, I. & J. Kim (2007),. "Social Security and Demographic Trends: Theory and Evidence from the International Experience", Review of Economic Dynamics 10, p. 55-77.
Cigno, A., L. Casolaro & F. C. Rosati (2000), "The Role of Social Security in Household Decisions: VAR Estimates of Saving and Fertility Behaviour in Germany", CESifo Working Paper Nr. 394.
Cigno, A. & F. C. Rosati (1996), "Jointly Determined Saving and Fertility Behaviour: Theory, and Estimates for Germany, Italy, UK and USA", European Economic Review 40, p. 1561–1589.
Cigno, A. & F. C. Rosati (1997), "Rise and Fall of the Japanese Saving Rate: the Role of Social Security and Intra-family Transfers", Japan and the World Economy 9, p. 81–92

Before children were generally speaking a result of sex (modern medicine weakened that connection significantly), "retirement planning" (also gone) and love for kids. And it is obvious that the love for children is not enough to guarantee population levels in Western countries/ the continuation/sustainability of social security systems or even our societies.
Now parents have to pay via tax/PRSI the pension of current pensioners, they have to pay for children which will pay future pensions - and are expected to save on top of that for their own pension. People who don't have children though can go to the Maledives and buy a new car and expect that someone elses children will pay their pension later on. So they don't invest in human capital (children) nor built up real capital (save in a private pension) but get a full state pension paid by someones elses investment in children.The governments have incentives in place not to have kids and people adapt accordingly. The system is designed to fail.


Accordingt to Hans-Werner Sinn, the former president of the ifo institute, the best way to handle the situation is to force everyone to save for a private pension. But for evey child you have, you can reduce your forced saving amount by one third - and can access one third of the already saved amount - plus you will have access to a full state pension after three kids. Furthermore tax incentives for families as done in France should be introduced and child care facilites (creche, etc) to be improved.
So either you create human capital or you create real capital.

That you are nervous / that this is seen as politically incorrect doesn't matter. These political correctness will sooner or later be shattered on the rocks of economic reality.
Some politicians are slowly realising this (I am doubtful about Ireland though am not following Irish politics closely enough - but water charges seem to be here much more important than the future of the country - but other European politicians do realise it slowly and start to act).

 

[rob oyle]

I would tend not to agree with Merowig. Hopefully I didn't misunderstand your points but we are having no problem maintaining our populations in the West - the seemingly accepted idea of a replacement rate is that we have children which take our place when we go. However, our children are not replacing us - their grandparents (and in a lot of cases great grandparents) are still around when they are born, so effectively we are adding to the population with each generation. On top of that, there is the migration effect from developing countries to the west. Globally we are doubled our population every 45 years or so and that is simply unsustainable. Environmentally, a child born into the West consumes a multiple of the resources of one born in the third world/developing nations and we have simply reached the tipping point of our claim on the planet - we're already exploiting 54% of the non-ice covered land on the planet (according to the national Geographic) and the UN projections updated last year is no projecting a population of 11 billion by 2050 (based on a medium fall off in the fertility rate). Our economic growth addiction will be curbed by the environmental limitations of our planet soon enough but that's still beyond the political horizon for the majority of nations.

All taxpayers heavily invest in the decision of some to have children - indirect taxation for education, child benefit, tax allowances that are only available to those that choose to have children. All taxpayers have to pay towards the pensioners of current pensioners. The notion that children are born to pay the pensions of their parents is wrong and the culture needs to change (as I think everyone agrees) but the idea that the childfree fritter away their hard earned savings is overly simplistic. Everyone should save towards a pension and then the cost of their pension should be paid from their own resources but the idea that you don't have to save as much if you choose to procreate surely only incentivises procreation further. It would seem like an 'opt-out' if you have a big enough brood. It's late, more on this when I've though about. Ultimately I guess it matters little what we say here as our political class only see the way in five-year blocks and long-term planning earns no votes in this country.

 

[Merowig]

I would tend not to agree with Merowig. Hopefully I didn't misunderstand your points but we are having no problem maintaining our populations in the West - the seemingly accepted idea of a replacement rate is that we have children which take our place when we go. However, our children are not replacing us - their grandparents (and in a lot of cases great grandparents) are still around when they are born, so effectively we are adding to the population with each generation.

It doesn't matter if you agree or not - the Maths and statistics speak for themselves. If couple is having less than 2.1 children - the population will shrink. This can be seen already in Russia, Japan, Italy, Germany,... etc
Italy will e.g. lose a third of their population most likely.
I don't agree with the Irish weather - it still rains though...

On top of that, there is the migration effect from developing countries to the west.

At least for Germany there is no way that immigration will be able to solve the problem. See:

United Nations (2001), Population Division, Department of Economic and Social Affairs, Replacement Migration: Is it a Solution to Declining and Ageing Populations?, New York.

Furthermore at least for Germany immigrants are causing more costs than the taxes they will later pay.

Globally we are doubled our population every 45 years or so and that is simply unsustainable. Environmentally, a child born into the West consumes a multiple of the resources of one born in the third world/developing nations and we have simply reached the tipping point of our claim on the planet - we're already exploiting 54% of the non-ice covered land on the planet (according to the national Geographic) and the UN projections updated last year is no projecting a population of 11 billion by 2050 (based on a medium fall off in the fertility rate). Our economic growth addiction will be curbed by the environmental limitations of our planet soon enough but that's still beyond the political horizon for the majority of nations.

I advocate to have a sustainable population. E.g. at least a ~ 2.1 fertility rate. A higher fertility rate in e.g. Pakistan or Bangladesh doesn't solve the Wests problems. Some countries have a too high fertility - others too low.

By the way the club of Rome already prophesied apocalyptic scenarios in 70s - so I take this with a pinch of salt.

All taxpayers heavily invest in the decision of some to have children - indirect taxation for education, child benefit, tax allowances that are only available to those that choose to have children. All taxpayers have to pay towards the pensioners of current pensioners. The notion that children are born to pay the pensions of their parents is wrong and the culture needs to change (as I think everyone agrees) but the idea that the childfree fritter away their hard earned savings is overly simplistic. Everyone should save towards a pension and then the cost of their pension should be paid from their own resources but the idea that you don't have to save as much if you choose to procreate surely only incentivises procreation further. It would seem like an 'opt-out' if you have a big enough brood. It's late, more on this when I've though about. Ultimately I guess it matters little what we say here as our political class only see the way in five-year blocks and long-term planning earns no votes in this country.

Children pay future state pensions and taxes, create jobs. If you dont have enough children the system collapses. Thats the way the system is designed.
Childcare is expensive - plus opportunity costs as one parent usually needs to stop working for a while in order to take care of the children.

And that the childfree are fritter away their hard earned savings is not overly simplistic. If you don't have children you have a higher standard of living and many people don't reinvest this in pensions but spend it. Procreation needs to be incentivsed as the current system incentivses "double income - no kids" (and no savings). The state is intervening already in demographics negatively - and the state needs to intervene again to correct the previous intervention...

P.S.: What tax allowances for parents with children are available in Ireland? My French colleague at work would love to have some

 

[Sarenco]

I think it's pretty obvious that there is a lot more to demographics than simply looking at fertility rates. Our own demographics over the last two centuries provide ample evidence in this regard.

With respect, I think it is rather presumptuous of you to conclude that there is something inevitable, or even desirable, about your proposal to link retirement benefits to an individual's virility/fertility, rather than their monetary contribution to society over their working lives. I would note that your proposal hasn't been adopted, or even seriously considered, in any other jurisdiction that is facing this issue.

It is certainly true that falling fertility rates in many western countries is a significant problem. I also fully accept that social transfers already impact behaviours. However, it is a huge jump to somehow tie State retirement benefits to the number of children you have managed to breed. There are many other ways to support and incentivise families through our social provision and taxation systems.

 

[Merowig]

With respect, I think it is rather presumptuous of you to conclude that there is something inevitable, or even desirable, about your proposal to link retirement benefits to an individual's virility/fertility, rather than their monetary contribution to society over their working lives. I would note that your proposal hasn't been adopted, or even seriously considered, in any other jurisdiction that is facing this issue.

It is certainly true that falling fertility rates in many western countries is a significant problem. I also fully accept that social transfers already impact behaviours. However, it is a huge jump to somehow tie State retirement benefits to the number of children you have managed to breed. There are many other ways to support and incentivise families through our social provision and taxation systems.

For easy maths lets assume a constant fertility rate of 1
Example population of 1 million Grandparents (population segment A) - each couple had 1 child as an average - so 500k are in working age/fertile age (population segment B) - from these 500k there will be 250k children (Segment C) - total population is 1.75 million
Fastforward couple of decades:
A died - B (500K) are now grandparents - C (250k) is working and of fertile age - and there are 125k of new children (D) - total population is now 875000.
You can continue this a couple of decades and the results will be extraordinary.
The reality is a bit less extreme - so the decline is less steep - but serious enough for several countries in Europe (Ireland is in much better shape than Germany or Spain for example).
We know how many women in fertile age are available - it is not realistic to expect a reversal to a rate 2.1 or above to catch up without some serious policy changes.

In regards to tie retirement benefits to the number of children: this is or was under discussion in Australia, Germany and Hungary as some examples.
The German constitutional court already demanded that the state reduces the amount of "socialization of pension contributions" paid by children to their parents' generation. Germany has a mandatory long-term care insurance for the time when you are older - people without children already have to pay more into this scheme than people with children. The proposal from Hans-Werner Sinn is still considered in Germany. In Hungary 8 years of child rearing are counting as paying contributions to the state pension - and you have very serious considerations to link the amount of children you have to the amount of state pension later.

 

[rob oyle]

It doesn't matter if you agree or not - the Maths and statistics speak for themselves. If couple is having less than 2.1 children - the population will shrink. This can be seen already in Russia, Japan, Italy, Germany,... etc
Italy will e.g. lose a third of their population most likely.

I am looking at the macro level - we're adding almost a net quarter of a million additional bodies to the planet every day, 80 million a year. That's a pretty big 'if' statement, the evidence shows it's not born out by the numbers...

At least for Germany there is no way that immigration will be able to solve the problem. See:

United Nations (2001), Population Division, Department of Economic and Social Affairs, Replacement Migration: Is it a Solution to Declining and Ageing Populations?, New York.

Furthermore at least for Germany immigrants are causing more costs than the taxes they will later pay.

Germany has achieved population stability over recent decades. That should be seen as a positive, not some ticking time bomb. I understand what people are saying when they talk about aging populations but the idea that the solution is some sort of ponzi schemee, where we continue to NEED more younger people because there are more older people isn't sustainable. The ratio of pensioners to taxpayers is increasing so we need to build a pension system that takes that into account, rather than try to keep increasing our numbers and then having even more pensioners when they reach retirement age. If we need 5 taxpayers now to support a pensioner then we'll need 25 taxpayers to support those 5 in their own retirement.

I advocate to have a sustainable population. E.g. at least a ~ 2.1 fertility rate. A higher fertility rate in e.g. Pakistan or Bangladesh doesn't solve the Wests problems. Some countries have a too high fertility - others too low.

By the way the club of Rome already prophesied apocalyptic scenarios in 70s - so I take this with a pinch of salt.

Well, the human population is already having an irreparable impact on the planet - we're the cause of the sixth mass extinction event currently underway. We live on a planet of finite resources but we insist on a perpetual growth model. The doomsday sayers' time is here!
I would like to see a sustainable population too but we're far beyond that stage already. Maybe we won't see the results for a number of decades but by then, it'll be too late to reverse the impact we've had or the problems we've created.

Children pay future state pensions and taxes, create jobs. If you dont have enough children the system collapses. Thats the way the system is designed.
Childcare is expensive - plus opportunity costs as one parent usually needs to stop working for a while in order to take care of the children.
And that the childfree are fritter away their hard earned savings is not overly simplistic. If you don't have children you have a higher standard of living and many people don't reinvest this in pensions but spend it. Procreation needs to be incentivsed as the current system incentivses "double income - no kids" (and no savings). The state is intervening already in demographics negatively - and the state needs to intervene again to correct the previous intervention...

But I thought this was exactly the system that we MUST get away from? Having children to prop up the existing pension model isn't sustainable. Making the decision to have children is for each individual but shouldn't be incentivised (is that a verb? my spellchecker doesn't like it!). I agree that having less children will put people in a more financially secure position but that is precisely why we should look to have people set aside these additional resources for their retirement, rather than plough them into further increasing our numbers and placing those problems at the feet of our children in their retirement.

P.S.: What tax allowances for parents with children are available in Ireland? My French colleague at work would love to have some

It wasn't a singular statement but showing a number of incentives that exist - in this case the child carer credit.

 

[Merowig]

I am looking at the macro level - we're adding almost a net quarter of a million additional bodies to the planet every day, 80 million a year. That's a pretty big 'if' statement, the evidence shows it's not born out by the numbers...

That is completely irrelevant for the topic here - as there is no global pension system and very likely we will never see one.
Relevant are births in the respective countries - Ireland, Germany, etc.
Birthrate of Bangladesh doesn't impact a pension in Germany or Ireland.

Germany has achieved population stability over recent decades. That should be seen as a positive, not some ticking time bomb. I understand what people are saying when they talk about aging populations but the idea that the solution is some sort of ponzi schemee, where we continue to NEED more younger people because there are more older people isn't sustainable. The ratio of pensioners to taxpayers is increasing so we need to build a pension system that takes that into account, rather than try to keep increasing our numbers and then having even more pensioners when they reach retirement age. If we need 5 taxpayers now to support a pensioner then we'll need 25 taxpayers to support those 5 in their own retirement.

http://www.dw.com/en/german-population-plunge-expected/a-2229744
https://populationpyramid.net/germany/2016/

No stability at all - around 2030 when the baby boomers will retire - it will become extremely interesting. Widespread poverty can be expected during retirement age. Geopolitical implications also (who would bail out then Europe again? )

Well, the human population is already having an irreparable impact on the planet - we're the cause of the sixth mass extinction event currently underway. We live on a planet of finite resources but we insist on a perpetual growth model. The doomsday sayers' time is here!
I would like to see a sustainable population too but we're far beyond that stage already. Maybe we won't see the results for a number of decades but by then, it'll be too late to reverse the impact we've had or the problems we've created.

According to the doomdays sayers - the apocalypse should have already happened some decades ago.

But I thought this was exactly the system that we MUST get away from? Having children to prop up the existing pension model isn't sustainable. Making the decision to have children is for each individual but shouldn't be incentivised (is that a verb? my spellchecker doesn't like it!). I agree that having less children will put people in a more financially secure position but that is precisely why we should look to have people set aside these additional resources for their retirement, rather than plough them into further increasing our numbers and placing those problems at the feet of our children in their retirement.

The system propsed by Hans-Werner Sinn makes sense - everyone is forced to save for their pension - for every child you have to save a third less and you can access a third of the already saved amount. Current state pensions are not further increased. Incentive will make the population level much stable - and people have to put money aside because its made mandatory.

It wasn't a singular statement but showing a number of incentives that exist - in this case the child carer credit.

Some of the so called incentives are not working - I read yesterday about a comparison of the French and the German system - and how birth rates plunged in the Saarland after it switched jurisidication from France to West Germany.

 

[Cervelo]

one idea floated would be that a full state pension (or as an alternative a significantly increased state pension) is only given to people who had three children.

I can understand the thinking behind this idea but I am totally shocked that it could be considered a viable option, there are many reasons why a couple or a single person cant/wont have children and to be penalised for not having children would I suspect be viewed as discrimination amongst other things

 

[rob oyle]

I don't know what we're talking about any more - you proposed that those that have children have a lower threshold to save for their retirement and this be part of a state programme. This is driven on the basis that these children will be taxpayers of the future and will fund the state coffers, including funds for pensions/care of the elderly. I was saying that continuing to rely on the next generation to meet our retirement needs is a ponzi scheme that multiplies the issue up until it is not possible to continue this approach through resource limitations - whether than be on a national or global scale. Trying to keep the low/middle segments of a population pyramid wider than older ages is unsustainable. I don't see any need for incentivising people to have children but instead that the resources of the taxpayers today are put towards their retirement.

No doubt there would be criticism of this in the future where the older generations are seen to be 'hogging all the wealth' but the alternative is they have no wealth and the young provide for their older generations in their working lives, which is what we have now and will continue to have until we make some fairly significant changes.

I wasn't speaking of an apocalypse but a continuing constraining of resource availability as human population and materials demand continues. We're there already and yet we're adding to the problem by denying its existence ('climate change is a myth') or preparing half-arsed ideas ('the population of the planet could live in Australia with enough land to feed them').

The pronatalist Government incentives are working - is anyone claiming that we don't have a high enough birth rate here or in (say) Britain? We can all pick out countries that meet our argument but we have to get away from the mindset that we need more children/future taxpayers in order to have state provision for pensioners.

 

[Merowig]

I can understand the thinking behind this idea but I am totally shocked that it could be considered a viable option, there are many reasons why a couple or a single person cant/wont have children and to be penalised for not having children would I suspect be viewed as discrimination amongst other things

I don't see it as discrimination - as previously stated - something similiar is already practised law : "Germany has a mandatory long-term care insurance for the time when you are older - people without children already have to pay more into this scheme than people with child"
This is perfectly legal and became law because of a verdict of the German constituional court. I hope I get the translation right: "In addition to financial contributions, parents contribute as well the important system preserving generational renewal, so they are responsible for the next Generation, on which the funding of long-term care in the future is depending."

 

[Sophrosyne]

How would the "fertility" theory work in a country that had large emigration and insignificant immigration?