Why is there no concern about the state's unfunded pension liabilities?

Can anyone confirm for me, that if the OAP age rises to 68, then if you are 65 and lose your job, are you entitled to the dole until the 68, and if so, is the dole more/less than the OAP?
 
Just another question or two about pensions. Say more tax is collected and put aside for future pension needs as suggested here, what is it invested in?
Baring in mind that investments can fall in value as well as rise. And who does the investing?
 
The NTMA one would presume.

A dedicated fund is the only answer. A fund that is invested in high quality global equities and other appropriate assets. If necessary, recruit (say) Norwegians to set up the correct structure and to administer it.
 
I'm not convinced that there is any merit in trying to re-establish a sovereign fund to meet future State pension commitments while we are carrying a (frankly massive) national debt.

For starters, where's the additional money going to come from? The tax wedge on higher incomes is already high by international standards and there is considerable resistance to broadening the tax base. In my opinion, rising income taxes at higher income levels would be counter-productive at this stage as higher earners would simply leave the jurisdiction.

Cut services? Could our healthcare, education or social protection systems cope with further cuts?

I have studied the actuarial projections in some detail and I keep coming back to the same conclusion - ultimately the State will not be able to discharge its current pension promises. No tweaking of the funding arrangements will change this fact - there simply won't be enough taxpayers around, relative to the number of pensioners, to meet these commitments.

In my opinion, we will have to accept sooner or later that the the State will not be in a position to meet its current pension commitments. The only question remaining for me is whether we accept and deal with this reality today or leave it to fester and become unmanageable tomorrow.

I think it is interesting to look at the position in the UK by way of contrast. The basic pension in the UK is roughly 40% lower than our own and the Chancellor recently announced that the SFT (which also impacts public sector workers) is to be reduced to £1m (as against €2m here).

Do we really think we can justify higher pension payments than the UK?
 
Sarenco said:
I have studied the actuarial projections in some detail and I keep coming back to the same conclusion - ultimately the State will not be able to discharge its current pension promises.
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Sarenco said:
In my opinion, we will have to accept sooner or later that the the State will not be in a position to meet its current pension commitments.
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Hi Sarenco

First of all, we have to start addressing this immediately. We can differ on the solution, but I presume everyone agrees that the earlier we start, the less painful it will be.

We have to address the funding and the benefits.

Benefits
Switch it to a defined contribution scheme from a defined benefit scheme. Work out what everyone has contributed, and when that is gone, then they no longer qualify.

Many will be well off and won't need a state pension.

Incorporate a person's home in the means test. If a person has a family home, then any payment of non-contributory pension becomes a charge on the family home.

Cut the non-contributory pension immediately. There should be a significant difference between those who have paid for their pension and those who have not.

Funding
Everyone must pay [10%] of their income towards a pension fund. If you are getting €180 Jobseekers Allowance, €18 would go automatically into a pension fund for you. If you are earning €9.50 per hour, 95 cents would go into a pension fund for you.

Every year, people would get a statement showing how much they have in their pension fund. This fund would be run down as they get paid a contributory pension on retirement. When it runs out, they would get the much lower non-contributory pension. So it matters how much they have in the fund.

Ideally, but it would take a long time to implement, the pension on retirement would increase in line with the size of the fund.

Interaction with private pensions
If everyone has to put in 10% of their salary into a state pension fund, then there would be little left for private pensions.

So maybe set up minimum funding targets. Let's say that they need €300k in the fund at age 65, and €100,000 at age 40, and €50,000 at age 30. People have to contribute 10% to the state pension while their fund is below the target. If a 30 year old, has contributed €50,000, then their state pension contribution would be reduced to [5%].

Or make it simpler - everyone has to contribute 10% to the state pension fund until they are 40. At 40, they can reduce the contribution if they have exceeded the target. The idea would be to encourage people to overfund as much as possible in the early years.
 
Sarenco said:
I'm not convinced that there is any merit in trying to re-establish a sovereign fund to meet future State pension commitments while we are carrying a (frankly massive) national debt.
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I would try to get away from the concept of "state pension commitments" and make people individually responsible for saving for their own pension. It would not be a defined benefit scheme, but a defined contribution scheme.

I thought that the National Pension Reserve Fund was wrong while we had a national debt outstanding. It violated the principle of investing borrowed money.

However, while it might not be financially the best strategy, I can see why it probably would have other advantages. If we produced an annual "state of the nation's pension fund" report which showed that our liabilities were €300 billion and there was only €10 billion in the fund, then people might well understand the gravity of the problem and accept that they would have to increase their funding a lot more.

If we pay down our national debt, there will be huge pressure to keep borrowing to live beyond our means. As long as we have national debt, it will keep pressure on to reduce spending.

And, of course, the pension fund, could be invested in the government debt. It would not be ideal, but while we have €200 billion in national debt, it probably would be the best overall national strategy.
 
Brendan Burgess said:
Cut the non-contributory pension immediately. There should be a significant difference between those who have paid for their pension and those who have not.
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Would you fancy the chances of the politician who put this idea forward I'm afraid you won't see any TD prepared to put his/her job on the line by backing this proposal!
Yes there is a sound basis for this type of proposal. If it is going to replace the existing OAP then the 10% contribution could be somewhat diluted by the associated offset in Government cost. I.e. theoretically we are still on a contributory OAP as PRSI is meant to be funding the existing pension. Practically this is now somewhat forgotten as contributory and non-contributory pensions are virtually indistinguishable. My point is that many of us are contributing already for 40 plus years towards the OAP and it is still seen as a non-funded benefit open to change at the whim of successive Governments. A 10% wage/salary contribution is likely to be somewhat high for those on low wages and you also have the benefit of employer contributions for most on higher wages. The basis of such a scheme is sound and in all likelihood fully necessary at some stage in the near future. However, I think that there would need to be an in-depth study undertaken of the feasibility of introducing an equitable scheme that does not severely diminish the existing net wage of those in the lower pay brackets.

Whether the current system of a common payment to all is fair or unfair is now probably a moot point as it will be creaking at the seams in less than 10 years anyway. This issue will be buried for at least 12 months as we will be inundated with pre-election spin from all parties who intend spending several billion of our taxes in buying their way into Government! part of the price of living in a democracy
 
Joan Burton established a new " Universal Retirement Savings Group " early this year to " develop a roadmap and timeline " for the introduction of a new universal supplementary retirement savings scheme .

Will this be a mandatory workplace pension scheme ? - the Irish Times thinks so & the small firms association ( an affiliate of IBEC ) fear so.

The group are to report back to the Government in Q4 of this year but I think we can safely say that the Government's cogitation period on any recommendations will safely take us past the date of the next General Election !- particularly as the current Government is obviously currently more concerned with the raising of the minimum wage , a part restoration of Public Sector pay , reducing the USC & perhaps part restoring the Christmas bonus - they certainly don't want bad news spoiling the party.

It should also be noted that similar remedial initiatives in 1996 & 2005 fell foul of political expediencies.

Such a scheme conjures up the perfect storm in that it will increase labour costs , reduce worker's net pay & impact on the vote of whatever parties introduce such a scheme.

As the Irish Brokers Association have pointed out there is no alternative to a mandatory scheme given the doomsday scenario outlined so clearly by Cormac Lucey & myriad other economists & economic commentators.
If such a scheme looks like coming to fruition I really am not looking forward to what is likely to be an unedifying media & social battleground between public & private sector , defined benefit & defined contribution scheme members , contributory & non contributory state scheme members , Trade Unions IBEC et al.

Has Joan or perhaps her incumbent got the bottle to carry this off - should be interesting !
 
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What are your views Deiseblue?
Should everyone have to fund their own pension?
 
The OP seems to be focussed on the "unfunded" nature of the liability. There may well be a problem with the liability but it is an illusion to think that funding would address it.

The vast majority of state pension schemes throughout the world are "unfunded" in the sense that there is no specific pot set aside. But that does not mean the pot isn't there. The pot for the State is the economy and its ability to transfer revenues within the economy. If this were a communist state the state would legally own most of the economy. Would that mean that it's pension liabilities were far better funded than a privatised economy? Not at all. (I am leaving aside the issue of which system is the more economically efficient.) In terms of funding for future pension liabilities the difference between public ownership and private ownership of the economy is merely an accounting one. Either the economy can withstand the solidarity transfers required to meet pensions or it cannot.

The job of government is to maximise economic output over the long run. The distribution of the fruits of the economy between the citizenry is a separate matter. The demographic projections suggest that the solidarity transfers implied by current state pension arrangements may not be socially sustainable. Grabbing more and more public ownership of the economy through a funding arrangement does not solve the problem. The problem (if it transpires) will have to be managed by reducing the expectations of people in retirement.

Let's see the illusion of state funding of pensions through another lens. Imagine we had "built up" this pension fund. Unless we expect the demographic dynamic to go into reverse the fund has to be maintained and indeed on current trends continuously grown. We never have the chance to spend it without ditching future pensioners

Charlie's pension reserve fund was projected to be spent between 2025 and 2050. It was perceived that there was a demographic "hump" especially in public service pensions. But the "time bomb" discussed by Cormac Lucey et al is more than a hump, the population is expected to continue aging.

I am sceptical of these long range "time bombs" (like climate change). After all a far greater proportion of the population is over 65 to-day than it was 50 years ago. Were the folk in the 1960s worried about a pensions time bomb exploding in the early 21st century? If they were they have been proven to be alarmist.

Economic growth has been the lubricant which has soothed these demographic frictions. It may continue to do so. Funding as a mere book keeping exercise has no role to play in that process.
 
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I would happily forgo the state pension is I didn't have to pay PRSI or pay a reduced PRSI.

I currently fund a private pension and would increase this on the back of no or lower PRSI. I am quite confident that when I retire (25+ years) that I will not be getting any state pension however will have been contributing towards one my whole working life.
 

Hi Brendan

What you are proposing sounds very like the pension system introduced by General Pinochet's Finance Minister in Chile and still in operation today - the linked research paper gives further details.

https://www.hsdl.org/?view&did=707798

The Chilean system is interesting but it's far from ************************* and entails very significant administration costs. Ultimately, if you aggregate all the individual retirement accounts the net result is economically not much different to a sovereign pension reserve fund, with considerably higher costs.
 

Hi Duke

I agree with you that the funding model employed is really of secondary importance but I disagree with your analysis/scepticism of the demographic projections.

The absolute number of seniors it not particularly important - it's the ratio of dependants to non-dependants that is critical. In Ireland, this dependancy ratio is projected to gradually (but dramatically) rise over the next 40 years or so before it gradually starts to diminish. In other words, it is very much a projected demographic "hump" that needs to be managed.

I take the point that long-term demographic trends are notoriously difficult to project with any degree of precision but there is no real disagreement that the dependancy ratio in Ireland will change radically over the next 40 years.

In my opinion, we need to adjust our commitments/expectations accordingly.
 
Sarenco

We are not a million miles apart.

I was unaware that it was a demographic "hump" problem. I am presuming that longevity is expected to continue to increase so (leaving kids out of it) the only thing that would reduce the dependency ratio is an increase in the working lifetime. Is this what the projections say?
 
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If things get really bad, as projected - why not incorporate a person's family home for the 'contributory pension' as well as the 'non contributory pension' in the means test re. future charge? It would make pensions self funding for all home owners (majority of the population). The only people that will suffer are the progeny of people who don't have a private pension.[
 
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Hi Duke

I am trying to get my head around your argument, which I don't really understand.

Let's assume we had no state pensions whatsoever. No involvement of the state either - except that there was a law that everyone must contribute 10% of their income to a private pension fund up to €1m so that they would have an adequate pension in retirement.

Would that not mean that most people would have to save more than they are saving at present? Instead of going on holidays or buying new cars or eating out, they would have to build up a fund to be financially independent on retirement.

"There may well be a problem with the liability but it is an illusion to think that funding would address it."

Wouldn't compulsory private funding address the problem or compulsory state funding?

It wouldn't solve it because of the extent of the problem - the benefits would have to be cut as well.

And, of course, some people would be left destitute, so the state would have to step in.

Or look at it another way. If the funding doesn't matter, what would happen if there were no private pensions whatsoever. Surely that would create huge problems?
 

Hi Duke

Yes, the actuarial projections show the ratio of people of working age to seniors (65+) (the pensioner support ratio) will fall pretty dramatically to mid-century and then much more gradually to 2060 (projecting beyond this point is not very meaningful) . Perhaps describing the shape of this projection as a "hump" is not quite right - the graph looks more "L" shaped.
 
I think Dukes point is that the big question is can the state as a whole afford the social transfer.

If it can then where it comes from and whether it’s funded from current expenditure or future liabilities are funded through current taxation is not really relevant.

If it can’t then it can’t and how exactly it fails to do so is not really relevant either.

The only way to increase wealth is to increase productivity and efficiency. Can we as an economy increase our productivity and efficiency at a sufficient rate to cover the increasing cost of pensions? That, for me, is the issue.
 
Boss I think Purple explained my point far better than me. Nevertheless, I will try and address your questions. First thing is to distinguish between the individual and the collective (the country, the state, the economy, call it what you will). Individuals can behave in ways which if followed by the collective would be a total disaster. For example, the individual could chose to live very frugally during her working lifetime and invest all her savings in foreign assets. A very comfortable retirement would result. If the collective did this the economy would collapse (other economies would benefit from the outward investment. Ignore the foreign dimension in the following, it is a distraction.)

To help me understand the macro picture, I like to consider really extreme versions of the problem. So imagine that by 2060 everybody was a pensioner. It doesn't matter how much they funded and saved there would be no economy to pay their pensions. They would possess a whole heap of machinery and other assets which would be worthless.

At the level of State planning it comes down to following the right mix of current and capital expenditure for the long term growth in the economy. That is the key - max the long term growth. I presume that is what we are always striving for. Would the "funding" for future pension liabilities change the mix and get better long term growth? If so it simply means we have got the mix wrong to begin with.

In summary, governments should always be striving for the best mix of current and capital spend for the long term interests of the economy. An awareness that there is a pensions time bomb might make the success of the strategy all the more imperative. There is something wrong with the strategy in the first place if recognising this time bomb causes a shift to be made from current spend to capital spend. Repeating myself, such a decision could well make sense at the individual level but is fallacious at the collective level.

So my thought scenario goes as follows. Government completely ignore the pensions time bomb but achieve their economic objective of maxing long term growth. In 2060 we have as good an economy as we could possibly have. The other given in my thought scenario is the demographics. Let's say by 2060 we do indeed have a superfluity of pensioners. The ability of these pensioners to take a large share of the economy has limits no matter how much either they individually had "funded" their pension or the State had funded it.

Take individual funding first - yes it gives them some legal claim to their share of the economy - but if that were socially too onerous on the working population one would see things like pension or wealth taxes to redistribute to the workers. Taking State funding, what exactly do we mean? Do we mean that the State has earmarked a certain chunk of the economy for the pensioners? Again if this presents an unbearable call on the workers political pressure would force a redistribution.

Unless you are claiming that what you are suggesting will enhance long term growth, I see the concept of funding as largely illusory in the context of the pensions time bomb.
 
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I will have to reflect on that. I have had problems getting my head around the "savings ratio" and such economic concepts.

Does it really apply to an open economy like Ireland? If I choose to buy foreign shares today instead of going on a foreign holiday or buying a car, I would have thought that would work out better for the economy in the long-term. When I retire I will repatriate my assets from overseas and spend them in the local economy - probably paying a foreign nurse to care for me.

If, instead of putting money into overseas shares for my pension, I eat out more and decorate my house every year, the economy will be better off today, but only temporarily.

If I invest in infrastructure in Ireland, instead of eating out, I suspect that we will be better off in the long-term.

I think I know where you are coming from, but intuitively it feels wrong. It sounds like the anti-austerity argument. Borrow lots of money now to stimulate economic growth. Are you saying we should spend, spend, spend instead of saving, saving, saving.

I suspect that a balance must be struck.
 
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